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  • 1992

    • For Your Information

      NASD Imposes $200 Fee for Form 211 Applications

      On January 2, 1992, the SEC approved a proposed rule change by the NASD relating to a fee for Form 211 applications filed with the NASD pursuant to Schedule H, Section 4 of the NASD By-Laws. The rule change is effective immediately and, as a result, a $200 filing fee will be required together with each Form 211 application received on or after January 20, 1992. The fee is not refundable in the event that the member cannot satisfy the requirements of Schedule H, Section 4 or SEC Rule 15c2-11. Members are reminded that this fee, along with any other costs associated with making a market, must be paid by the member and cannot be passed along to the issuer or other parties.

      In connection with this rule change, and consistent with Schedule H, Section 4 of the By-Laws, the NASD will no longer require that members submit a Form 211 to the NASD prior to entering a quotation in the National Quotation Bureau "Pink Sheets" when a valid exception to SEC Rule 15c2-11 is available. For further information, please refer to SEC Release No. 34-30145, Notice to Members 90-40, or call the NNOTC Compliance Unit at (202) 728-8149.

      NASD Mails New Edition of Guide to Information and Services

      With this issue of Notices to Members, NASD members are receiving the January 1992 edition of the NASD Guide to Information and Services. This publication, updated semiannually, is arranged by subject and includes names and phone numbers of persons whom members may call for information and assistance. A new feature of the guide, found on the inside front cover, is answers to five questions often asked by members.

      California Increases Agent Registration and Transfer Fees

      Effective January 1, 1992, California increased its agent fees. Agent registration and transfer fees rose from $10 to $25. If you have any questions regarding these changes, call NASD Information Services at (301) 590-6500.

      Procedures, Fees Change for Unclassifiable (Illegible) Fingerprint Card Submissions

      Effective January 2, 1992, the Identification Division of the Federal Bureau of Investigation (FBI) began charging a $23.50 processing fee for a third fingerprint card submission for an individual whose previous cards were returned as illegible.

      Please make sure that the second submission for an individual includes the new and the returned illegible card to avoid a full $23.50 charge. But do not attach previously processed cards to the third submission because they will be rejected by the FBI.

      The following fingerprint processing fees became effective January 2, 1992:

      Filing Type

      Document Requirements

      Charge Per Card

      Initial submission

      Original card

      $23.50

      Second submission

      New and illegible card

      $1.50

      Third submission

      New card

      $23.50

      If you have any questions about this new procedure, contact the Member Services Phone Center at (301) 590-6500.

      Three PLATO Development Centers Move to New Locations

      Effective immediately, the Charlotte, North Carolina PLATO Professional Development Center has relocated to 5600 77 Center Drive, Suite 370, Charlotte, NC 28217. The telephone number has not changed.

      Effective March 2, 1992, the Bellevue, Washington PLATO Professional Development Center will relocate to 11400 Southeast 8th Street, Suite 270, Bellevue, WA 98004. The telephone number will be (206) 451-9883. The center will close at noon on Thursday, February 27 and all day Friday, February 28.

      Effective March 16, 1992, the Milwaukee, Wisconsin PLATO Professional Development Center will relocate to 10400 West North Avenue, Suite 340, Wauwatosa, WI 53226. The telephone number will remain the same. The center will close at noon on Thursday, March 12 and all day Friday, March 13.

      In the January 1-March 31, 1992, PLATO Brochure, the area code for the Birmingham, Alabama PLATO Professional Development Center is incorrect. The correct area code is 205.

      Tokyo Examination Session Rescheduled in April

      The April 18, 1992, session in Tokyo, Japan has been rescheduled to April 25.

      Paper and Pencil Examination Center Location, Dates Change

      In Las Vegas, Nevada the testing room has been changed to Room 112. In Great Falls, Montana the May 2, 1992, session has been rescheduled to May 9. All centers' July 4, 1992, sessions have been rescheduled to June 27, and all September 5, 1992, sessions have been rescheduled to August 29.

      Revised Series 26 Study Outline Becomes Available Through NASD

      The revised study outline for the Investment Company Products/Variable Contracts Limited Principal Examination (Series 26) is available through the NASD Member Services Phone Center at (301) 590-6500. The cost of this outline is $10.

      The revised examination will be implemented effective April 1, 1992. Questions regarding this revised examination program may be directed to Mark Costley, Qualifications Analyst, at (301) 590-6697.

      NASD Service Fee for Second Fingerprint Submission Rises

      The NASD service charge of $1.50 for the second fingerprint submission has increased to $2.50, effective February 5, 1992.

      The current fingerprint processing fees appear at the right

      If you have any questions about this new procedure, contact the Member Services Phone Center at (301) 590-6500.

      Initial Submission (original card)

      $23.50 per card

      Second Submission (new and illegible card)

      $2.50 per card

      Third Submission (new card only)

      $23.50 per card

      New Format Designed for SRR's Letters to Members

      Effective March 16, 1992, the Special Registration Review (SRR) department will begin using a new format when generating Advisory Messages to member firms concerning Forms U-4 and U-5 for registration and termination of brokers. Through software enhancements, the old style of free-form text has been replaced by more concise, prestructured sentences that resemble the Disclosure Reporting Page (DRP) format.

      The top portion of the Advisory Message will identify the respective individual and inform the member of both the type of filing reviewed and the problems or deficiencies noted (i.e., missing data, omitted disclosure, erroneous combining of multiple events on a single DRP, etc.). Following a blank line, sentences will appear that serve to instruct the member in correction of the noted problem. These sentences will specify what type of filing or document is required to be submitted and what information is needed. The new style of letters is created based on the review of all reportable events appearing within a broker's Central Registration Depository (CRD) record. In cases where letters must be created for multiple events, each set of messages will be separated by a partial row of asterisks.

      The new software offers additional abilities such as on-line review by Firm Access Query System (FAQS) subscribers, duplication of letters by SRR on request, and the automatic 30-day tracking and regeneration of outstanding letters up to a 120-day period. At 120 days, purge notices would be sent to the firm on any outstanding deficient filings. Comments or questions concerning the new letters may be addressed to Daphne Smith, Manager, Special Registration Review, at (301) 590-6842.

      NASD Sponsors Full-Day CRD Conference in Maryland May 1

      The NASD is sponsoring an all-day CRD Conference Friday, May 1, at the Holiday Inn, Crown Plaza, in Rockville, Maryland. There is limited space, so make your reservations early. The registration fee is $75 per person and includes seminars, workshops and training sessions, continental breakfast, and lunch. Registrants are responsible for their own transportation, hotel costs, and reservations. For hotel reservations, call the hotel directly at l-(800) 492-1331. Please identify yourself as with the National Association of Securities Dealers, Group #8702, to ensure obtaining the group rate of $85 per person per night. For your registration form and additional information, please call the Member Services Phone. Center at (301) 590-6500.

      New Versions of Forms U-4 and U-5 Become Only Ones Accepted

      The Uniform Application for Securities Industry Registration or Transfer (Form U-4) and the Uniform Termination Notice for Securities Industry Registration (Form U-5) have been changed. The new versions of the forms dated 11/91 became the only versions accepted by the NASD after February 21, 1992. After that date, all earlier versions of the forms are being sent back to the firm. Copies of the new forms were mailed to member firms in November 1991. If you did not receive copies or need additional copies, please call the NASD Member Services Phone Center at (301) 590-6500 to order a sufficient supply.

      NASD to Host Major Securities Industry Conference in Florida May 20-22

      The NASD's 1992 Eastern Regional Securities Conference, sponsored by Districts 5, 7, 8, 9, 10, and 11, will be held at The Peabody in Orlando, Florida, May 20-22. The program will begin with a state-of-the-NASD address by NASD President and Chief Executive Officer Joseph R. Hardiman, followed by a general session panel on the "Outlook for the Economy, Markets, and the Securities Industry." A second general session panel entitled "New Developments in Securities Regulation" will feature discussions of significant rules and regulations recently adopted, pending approval, or under development at the SEC, NASD, and state level and their potential impact on members.

      During the workshop portion of the program, participants will be able to choose from among 12 sessions at which the following topics will be discussed: advertising rules and recent interpretations; compliance and supervision issues; continuing education and assessment for industry professionals; corporate financing matters; dealing with the problem registered representative; fair dealings with customers in terms of markups and pricing; regulation of financial planners, investment advisors, and insurance broker/dealers; new initiatives in the fixed income market; market services and market surveillance; new products/derivatives and related regulatory considerations; and financing small businesses. There will also be a full-day training session for NASD arbitrators.

      Conference registration is limited and costs $335 per person for the full conference, $125 for the arbitrators training session, or $425 for both sessions. To request a conference brochure, which includes a full agenda and registration information, please FAX your name, firm, and address to Elisabeth Owen at (202) 728-6952.

      New Phone Number Listed for Wauwatosa PLATO Center

      The telephone number for the recently relocated Wauwatosa, Wisconsin PLATO Professional Development Center was omitted from the PLATO brochure. The correct number is (414) 774-1378.

      Fidelity Bonding Coverage of Certain Employees

      All financial institution fidelity bonds, including the bond used in the NASD Group Buying Program, contain a clause (usually in Section 12 of the bond) that terminates coverage of an employee when principals of the insured firm first become aware that, at some time in the past, whether in the employ of the firm or not, an employee committed a fraudulent or dishonest act.

      If a member has knowledge that any of its employees has engaged in fraudulent or dishonest activity, there is a distinct possibility that, if the employee engages currently in similar activity causing a loss to the member, the member's subsequent claim on the insurance carrier for indemnification will be denied.

      There is also the question of member compliance with the provisions of the NASD fidelity bonding rule (Article III, Section 32, NASD Rules of Fair Practice). These provisions require that all persons associated with a member firm be covered under a member's fidelity bond.

      When a member learns that an employee has engaged in fraudulent or dishonest activity in the past, it should immediately contact its insurance carrier and disclose the nature and extent of the conduct. The carrier then will review the information and decide whether to provide coverage of the employee. In many situations, particularly if the activity occurred many years ago and the employee's conduct has since been exemplary, the carrier may be willing to provide coverage. If not, the employee cannot continue to be employed by a member firm.

      A similar situation exists when a member is in the process of hiring a new employee. Any past evidence of fraudulent or dishonest conduct should be disclosed to the insurance carrier for its decision whether to provide coverage.

      We are bringing this matter to the attention of members at this time because we believe that many members may not be aware of the employee termination clause in their fidelity bonds. In a recent case a claim by a member for almost $500,000 was denied by an insurance carrier because the member knew that in the early 1980s the registered representative, who was the cause of the current loss, violated an NASD rule that the insurance carrier considers involved dishonest conduct.

      NASD Member Voting Results

      As a member service, the NASD is now publishing the final result of member votes on issues presented to them for approval in the monthly Notices to Members. These tallies will appear in the "For Your Information" section of the Notices.

      Thus far in 1992, members have voted on the following issues:

      • Notice to Members 92-1 — Proposed Amendment to Article VI, Section 3 of the By-Laws to Extend the NASD's Summary Suspension Procedures to Situations Where Members or Associated Persons Fail to Comply With Arbitration Awards. Voting Deadline: February 18, 1992. Ballots For 2,070; Against 204; and Unsigned 9.

      • Notice to Members 92-8 — Proposed Amendment to Rules of Fair Practice, Article III, New Section 46: Short-Sale Rule for Nasdaq/NMS Securities and New Section 47: Primary Nasdaq Market Makers. Voting Deadline: March 13, 1992. Ballots For 1,779; Against 445; and Unsigned 15.

      Application of the Free-Riding and Withholding Interpretation to Investment Partnerships

      The NASD has recently received numerous inquiries asking if an investment partnership that has restricted persons as partners may invest in "hot issues" under the NASD's Free-Riding and Withholding Interpretation if the partnership is structured to preclude the restricted persons from benefiting from the hot-issue purchases.1 This issue was presented to the NASD Corporate Financing Committee and to the National Business Conduct Committee for their consideration. Both committees affirmed the position — which the NASD staff has taken since at least 1980 — that regardless of whether the partnership internally allocates profits and losses from hot-issue transactions away from restricted persons, a member may not sell a hot issue to an investment partnership if restricted persons have a beneficial interest in such partnership unless the sale complies with the provisions of the Interpretation.

      Therefore, a partnership that has persons associated with a broker/dealer as partners would be unable to purchase hot issues because such persons are absolutely restricted by the Interpretation. Partnerships that have other categories of conditionally restricted persons as partners would only be able to purchase hot issues if the partnerships were able to demonstrate compliance with the "investment history," "insubstantial," and "not disproportionate" tests of paragraph 5 of the Interpretation.

      The staff has taken this position because the NASD has no jurisdiction over investment partnerships or similar entities and has no way to verify whether such restrictions or allocations are being followed. This position also considers the fact that the Interpretation provides for granting exemptions in only one area (i.e., issuer-directed securities) with such exemptions available only in very limited circumstances, not related to investment partnerships.

      In response to the interpretative issues raised and to a request by the NASD's Advisory Council, the Board of Governors has authorized the creation of a committee composed of members of the Corporate Financing, National Business Conduct, and Insurance-Affiliated Broker/Dealer Committees to conduct a general review of interpretative issues regarding the Free-Riding and Withholding Interpretation, including the treatment of restricted persons in investment partnerships. This committee will report its recommendations for consideration and/or action by the Board of Governors.


      1 The Interpretation includes a provision relating to Investment Partnerships and Corporations that was amended in 1988 (see NASD Manual p. 2047, Notice to Members 88-93).

      Last Call to Register for NASD's Eastern Regional Securities Conference To Be Held May 21 and 22 in Orlando

      The NASD's Eastern Regional Conference, sponsored by Districts 5, 7, 8, 9, 10, and 11, will be held at The Peabody on May 21-22 in Orlando, Florida. The program will include a state-of-the-NASD address by NASD President and CEO Joseph R. Hardiman and a luncheon address by J. Carter Beese, the newest SEC Commissioner. The program will also feature a general session with panels on the "Outlook for the Economy, Markets, and the Securities Industry" and "New Developments in Securities Regulation."

      Workshops, a major part of the program, will cover advertising rules and recent interpretations; compliance and supervision issues; continuing education and assessment for industry professionals; corporate financing matters; dealing with the problem RR; fair dealing with customers in terms of markups and pricing; regulation of financial planners, investment advisors, and insurance broker/dealers; new initiatives in the fixed-income market; market services and market surveillance; new products/derivatives and related regulatory considerations; and financing small businesses. There will also be a full-day training session for NASD arbitrators on May 20.

      Conference registration is limited and costs $335 per person for the full conference, $125 for the arbitrators training session, or $425 for both sessions. To make reservations, call Elisabeth Owen at (202) 728-8005.

      Vermont Increases Agent, Broker/Dealer Fees Effective July 1

      Effective July 1, 1992, Vermont will increase its agent and broker/dealer fees. Agent registration, transfer, and renewal fees will rise from $30 to $45. Broker/dealer registration and renewal fees will go from $200 to $250. If you have any questions regarding these changes, call the NASD Member Services Phone Center at (301) 590-6500.

      NAIC's "Own Your Share of America" Campaign Gets Underway

      To increase direct individual investment, the National Association of Investors Corporation (NAIC) is conducting an "Own Your Share of America" campaign. This promotional effort is intended to encourage people to become direct owners of the common stock of publicly traded companies. The campaign will run every June for five years beginning this month.

      The NASD supports NAIC's efforts because The Nasdaq Stock Market™ is the market of individual investors — they own 60 percent of Nasdaq® securities by market value, and their participation in this market is growing. According to recent survey data, between 1985 and 1990 the number of individual investors in Nasdaq securities jumped from 8.3 to 11.1 million, an increase of 32.4 percent.

      If you or your firm would like more information on the program, call or write to: NAIC, P.O. Box 220, Royal Oak, MI 48068, (313) 543-0612.

      Louisiana Raises Agent Fees

      Effective June 10, 1992, Louisiana raised its agent fees for registration, transfer, and renewal from $50 to $60.

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

      Major Medical Insurance Brochures Mailed to Registered Reps

      In June, insurance administrators for the NASD began mailing major medical coverage brochures to registered representatives of those firms that have given their consent for such direct contact.

      This coverage, insured by National Casualty Company, features cost-saving deductibles of up to $2,000, good-health and spouse discounts, and rates that are generally competitive. Interested registered representatives may obtain detailed information by contacting Benefits Administrators, Inc., at 1-800-336-0883.

      NASD Member Voting Results

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

      • Notice to Members 92-25 — Proposed Amendment to Article III, Section 15 of the NASD Rules of Fair Practice Re: Exemption for Negative-Response Letters Used to Facilitate Certain Bulk Exchanges of Money Market Mutual Funds. Voting Deadline: June 22, 1992. Ballots For 1,890; Against 133; and Unsigned 19.

      New FDIC Regulations Issued for Brokered Deposits

      Members who engage in the practice of brokered deposits with federally insured depository institutions must now notify the Federal Deposit Insurance Corporation (FDIC) in writing that they are acting as deposit brokers.

      The regulation defines a deposit broker as: (A) Any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and (B) An agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.

      Under this new regulation, a deposit broker must register with the FDIC before it may solicit or place deposits with an insured depository institution. In addition, a deposit broker must keep certain records and on request file written reports with the FDIC.

      The regulation was published in the June 5, 1992, Federal Register Volume 57, Number 109, at pages 23933-44. For further information, contact William G. Hrindac, Examination Specialist, Division of Supervision, (202) 898-6892 or Valerie Jean Best, Counsel, Legal Division, (202) 898-3812, or write to FDIC, 550 17th Street, N.W., Washington, DC 20429.

      Minnesota Increases Agent Transfer Fee

      Effective August 1, 1992, Minnesota increased its agent transfer fee from $20 to $25. The state agent registration fee remains $50.

      If you have any questions regarding this change, call NASD Member Services Phone Center at (301) 590-6500.

      NASD Membership Department Schedules CRD Conference October 22-23

      The second Central Registration Depository (CRD) Conference in 1992 will take place October 22-23, 1992. Additional details will appear in future Notices To Members and the CRD banner pages. For further information, call Rick Sheridan at (301) 590-6523.

      NASD Mails Insurance Brochures to Associated Persons

      In August, the NASD will mail brochures to associated persons describing the NASD's Individual Term Life Insurance Plan designed for NASD employees, registered representatives, and employees of member firms. Only those eligible associated persons whose member firms have authorized the NASD to contact them directly will receive these brochures.

      The coverage described in the brochures serves to supplement whatever life insurance the member firm may already provide. The insurance amounts range from $25,000 to $250,000 and the insurance includes optional spouse and child coverage. Waiver of premium for disability of the primary insured applies to these optional family coverages.

      Please be assured that all information used for this mailing is strictly confidential and will not be used for any other purpose. Any individual interested in more detailed information may obtain it by contacting Benefits Administrators, Inc., at (800) 336-0883.

      Application of the Free-Riding and Withholding Interpretation to Investment Partnerships Managed by Entities or Persons Not Associated With NASD Members

      In the May 1992 Notices to Members, the NASD reiterated a staff position of long standing that regardless of whether an investment partnership internally allocates profits and losses from hot issue transactions away from restricted persons, a member may not sell a "hot issue" to an investment partnership if restricted persons have a beneficial interest in such partnership unless the sale complies with the provisions of the NASD's Free-Riding and Withholding Interpretation (Interpretation). Thus a partnership having persons associated with a broker/dealer as partners could not purchase hot issues because such persons are absolutely restricted by the Interpretation. Furthermore, partnerships with other categories of conditionally restricted persons as partners could only purchase hot issues to the extent the partnership demonstrated compliance with the "investment history," "insubstantial," and "not disproportionate" tests of paragraph 5 of the Interpretation. The May Notice stated that the National Business Conduct Committee (NBCC) was creating a committee to review the Interpretation.

      The May Notice had resulted from an inquiry considered by the NASD's NBCC and Corporate Financing Committee in which an NASD member and its associated persons had been involved in the management and distribution of the interests in partnership.

      After publication of this Notice, the NASD received several requests for clarification of the position as it would relate to partnerships managed by third party, non-broker/dealer affiliated entities in which restricted persons may be passive investors. These requests sought interim relief from the restrictions described in the Notice pending the overall review of the Interpretation by the NBCC Subcommittee. These requests stated that for many years partnerships have been operated with "carve out" provisions in the partnership agreement that prevent restricted persons from participating in the hot-issue purchases. The partnerships relied on opinion-of-counsel letters which concluded that sales to these partnerships would comply with the provisions of Part B of the Investment Partnership section of the Interpretation. Under Part B, the member executing the transaction for investment partnership must receive an opinion of counsel that states no restricted persons have a beneficial interest in the account. The opinion-of-counsel letters had concluded no beneficial interest existed because of the carve-out provisions.

      The NASD's NBCC and Corporate Financing committees reviewed these requests. The committees determined that, pending review of the entire Interpretation, it was appropriate to grant limited interim relief to investment partnerships having restricted persons as limited partners under certain conditions. Such partnerships must be managed by third-party general partners either corporate or individual who are not affiliated with NASD members, and such partnerships must internally allocate profits and losses from hot-issues transactions away from the restricted persons. In reaching this conclusion, the committees distinguished such third-party partnerships from the managed partnerships previously reviewed.

      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 public accountants that: (a) all hot issues purchased by the partnership were placed in this new-issue account; and (b) the partners participating in the new-issue account are not restricted persons under the Interpretation. Said independent public accountants must be members of the American Institute of Certified Public Accountants (AICPA).
      2. Prior to the execution of the initial hot-issue transaction, the partnership's outside legal counsel will render an opinion that complies with paragraph B of the section of the Interpretation entitled "Investment Partnerships and Corporations."
      3. As part of its audit procedure for the partnership, the independent certified public accountant (who is a member of the AICPA) will confirm in writing to the partnership 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 partner ships 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.

      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 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 public accountant described in paragraph 3 above shall be obtained at the partnership's next audit.

      As previously discussed, the NBCC has created a committee to review the Interpretation and the NBCC invites the membership to provide to this committee any comments or topics on the Interpretation for the committee's consideration. Such comments or topics should be directed to T. Grant Callery, Vice President and Deputy General Counsel, NASD, 1735 K Street, NW, Washington, DC 20006-1506. Any questions concerning this Notice should be directed to T. Grant Callery at (202) 728-8285 or Craig L. Landauer, Assistant General Counsel, at (202) 728-8291.

      NASD Member Voting Results

      As a member service, the NASD publishes the final 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 92-30 — Proposed Amendment to Rules of Fair Practice to Require Members to Send Periodic Statements of Account to Customers; Last Voting Date: July 22, 1992. Ballots For 1,827; Against 329; and Unsigned 18.

      North Carolina to Increase Agent Fees

      Effective January 1, 1993, North Carolina will increase its agent fees. Agent registration, transfer, and renewal fees will rise from $45 to $55. The higher renewal fee will be reflected in the annual renewal invoice sent to firms in November 1992. Broker/dealer registration and renewal fees will remain at $200 each.

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

      NASD Member Voting Result

      As a member service, the NASD publishes the final 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 92-36 — Proposed Amendment to Article III, Section 35 of the NASD's Rules of Fair Practice and Section 8 of the NASD's Government Securities Rules to Require Members to Prefile Advertisements for Collateralized Mortgage Obligations; Last Voting Date: August 21, 1992. Ballots For 1,810; Against 298; and Unsigned 33.

      SEC Solicits Public Comment on Its Electronic Filing and Retrieval System, EDGAR

      The Securities and Exchange Commission (SEC) has requested public comment on proposed rules to implement the operational phase of its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The proposed rules will apply to electronic submissions (generally by the issuers of securities) processed by the Division of Corporate Finance, and in some cases, to those processed by the Division of Investment Management. The proposals will also affect paper filings in limited circumstances. Separate releases contain additional proposed rules relating to electronic submissions processed by the Division of Investment Management and to payment of fees into the SEC's lock-box depository.

      In its release, the SEC noted a number of benefits that will accrue to filers from the submission of documents in electronic format. First, time saved by direct transmission of filings will provide filers greater opportunity to meet market windows and eliminate the uncertainty and delay of mail or messenger delivery. Second, the improved dissemination of information resulting from the system will increase public information about all companies, particularly mid-sized and smaller companies, and should increase their visibility and market following.

      Third, the SEC's hours for receipt of directly transmitted submissions will be extended to 10 p.m. Eastern Time. Fourth, use of modular submissions and segmented filings will save transmission time and eliminate duplicative transmission of information by permitting a filer to submit data, such as financial statements, and then use the data in subsequent submissions. Fifth, the EDGAR electronic mail/bulletin board service will provide prompt filer notification of acceptance or suspension of submissions.

      In addition, EDGAR will allow the SEC to store, process, and disseminate information more efficiently, and will make the staff review process more efficient. Computerization also will provide a foundation for future development of one-stop filing via EDGAR and EDGAR-compatible systems with the North American Securities Administrators Association for the states and with the self-regulatory organizations, namely the National Association of Securities Dealers, Inc., and the stock exchanges.

      All comments on these releases are due by October 6, 1992, and should be submitted in triplicate to:

      Jonathan G. Katz, Secretary
      SEC
      Mail Stop 6-9
      450 Fifth Street, N.W.
      Washington, D.C. 20549.

      In announcing its EDGAR proposals, the SEC issued four separate releases which were published on Friday, August 7, 1992, in the Federal Register, Volume 57, No. 153.

      For information on Rulemaking for EDGAR System [Release Nos.: 33-6944; 34-30951; 35-25587; 39-2285; IC-18862; File No. S7-21-92] contact: Barbara C. Smith Jacobs or James R. Budge, at (202) 272-2589, Office of Disclosure Policy, Division of Corporate Finance, SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.

      For information on Rulemaking for EDGAR System; Investment Companies and Institutional Investment Managers [Release Nos. 33-6945; 34-30952; IC-18863; File No. S7-22-92] contact: Anthony A. Vertuno, Senior Special Counsel, EDGAR IM Project, (202) 272-7716, Kenneth J. Berman, Special Counsel, (202) 272-2107, or Ruth Armfield Sanders, Staff Attorney, (202) 272-7714, Division of Investment Management, SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.

      For information on Rulemaking for EDGAR System Public Utility Holding Companies [Release Nos. 33-6946; 34-30953; 35-25588; File No. S7-23-92] contact: Richard T. Miller, Staff Attorney, (202) 504-2268, Office of Public Utility Regulation, Division of Investment Management, SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.

      For information on Instructions for Filing Fees [Release Nos. 33-6947; 34-30954; 35-25589; 39-2286; IC-18864; File No. S7-24-92] contact: Jessica L. Kole, Special Counsel (202) 272-2700, Office of the Executive Director, SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.

      NASD® Adds New Member Service to NASDnetSM Electronic FOCUS System

      The NASD® is offering a new service which gives member/designees the ability to provide clearing corporations and clearing firms with copies of FOCUS reports electronically. This service is available through the NASDnetSM electronic filing system currently used by all NASD member/designees to file FOCUS reports with the NASD.

      Using NASDnet to collect FOCUS information will ensure that third parties receive FOCUS reports from members/correspondents promptly without risk of the filings being "lost in the mail." Because of the rigorous edits contained in the PC FOCUSSM/NASDnet system, the FOCUS data received will be accurate and complete. Electronic receipt of FOCUS data means that third parties will no longer have to rekey the information. Using the NASD system to receive FOCUS data from correspondents will enhance risk management capabilities by enabling third parties to analyze correspondents' data much sooner and without any need to verify any of the information provided.

      The cost for this new service will be $100 a year for each firm forwarding FOCUS reports through NASDnet. This fee will cover telecommunications costs and will provide unlimited support for third parties and member/designees from our Customer Support Staff. The NASD will bill this amount to third parties at the beginning of each calendar year.

      For more information, please contact Elizabeth Wollin at (301) 590-6887.

      NASD Member Voting Result

      As a member service, the NASD publishes the final 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 92-37 — Proposed Amendment to Article III, Section 21 of the Rules of Fair Practice to Require Predispute Arbitration Agreements to Include a Notice That Class-Action Matters May Not Be Arbitrated; Last Voting Date: August 21, 1992. Ballots For: 1,716; Against 365; and Unsigned 47.

      NASD Conference in New York

      The NASD is sponsoring a one-day educational seminar at the New York Vista Hotel in New York on Wednesday, November 4, 1992. Distinguished speakers will discuss topics such as markups; supervision; trading of U.S. government, high-yield, and municipal securities; derivatives; collateralized mortgage obligations (CMOs); wrap-fee programs; arbitration; and compliance issues facing today's compliance officers and securities attorneys. Featured speakers include Joseph R. Hardiman, NASD President and CEO, and Congressman Charles Schumer, Chairman of the House Judiciary Subcommittee on Crime and Criminal Justice.

      For a conference brochure and further information, call Rosalie Tardi at (212) 858-4178 or fax your request to (212) 858-4189.

      NASD Announces Early Closing for Nasdaq and SelectNetSM on November 27 and December 24, 1992

      The Nasdaq Stock MarketSM and SelectNetSM will close two hours early on the day after Thanksgiving, Friday, November 27, and Christmas Eve, Thursday, December 24. This means that The Nasdaq Stock Market will close at 2 p.m., instead of the regular closing time of 4 p.m., on those days and that SelectNet will stop accepting orders at 3:15 p.m. instead of the regular 5:15 p.m. closing time.

      The Automated Confirmation Transaction (ACT) service and the Mutual Fund System, as well as all other postclosing activities, will occur two hours earlier than the normal daily processing time.

      Any questions concerning these closing times should be directed to New York Market Operations at(800)635-6485.

      1992 Economic Census Will Count Millions of Business Firms

      More than 3.5 million American businesses will receive 1992 Economic Census questionnaires from the U.S. Census Bureau in December. Should your firm receive one, please note that the due date for returning it is February 15 and that firms receiving census forms are required by law to respond.

      This is the most comprehensive Economic Census ever undertaken. For the first time, the census will measure activity in finance, insurance, and real estate along with the sectors traditionally covered: retail and wholesale trade, service industries, transportation, manufacturing, mining, and construction industries.

      Taken every five years, the Economic Census identifies trends in business activity that are vital to measuring and encouraging growth in the American economy. The federal government uses census data to measure economic change. State and local agencies use the Economic Census in regional planning and economic development as well as to attract and keep business activity in their areas.

      Businesses can use the data generated by the census to develop business plans, calculate market share, and compare themselves to industry averages. The Economic Census also is important for business-to-business marketing: results frequently influence the location of retail outlets and the design of distribution systems.

      The information provided in the census is absolutely confidential. By law, only sworn Census Bureau employees may see individual responses, which are also exempt from the Freedom of Information Act. Statistics from the 1992 Economic Census will be published in more than 500 printed reports and in formats for computers, including compact discs (CD-ROMs). Both printed reports and CD-ROMs will be available in hundreds of libraries across the nation, or may be purchased inexpensively from the Government Printing Office. If you have any questions about the census, call Robert Marske at (301) 763-7356 or FAX (301) 763-2324.

      NASD to Publish Back Notices to Members in Bound Volumes

      In response to increasing interest from members, the NASD will release bound-volume versions of past years of its Notices to Members monthly newsletter. Notices for years 1987 through 1991 are available for member purchase this month.

      The bound volume series includes each year's table of contents as well as a subject index cross-referenced to volumes. The Notices bound volumes will assist analysts, researchers, and legal staff in responding to compliance and regulation questions.

      The five-year series costs $600, and individual years are $150 per volume. For more information regarding these Notices to Members bound volumes, call NASD Corporate Communications at (202) 728-6900. Credit card orders may be placed at NASD MediaSourceSM at (301) 590-6578, Monday through Friday, 7 a.m. to 5 p.m, Eastern Time.

      Corrections to October 1992 Notices to Members

      In Notice to Members 92-52, which concerned broker/dealer and agent renewals for 1992-93, an important piece of information was omitted. Under the section titled "Filing Forms BDW," Alabama should have been listed as one of the seven jurisdictions that do not participate in the CRD Phase II program. The NASD will collect both broker/dealer and agent renewal fees from those firms that are registered in Alabama.

      Due to an error in Notice to Members 92-53, the last entry in the table, Total Underwriting Compensation, on page 373 read: 50 or more 6.89 5.00 25.57. It should have read: 50 or more 6.89 5.02 5.57.

      For your convenience, a corrected page 373 has been included in this edition of the Notices to Members on the opposite page.

      Important Information for Those Individuals Who Are Participating in the NASD Health Guard Plus Major Medical Program

      As we all know, medical care costs have been increasing nationally at a 20 percent plus rate. However, our plan has not had an increase in rates since April 1992, although our carrier, National Casualty, has the right to adjust rates on April 1 and October 1 each year. Since the Company did not exercise that right this October, it appears likely that some increase can reasonably be expected as of next April 1993. However, premiums already paid on existing policies are guaranteed against an-increase. For example, an insured whose premium due date falls in December and who pays a six-month premium is protected until June 1993; likewise, payment of a full annual premium would protect that premium against an increase until December 1993, "locking in" the current rates for a full 12 months.

      Coming in April 1993: an increase in the maximum limit of benefits from $ 1 million to $2 million a new optional $5,000 deductible, and greater discounts for insureds who have been claim-free.

      TOTAL UNDERWRITING COMPENSATION1

      Gross Dollar Amount of Offering (millions)

      Firm Commitment Initial Offerings (%)

      Firm Commitment Secondary Offerings (%)

      Best Efforts Offerings (%)

      $1

      15.80%

      14.57%

      11.83%

      2

      14.31

      12.91

      10.72

      3

      13.44

      11.94

      10.07

      4

      12.82

      11.26

      9.61

      5

      12.34

      10.72

      9.26

      6

      11.95

      9.56

      8.96

      7

      11.62

      9.12

      8.72

      8

      11.33

      8.76

      8.50

      9

      11.08

      8.45

      8.32

      10

      10.65

      8.18

      8.15

      11

      9.90

      7.95

      8.04

      12

      9.18

      7.74

      7.86

      13

      8.49

      7.56

      7.73

      14

      7.82

      7.39

      7.61

      15

      7.59

      7.24

      7.50

      16

      7.55

      7.10

      7.40

      17

      7.52

      6.97

      7.30

      18

      7.48

      6.85

      7.21

      19

      7.45

      6.74

      7.12

      20

      7.42

      6.63

      7.04

      25

      7.29

      6.20

      6.68

      30

      7.19

      5.86

      6.39

      35

      7.10

      5.60

      6.14

      40

      7.02

      5.37

      5.93

      45

      6.95

      5.19

      5.74

      50 or more

      6.89

      5.02

      5.57

      1 This table contains the results of a regression analysis of an overall population and not mathematical averages for each category. This data should be considered only in connection with the explanation of methodology contained in the attached Notice.

      Correction to Notice to Members 92-59 Regarding Prefiling of Advertisements for Collateralized Mortgage Requirements

      Please note that there is an error in the rule language reprinted on page 415 of Notice to Members 92-59 (November 1992). The language contained in Article III, Section 35(c)(2) of the Rules of Fair Practice (17th line in column 1) and Section 8(c)(l)(B) of the Government Securities Rules (19th line in column 2) that reads ". . . until the advertisement or sales literature has been refiled for. . . " should instead read "... until the advertisement has been refiled for . . . ." Collateralized mortgage obligations sales literature is not subject to NASD prefiling requirements. Also, this prefiling requirement will apply until November 15, 1993, not November 15, 1992, as was erroneously reported in the Notice.

    • 92-72 SEC Adopts Significant Amendments to the Net Capital Rule, Proposes Others for Public Comment

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On November 24, 1992, the Securities and Exchange Commission (SEC) announced the adoption of amendments to its Net Capital Rule, Rule 15c3-1 (Rule). Except for the minimum increases scheduled to take effect in three installments beginning June 30, 1993, the changes, explained in Securities and Exchange Release No. 34-31511, will become effective on January 1, 1993. In companion Release No. 34-31512, the SEC proposed for public comment additional amendments to the Rule. The last date for comments is February 5, 1993. The full texts of both releases follow this Notice.

      SUMMARY OF ADOPTED CHANGES

      I. MINIMUM NET CAPITAL CHANGES
      A. Firms That Carry Customer Accounts
      • $250,000 for a firm that (a) carries customer accounts or broker or dealer accounts, or (b) receives or holds funds' or securities2 for customers, brokers, or dealers.


      • $100,000 for a carrying firm that does not hold customer funds or securities, and is exempt from the SEC Customer Protection Rule, Rule 15c3-3, by virtue of paragraph (k)(2)(i).
      B. Introducing Firms

      The adopted amendments create two classes of introducing firms, each with a different minimum requirement.
      • $50,000 for a firm that introduces transactions and accounts of customers or brokers or dealers to another registered broker or dealer that carries such accounts on a fully disclosed basis, and receives but does not hold customer securities for delivery to the clearing broker or dealer. Such a firm could participate in firm-commitment underwritings as a selling dealer but not as a statutory underwriter.


      • $5,000 for a firm that introduces accounts on a fully disclosed basis and does not receive, directly or indirectly, securities from or for, or owe funds or securities to, customers and does not engage in activities that require a higher minimum capital requirement, such as market making, wire-order mutual funds, or underwritings.3 The present prohibition against a $5,000 introducing firm participating in a firm-commitment underwriting in any capacity will continue. The companion release proposes amending this category to a minimum requirement of $25,000.
      C. Dealers and Underwriters
      • $ 100,000 for a firm that endorses or writes non-exchange or non-Nasdaq options or effects more than 10 transactions in a calendar year for its own investment account.
      However, a dealer would not include one engaged solely in the sale of mutual funds, best-efforts or all-or-none underwritings using a required Rule 15c2-4(b)(2) escrow account, or an introducing firm with dealer activities limited to those permitted by the Rule.
      D. Brokers or Dealers That Transact Business in Mutual Fund Shares and Certain Other Share Accounts
      • $25,000 for a firm engaged in this type of activity on other than a subscription-way basis that does not engage in any other dealer activity except as permitted by the Rule. A firm that does not handle customer funds or securities and is not a direct wire-order firm will have a $5,000 requirement. The SEC has proposed increasing this to $10,000.
      E. Market Makers
      • $100,000 for a firm that computes under the basic method. However, a market maker firm that clears and carries customer accounts and is fully subject to the provisions of Rule 15c3-3 has a $250,000 requirement. Another change raises the requirement for each security priced at $5 or less per share to $1,000 from $500. (The current capital requirement of $2,500 per share for securities priced over $5 remains unchanged. However, the SEC is proposing to standardize the per security capital requirement at $2,500 and thereby eliminate the two-tier price distinction.) In addition, the net capital ceiling for a market maker will increase to $1 million effective June 30, 1993.
      F. All Other Brokers or Dealers

      A $5,000 minimum category is maintained for firms that do not handle customer funds and securities, such as firms that sell direct participation programs (DPPs) in real estate syndications or firms that engage exclusively in mergers and acquisitions. However, the SEC is proposing to raise this requirement to $10,000.
      II. OTHER ADOPTED AMENDMENTS
      A. Securities Haircuts

      Equity Securities: Presently there are two methods of calculating haircuts, depending on whether a firm computes under the basic or alternative method. The SEC has established one standardized method for all firms. It would be 15 percent of the market value of the greater of the long or short position, plus 15 percent of the lesser to the extent it exceeds 25 percent of the greater position.

      The amendments also adopt the alternative method for computing concentration charges for all firms. For equities, that would be 15 percent, effective immediately, not after 11 business days as in the basic method.
      B. Aggregate Indebtedness

      In light of the proposed increases in the minimum net capital requirements, the SEC has identified two items of aggregate indebtedness (AI) for which the current 6 2/3 percent charge is deemed not appropriate. Accordingly, the AI impact is reduced for the following two items:
      1. Mutual Funds Payable Offset by Fails to Deliver

      When a broker/dealer owes money to a mutual fund for the purchase of shares of the fund offset by a receivable from another broker/dealer (fail to deliver) related to that transaction, rather than subjecting the entire liability to the 6 % percent charge, the amended rule excludes 85 percent of the liability amount from AI.
      2. Stock Loan and Stock Borrowed

      Currently, when a broker/dealer borrows stock for money and, in turn, lends out those securities for money to another broker/dealer, no offset is permitted, and the entire payable amount is included in A.I and subject to the 6 2/3 percent charge. The release notes that given "... the matched nature of those related payables and receivables, the Commission does not believe that the risk merits a charge of 6 % percent on the dollar amount of the liability." Accordingly, when a security loan liability is related to a corresponding security borrowed asset, the new rule excludes 85 percent of the liability amount from AI.
      C. Contractual Charges

      Although the adopted equity securities haircuts are standardized at 15 percent, the current open contractual commitment charge of 30 percent haircuts for securities not listed for trading on a national securities exchange or not designated as Nasdaq National Market® remains unchanged. The haircut requirement for equity securities collateralizing a secured demand note will also remain at 30 percent.

      With the increase in the capital requirements, the SEC is permitting the use of that additional capital to offset the initial haircut related to a firm-commitment underwriting or any subsequent contractual commitment haircuts on positions associated with that underwriting. The amendment would not require a broker/dealer with more than $250,000 of net capital to apply the contractual commitment haircut charge in circumstances in which that haircut would be $150,000 or less.

      These changes are effective January 1, 1993, with the increases in the minimum net capital amounts phased in over a period of 18 months.
      III. PROPOSALS NOT ADOPTED
      • The proposed $100,000 minimum requirement for introducing firms that routinely receive customer funds and securities has been reduced to $50,000.


      • The additional capital requirement for introducing firms of .25 percent of the debit balance of introduced accounts was dropped.


      • The proposal to prohibit firms that do not carry customer accounts from using the alternative method to compute net capital was not adopted.


      • The 15 percent haircut on zero coupon and stripped securities was deleted.
      IV. PROPOSED AMENDMENTS

      Even with the adopted changes that become effective on January 1, 1993, the SEC believes that, based on the comments received on the original proposal, there are three matters that require further consideration. Two of these deal with the minimum net capital requirement for firms that do not receive customer funds or securities; the third concerns the security-per-share-price method for determining the net capital requirement for a market maker.

      Originally, the SEC proposed a three-tier capital structure for firms that introduce customer accounts on a fully disclosed basis to another broker/dealer. The SEC received many comment letters, including one from the NASD, opposing the three-tier framework. Most cited compliance and enforcement difficulties. In addition, the $100,000 requirement for firms in this category appeared higher than necessary. As an alternative, the NASD proposed two tiers: $50,000 for firms that receive but do not hold customer funds or securities, and a $25,000 requirement for firms that do not receive customer funds or securities. The SEC has adopted the $50,000 requirement and has published for comment a proposal on the $25,000 requirement.

      Citing the effect of inflation, the NASD recommended, and the SEC has proposed, an increase from $5,000 to $10,000 in the requirement for other categories of firms who do not handle customer funds or securities, such as subscription-order mutual funds, DPP, and merger and acquisition firms.

      Finally, the SEC is proposing to eliminate the distinction, for net capital purposes, between securities selling at $5 or less per share and those over $5 by establishing a standardized per security market-maker capital requirement of $2,500 per security, regardless of the price of the security.

      The phase-in of these proposed new requirements is as follows:

      Minimum Net Capital Required By Class of Broker/Dealer

      Class

      Rule Until 6/30/93

      7/1/93 Until 12/31/93

      1/1/94 Until 6/30/94

      After 6/30/94

      Introducing firms that do not receive customer funds or securities

      $ 5,000

      $ 12,000

      $ 19,000

      $ 25,000

      Other

      5,000

      6,500

      8,500

      10,000

      NASD members that wish to comment on the proposed rule change should do so by February 5, 1993. Send comment letters in triplicate to:

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

      Comment letters should refer to File No. S7-36-92. All comment letters received will be made available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549.

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

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

      Questions concerning this Notice may be directed to Walter Robertson, NASD Associate Director, Financial Responsibility, at (202) 728-8236 or Samuel Luque, Associate Director, Financial Responsibility at (202) 728-8472.

      Analysis of Adopted Changes to Minimum Net Capital Requirements

      Class of Broker/Dealer

      Present Requirement

      The September 1989 Proposed Requirement

      Adopted Requirement

      A. Firms that carry customer accounts and fully compute under Rule 15c3-3

           

      Basic Method

      Greater of $25,000 or 6 2/3% of aggregate indebtedness (AI)

      Greater of $250,000 or 6 2/3% of AI

      As Proposed

      Alternative Method

      Greater of $100,000 or 2% of Rule 15c3-3 Reserve Formula debits

      Greater of $250,000 or 2% of Rule 15c3-3 Reserve Formula debits

      As Proposed *Use attached form to elect this option

      (In addition, if the broker/dealer is also a market maker, there is a requirement based on the number of markets made. See Class E below.)

      Firms that carry customer accounts, receive but do not hold customer funds or securities, and operate under the paragraph (k)(2)(i) exemption of Rule 15c3-3

      Greater of $25,000 or 6 2/3% of AI

      Greater of $100,000 or 6 2/3% of AI

      As Proposed

      B. Firms that introduce accounts on a fully disclosed basis to another broker/dealer

      Greater of $5,000 or 6 2/3% of AI

      (a) Greater of $100,000 or 6 2/3% of AI plus ½ of 1% of customer debits introduced, if firm routinely receives customer funds or securities;

      Not Adopted

         

      or

       

       

      (b) Greater of $50,000 or 6 2/3% of AI plus ½ of 1 % of customer debits introduced, if firm occasionally receives customer funds or securities;

      (a) Greater of $50,000 or 6 2/3% of AI if firm receives but does not hold customer funds or securities

         

      or

       
         

      (c) Greater of $5,000 or 6 2/3% of AI plus ½ of 1 % of customer debits introduced, if firm never receives customer funds or securities

      (b) Greater of $5,000 or 6 2/3% of AI if firm does not receive customer funds or securities

      C. Broker/dealers that trade solely for their own accounts

           

      Basic Method

      Greater of $25,000 or 6 2/3% of AI

      Greater of $100,000 or 6 2/3% or AI

      This category has been redefined as Dealers and Underwriters for firms that endorse or write options other than on an options exchange or the Nasdaq market or effect more than 10 transactions a year for their investment account. The adopted requirement is the greater of $100,000 or 6 2/3% of AI.

      D. Firms transacting a business solely in mutual fund shares and certain other share accounts

      Greater of $2,500 or 6 2/3% of AI

      Greater of $25,000 or 6 2/3% of AI

      As Proposed

       

      with

       
         

      Greater of $5,000 or 6 2/3% of AI for firms that do not handle any customer funds or securities and are not direct wire order firms

      As Proposed

      E. Market Makers

           

      Basic Method

      Greater of $25,000 or 6 2/3% of AI

      Greater of $100,000 or 6 2/3% of AI

      As Proposed

      Alternative Method

      Greater of $100,000 or 2% of Reserve Formula debits

      Greater of $250,000 or 2% of Reserve Formula debits

      (Because of the $250,000 minimum, firms that do not carry customer accounts will be permitted to elect the alternative method.)

      or

      or

       
       

      $2,500 for each security in which a market is made ($500 per security if the price is $5 or less per share

      Same, except the requirement will be $1,000 per security at $5 or less per share

      As Proposed

      with

      with

       
       

      a maximum requirement of $100,000)

      a maximum requirement of $1 million

      As Proposed

      F. Other broker/dealers

           

      Firms that deal only in direct participation programs (DPPs)

      Greater of $5,000 or 6 %% of AI

      Same

      Same

      Firms that do not take customer orders, hold customer funds or securities, or execute customer trades, because of the nature of their activities (e.g., mergers and acquisitions)

      Greater of $5,000 or 6 2/3% of AI

      Same

      Same (The SEC is proposing to amend the minimum to $10,000)

      The phase-in of these new requirements will be 18 months as follows:

      Minimum Net Capital Required By Class of Broker/Dealer

      Class

       

      Rule Until 6/30/93

      7/1/93 Until 12/31/93

      1/1/94 Until 6/30/94

      After 6/30/94

      A.

      Carrying Firms:

             
       

      Basic

      $25,000

      $100,000

      $175,000

      $250,000

       

      Alternative

      100,000

      150,000

      200,000

      250,000

       

      (k)(2)(i) Exempt

      25,000

      50,000

      75,000

      100,000

      B.

      Introducing Firms:

             
       

      Receive

      5,000

      20,000

      35,000

      50,000

       

      Do Not Receive

      5,000

      5,000

      5,000

      5,0001

      C.

      Dealers and Underwriters

      25,000

      50,000

      75,000

      100,000

      D.

      Mutual Fund Firms

             
       

      Wire-Order Basis

      2,500

      10,000

      17,500

      25,000

       

      Subscription Basis

      2,500

      3,300

      4,100

      5,0002

      E.

      Market Makers

             
       

      Basic

      25,000

      50,000

      75,000

      100,000

       

      Alternative

      100,000

      150,000

      175,000

      250,000

      F.

      Other

      5,000

      5,000

      5,000

      5,0002

      1 SEC is proposing to increase this requirement to $25,000.

      2 SEC is proposing to increase this requirement to $10,000.

      Firms that elect to operate under the Alternative Standard of the Rule, paragraph (a)(1)(ii), are required to give written notice of this election to their Designated Examining Authority (DEA) by January 1, 1993. Firms currently operating under the alternative method of paragraph (f) are also required to give written notice if they intend to use the Alternative Standard after January 1, 1993.

      Firms electing the Alternative Standard for whom the NASD is the DEA should use this notification form or a photocopy of it.

      Notification of Election of the Alternative Standard

      NASD, Inc.
      Automated Reports Department
      9513 Key West Avenue
      Rockville, Maryland 20850

      ____________________

      ____________________

      (Type Full Name of Firm)

      (NASD ID#)

      hereby gives notification of its election to operate under paragraph (a)(1)(ii) of Rule 15c3-1 (The Alternative Standard).

      We understand that to change this election, we must make application to and receive permission of the Securities and Exchange Commission.

      ______________________________

      (Type Name of Firm's Principal)

      ___________________________________

      _______________

      (Signature of Principal)

      (Date)


      1 Receives or holds funds is defined in the Rule as occurring when the broker or dealer "receives checks, drafts, or other evidences of indebtedness made payable to itself or persons other than the requisite registered broker or dealer carrying the account of a customer, escrow agent, issuer, underwriter, sponsor, or other distributor of securities."

      2 Receives or holds securities is defined in the Rule as occurring when the broker or dealer "does not promptly forward or promptly deliver all of the securities of customers or of other brokers or dealers received by the firm in connection with its activities as a broker or dealer."

      3 In its companion release the SEC makes clear that "to be considered a fully disclosed introducing firm, the broker/dealer must have in place a clearing agreement that states that, for the purposes of SIPA and the Commission's financial responsibility rules, customers are customers of the clearing, and not the introducing, firm. Furthermore, the clearing firm must issue account statements directly to customers. Such statements must disclose the nature of the relationship between the entities and contain the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding the customer's account. Finally, the account statement must disclose that customer funds or securities are located at the clearing, and not the introducing, firm. Absent such an arrangement, the introducing firm would be required to comply with greater minimum net capital requirements."


      Federal Register / Vol. 57, No. 232 / Wednesday, December 2. 1992 / Rules and Regulations

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240.

      [Release No. 34-31511; File-No. S7-28-89]

      RIN 3235-AD79

      Net Capital Rule

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule amendments.

      SUMMARY: The Securities and Exchange-Commission, is amending its net capital rule under the-Securities Exchange Act. The amendments will raise the absolute minimum net capital required of certain, registered broker-dealers. Broker-dealers that hold customer funds or securities, will be required to maintain; at least $250,000 in net capital. Those firms that clear customer transactions but do not hold customer funds or securities, beyond the settlement of the transaction will be subject to a $100,000 minimum net capital requirement. Broker-dealers that introduce customer accounts to other broker-dealers will be required: to maintain $50,000 or $5,000 in minimum net capital, depending on whether or not they receive securities; Broker-dealers that make markets in certain securities will be required to maintain greater net capital in proportion to the number of securities in which they make markets. The maximum on this additional market maker minimum-net capital requirement will be raised from $100,000 to $1,000,000. The minimum net capital requirement for certain mutual fund broker dealers will be increased to $25,000. The increases to the minimum capital levels will be implemented over a period of eighteen months. Additionally, the two-methods of computing deductions for equity securities positions (or "haircuts") will be standardized. Finally, certain changes will be made to the computation of aggregate indebtedness;

      EFFECTIVE DATES: For the amendments relating, to equity securities haircuts (paragraph (c)(2)(vi)(J)) charges, to aggregate indebtedness, (paragraph (c)(1)), and the capital requirements for market makers (paragraph (a)(4) except as to that provision raising the ultimate market maker capital requirement to $1,000,000, which shall become effective on June, 30, 1993), the effective date shall be January 1, 1993. For the amendments relating to minimum net capital requirements contained in paragraph (a), see the temporary phase-in schedule set forth in Appendix E to Rule 15c3-1.

      FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli (202) 272-2904, Michael P. Jamroz, (202) 272-2372 or Roger G. Coffin, (202) 272-7375, Division, of Market Regulation, 450 Fifth Street, NW., Washington, DC 20549.

      TABLE OF CONTENTS:

      I. Introduction
      A. The Commission's Proposal.
      B. Brief Summary of Comments
      C The Net Capital Rule
      II. Rule Amendments'—Minimum Net Capital Requirements
      A. Clearing Firms
      (i) The Commission's Proposal and the Need for Increases
      (ii) Industry Response
      (iii) Impact of Increased Requirements
      B. Dealers, Market Makers, and Trading Firms
      (i) Dealers
      (ii) Over-the-Counter Market Makers
      C. Introducing Firms
      (i) Introduction
      (ii) Need For Increases
      (iii) Interpretation of Introducing Accounts on a Fully Disclosed Basis
      (iv) Industry Response and Commission Action
      D. Other Broker-Dealers,
      (i) Mutual Fund Firms
      (ii) Best Efforts Underwriters
      (iii) Miscellaneous Brokers
      (iv) Further Proposals
      E. Phase-In Schedule
      III. Election of Alternative Standard
      IV. Equity Securities Haircuts
      A. General.
      B. Undue Concentration. Charge
      C. Contractual Commitments
      V. Aggregate Indebtedness
      A. Mutual Fund Payables
      B. Stock Loan Payables
      VI. Technical Amendments
      VII. Summary of Final Regulatory Flexibility Analysis
      VIII. Statutory Analysis
      IX. List of Subjects in 17 CFR Part 240
      X. Text of the Proposed Amendments

      SUPPLEMENTARY INFORMATION:

      I. Introduction
      A. The Commission's Proposal

      On September 15, 1989; the Commission issued a release requesting comment on proposed, increases to the minimum net capital requirements applicable to broker-dealers.1 The Commission was. concerned that the minimum net capital requirements which in some cases dated back to 1972, were no longer adequate.

      In that release, the Commission proposed increases in the minimum capital requirements for registered broker-dealers, based on the nature of the business of the firm, and the extent to which a broker-dealer has contact with customer funds, or securities. Briefly, under the proposal, firms that carry Customer accounts would be required to maintain at least $250,000 in net capital. Broker-dealers that clear customer accounts in accordance with Securities Exchange Act Rule l5c3-3(k)(2)(i) (and therefore, although they may receive funds or securities, they may not hold them beyond the settlement of a transaction) would be required to maintain at least $100,000 in net capital. Firms that introduce customer accounts to other broker-dealers would be required to maintain a minimum net capital of $100,000 or $50,000, depending upon whether the firm routinely or occasionally receives customer funds or securities. Under the proposal, broker-dealers that never receive customer funds or securities would be allowed to maintain minimum net capital of $5,000.

      The minimum net capital required to be maintained by firms that make markets in securities also would be raised under the proposed amendments. Under the net capital rule, a market maker is required to maintain the greater of the base minimum net capital requirements referred to above or an amount of net capital determined by the number of securities in which the firms makes markets. The net capital rule currently draws a distinction in this regard based on the price of the security. Securities priced $5 and below require capital of $500 each, while securities priced above $5 require capital of $2,500 each. Under the proposal, the amount to be maintained for securities priced under $5 per share would be raised to $1,000 per security. The ceiling on this net capital requirement would have been raised to $1,000,000, from the present $100,000.

      The proposed amendments also included provisions that would standardize the deductions under the rule for proprietary positions in equity securities. Currently, the applicable deduction (or "haircut") depends on the method the broker-dealer elects to compute its net capital requirement. Broker-dealers calculating their net capital under the basic method incur a different haircut charge than those computing haircuts on the alternative method, which generally results in lower haircut charges than the basic method.

      Further, broker-dealers computing net capital under the basic method would realize reductions in aggregate indebtedness charges for liabilities associated with mutual fund and . securities lending transactions. Finally, the Commission proposed that, for the purpose of calculating haircuts, stripped debt instruments be accorded the same treatment, for haircut purposes, as equity securities. The Commission's proposal will be discussed in greater detail in the appropriate sections of this release.

      The Commission believes that the concerns articulated in the proposing release are valid, and is therefore adopting most of the proposed amendments. Certain changes to the original rule amendments have been made however, and these changes will necessitate the proposal of additional amendments to the net capital rule.

      Therefore, the Commission is issuing two releases that relate to the minimum net capital standards applicable to broker-dealers. This release discusses the proposals that are being adopted by the Commission. In a separate release, the Commission is proposing for comment further amendments to the minimum net capital standards.
      B. Brief Summary of Comments

      The Commission received almost 275 letters in response to the proposed rule changes. Approximately 200 of the commentators objected generally to the proposed increases in minimum net capital requirements. Most of the commentators writing in protest against the increases objected to the proposed increases to the net capital requirements for introducing and mutual fund broker-dealers. Primarily, these firms feared . that an increase in minimum net capital requirements would restrict entry into the securities business and force existing entities to close. A frequently voiced complaint was that the proposal discriminated against smaller firms in favor of larger enterprises without sufficient justification.

      Self-regulatory organizations and other groups including the New York Stock Exchange ("NYSE"), the Securities Industry Association ("SIA"), the American Bar Association, the Chicago Bar Association, the Philadelphia Stock Exchange ("Phlx"), and the Midwest Stock Exchange generally supported the proposal. These commentators acknowledged the need to increase minimum net capital requirements and concurred with the general concerns set forth in the release proposing the amendments for comment. In particular, the National Association of Securities Dealers, Inc. ("NASD") expressed support for raising minimum net capital levels generally and made specific recommendations regarding the appropriate levels for introducing firms. The NASD's recommendation has, in large part, served as the framework for the requirements for introducing firms set forth in the releases being issued today.

      Comments with respect to the increased net capital requirements for firms that carry and clear customer accounts were split; a number of commentators objected to the potential anti-competitive effects of the increases. However, others recognized the risks created by firms that hold customer funds and securities and acknowledged the need for regulatory action.

      The Commission received mixed comments with respect to its proposal to increase the minimum capital' requirements of firms that make markets in over-the-counter securities. The NASD and the SIA supported the proposal; a number of broker-dealers criticized it, claiming that an increase in capital requirements would drive some market makers away from the over-the-counter securities market, reducing liquidity.

      Firms that commented on the proposed new haircuts for zero-coupon and stripped securities opposed the measure on the ground that the proposed haircut was not reflective of the risks or volatility associated with stripped debt securities. In this regard, the Public Securities Association ("PSA") provided data on the volatility of stripped securities to be used in determining haircuts for these instruments. The proposals to standardize haircuts and alter the computation of aggregate indebtedness were generally supported by the commentators.
      C. The Net Capital Rule

      The Commission's net capital rule requires that every registered broker-dealer maintain a certain specified minimum level of net capital.2 Rule 15c3-1 requires registered broker-dealers to maintain sufficient liquid assets to enable those firms that fall below the minimum net capital requirements to liquidate in an orderly fashion without the need for a formal proceeding.3 The rule prescribes required minimum levels based upon both the method the firm adopts in computing its net capital and the type of securities business it conducts. A firm engaging in a general securities business (which would include the ability to clear and carry customer accounts) calculating its net capital under the basic (or aggregate indebtedness method) must maintain a minimum net capital level of the greater of $25,000 or 6 2/3 percent of its liabilities (with certain exclusions). If the firm chooses the alternative method of computing its net capital (presently found in paragraph (f) of the rule), it must maintain net capital equal to the greater of $100,000 or 2 percent of its customer-related receivables.

      The current rule prescribes different minimum levels of net capital for firms based on categories of business activity. These levels were designed to address the risks perceived in the different types of businesses engaged in by broker-dealers. For example, if a broker-dealer carries no customer accounts and limits its business to certain specified activities, it needs to maintain only $5,000 in net capital, rather than the $25,000 that would otherwise be required under the basic method of computing net capital.4 One of the specified activities permitted' is the introducing, on a fully disclosed basis, of customer accounts to another broker-dealer that clears and carries the accounts.
      II. Rule Amendments—Minimum Net Capital Requirements

      The following section of this release addresses, in greater detail, the Commission's amendments to the net capital rule concerning minimum net capital requirements.
      A. Clearing Firms
      (i) The Commission's Proposal and the Need for Increases

      The Commission's proposal would raise the minimum net capital requirements of firms that clear customer accounts and hold customer funds and securities from $25,000 (or $100,000 for firms on the alternative method) to $250,000. Because of the reduced risk, clearing firms that receive customer funds and securities but do not maintain custody of such assets beyond the settlement of a transaction (and are therefore exempt from the customer protection rule by virtue of paragraph (k)(2)(i)) would have a minimum net capital requirement of only S100.000.5

      The Commission believes it is appropriate to require the highest minimum level of net capital for broker-dealers that are entrusted with the money and securities of customers, who I are, in most instances, incapable of i assessing the financial condition of custodian firms. The required minimum net capital level for custodian firms should not be such that the slightest financial adversity will cause the collapse of the broker-dealer, an event that may cause delays and possible losses to customers and the Securities Investor Protection Corporation ("SEPC") fund.

      Several liquidations supervised by the NASD illustrate the potential dangers more dramatically. One firm held $70 million of customer securities, although it maintained only $61,000 of net capital. Another held $8 million of customer securities against only $42,000 in net capital. In both instances, the NASD became aware of financial difficulties in time to have the firms transfer the customer accounts to other broker-dealers, thereby avoiding SIPC liquidations.

      During a self-liquidation, the expenses of a firm continue while its revenues drop significantly, often to zero. For example, employees of the firm being liquidated are retained in order to perform the services associated with transferring customer accounts to other firms. The salaries of these employees, along with the costs associated with maintaining the premises of the firm and transferring securities are borne out of the remaining capital of the firm. A self-liquidation can take from three weeks to several months, depending on the condition of the records of the broker-dealer and whether other broker-dealers willing to take the customer accounts can be readily located.

      Self-liquidation costs incurred by the self-regulatory authorities are difficult to measure, because a large portion of the expenses are for non-incremental employee salaries, although for broker-dealers located outside the commuting distance of an NASD regional office, there could be substantial employee per diem and travel expenses. The staff of the NASD has advised the Commission that, on average, even the smallest self-liquidation requires two to three NASD employees on premises for a minimum of two weeks. By contrast, a recent large liquidation required approximately 25 NASD employees on premises for almost ten weeks.

      Above the beyond accounting for costs, the Commission notes that customers of a firm undergoing a SIPC liquidation are usually unable to access their accounts during the liquidation. Aside from possible financial harm to customers, the delay in a liquidation causes considerable customer anxiety. Although every attempt is made to transfer the accounts of the insolvent broker-dealer to a healthy firm as quickly as possible, or to disburse the assets of the accounts directly to customers, delays can occur for many different reasons. A supervised self-liquidation can avoid the delays that might arise in the context of a court-imposed liquidation.

      While requiring additional amounts of capital will not prevent firms from failing, the additional capital serves as a fund from which the: expenses associated with a liquidation can be paid. Moreover, the greater sum will act as a more reliable cushion against the use of SIPC money to liquidate a failed broker-dealer. In most instances, a $250,000 minimum net capital requirement should prove to be a sufficient cushion for a reasonably conducted self-liquidation before a broker-dealer's insolvency. The self-regulatory organizations will be less hesitant to intervene and supervise a self-liquidation if there are thereby fewer questions concerning the liquidity of the firm's assets or if there is less of a threat by outside creditors to move against the broker-dealer. This is the most desirable situation for the customers of a firm that is no longer viable.

      Other organizations have expressed concern about the minimum levels of net capital. The Commodity Futures Trading Commission ("CFTC") recently approved amendments to National Futures Association ("NFA") rules that increased the minimum net capital requirements of futures commission merchants from $50,000 to $250,000.6 The Options Clearing Corporation requires its new members to maintain $1 million in net capital and other members to maintain $750,000 in net capital.7 The National Securities Clearing Corporation requires its member broker-dealers to maintain $50,000 in excess net capital over that required by Rule 15c3-1.8
      (ii) Industry Response

      Generally, the self-regulatory organizations, SIPC, and the SIA expressed approval of the higher requirements. Both the NYSE and the NASD specifically endorsed the proposal for clearing and carrying firms. However, approximately twenty-five broker-dealers expressed their opposition to the proposed $250,000 requirement. Many of these firms are small to mid-size regional firms that carry customer accounts and clear their own securities transactions but do not clear the accounts of other broker-dealers. Primarily, these firms feared that the proposal would drive them out of the securities business and therefore reduce competition. It should be noted however, that even among this group of firms that objected to the proposed minimum, almost one-half stated that some increase in minimum net capital requirements is warranted. One firm candidly acknowledged that the current minimum of $25,000 is far below what is needed to operate a securities business.

      Other small broker-dealers opposed the increase and disagreed with the contention that clearing firms could avoid the increased costs associated with obtaining the capital necessary to comply with the amendments by opting to become introducing broker-dealers.9
      (iii) Impact of Increased Requirements

      It is clear that the recommended amendments will require some firms to raise additional capital. The firms that will need extra capital to comply are, the Commission believes, currently operating a securities business with an inappropriately, and in some instances dangerously, low level of net capital. While the Commission agrees with those commentators who point out that regional clearing firms provide important services to investors, the Commission also believes that undercapitalized firms endanger investors and undermine the consumer confidence upon which all firms rely. Investors who choose to leave their funds and securities with a regional self-clearing firm will be better served if that firm maintains an amount of net capital sufficient to ensure its continuity and stability in the industry.

      In any event, the Commission's analysis of cost of capital data and the present net capital of clearing firms tends to refute the arguments of the commentators. Based on data received from the NASD reflecting financial information for firms designated to the NASD for examination ("NASD Data"), the approximate effect the increased requirements will have on the marketplace was calculated.10 Of the 458 NASD firms that clear customer accounts or hold customer property, 349 had net capital in excess of $250,000. These firms had a total combined revenue of $9.7 billion that represented 99 percent of the total revenue generated by all NASD clearing firms during the past year. Put another way, the rule amendments will affect 109 firms whose combined revenues of $105 million represent about 1 percent of the total $9.8 billion of clearing firm revenues. The Commission believes that this data demonstrates that the amendments will have a minimal effect on competition among clearing firms because, for the most part, investors already deal with well capitalized entities when making investment decisions.

      The Commission recognizes that a precise estimate of the costs the-recommended amendments would impose on clearing firms is difficult, if not impossible to calculate, especially considering the so-called "opportunity costs" involved in tying up additional resources in minimum net capital. Nonetheless, rough estimates based on the relative cost of capital demonstrate that the effect of the amendments should not be unduly harsh.

      Typically, broker-dealers are organized as corporations or partnerships. In either instance, the individual or individuals who establish the firm can deposit into the entity money either as equity capital or subordinated debt that has been borrowed personally. These deposits are deemed to be the net capital of the broker-dealer, so long as the broker-dealer incurs no liability on the personal loan.

      Once in the entity, the net capital of the broker-dealer may be invested in high-grade commercial paper, bank certificates of deposit or short-term government securities, all of which, as money market instruments, receive little or no haircut under the net capital rule. The Commission estimates the difference between the lending rate and the rate a broker-dealer could earn on the above-mentioned instruments to be approximately three to four percent annually before taxes. Based on the NASD data, the analysis shows that 109 clearing firms would need, on average, an additional $120,520 each to comply with the $250,000 requirement. Using a four percent spread to determine the cost of capital, it would cost each of the 109 clearing firms on average approximately $4,821 per year to comply with the new requirement. This is a small insurance premium to pay to protect the investing public and the SIPC fund.

      Rather than raise additional capital, many of the self-clearing firms that would be unable to meet the $250,000 net capital requirement would have another option available. These firms could lower their minimum required capital by conducting business in accordance with paragraph (k)(2)(i) of Rule 15c3-3, or by introducing their customer accounts to a clearing firm. All but 41 of the 109 NASD clearing firms that would not meet the $250,000 requirement would meet the $100,000 minimum capital requirement applicable to (k)(2)(i) firms. All but 12 of these firms would be able to meet the $50,000 requirement applicable to introducing firms.

      With respect to those firms that receive funds and securities, but do not hold them pursuant to paragraph (k)(2)(i) of Rule 15c3-3, the NASD data indicates that, at the end of 1991, 62 out of the 242 firms that conduct a general securities business and operate under that exemption would be unable to meet the $100,000 standard. Those firms would need a total of $2.7 million, or an average of $43,000 per firm, to meet the new requirements. Further, in 1991, NASD firms conducting business under the paragraph (k)(2)(i) exemption produced revenues of $3.1 billion. The 62 firms that would not be able to meet the new $100,000 standard had $24 million of revenues or .75 percent of the total amount. Thus, it does not appear that the $100,000 standard will have a significant impact on competition among this class of clearing firms.

      Several commentators disputed the Commission's cost of capital estimates. Others argued that a four percent spread was too low. The Commission recognizes that broker-dealers may incur economic costs other than the estimated four percent cost of capital. For example, if a principal of a broker-dealer borrows funds personally, he or she will likely be required to pledge personal assets as collateral for the loan. Additionally, there may be other inestimable opportunity costs associated with raising and using additional capital to comply with the amendments. However, even if the estimated cost of capital were eight percent, the average cost of capital for the 109 clearing firms that need to acquire extra capital would only be $9,642 per year, before taxes. It does not appear that these costs will be prohibitive, given the added protection the rule amendments will provide.

      As a concession to those firms required to meet the higher minimum requirements, the Commission's proposal would have relaxed the haircut charge associated with securities underwritings, known as the "contractual commitment haircut". The contractual commitment haircut applies to firm commitment underwritings and requires a charge on each net long securities position contemplated by any open contractual commitment in the broker-dealer's proprietary account. Currently, firms are required to take a 30 percent haircut (minus unrealized profits) on their open contractual commitments in equities. The size of this contractual commitment haircut can discourage smaller firms from participating in securities offerings, since the haircut could threaten their net capital compliance.

      Because small broker-dealers play an important role in the local capital formation process, the Commission believes that those firms meeting the higher minimum capital requirement should be permitted to enter into small firm commitment underwritings without incurring a significant contractual commitment charge. Therefore, under the rule amendments, broker-dealers that meet the $250,000 minimum will not be required to charge its capital for any contractual commitment haircut to the extent that the haircut would not exceed $150,000. For instance, if a broker-dealer participates in an underwriting in which it has a firm commitment to purchase securities, and the appropriate contractual commitment deduction would be $150,000 or less, the broker-dealer would incur no haircut. Commitments resulting in potential charges in excess of $150,000 would result in deductions on the amount in excess of $150,000. This will benefit smaller broker-dealers that wish to engage in underwritings but were previously subject to the full amount of the contractual commitment charge.

      In order to clarify the application of the $250,000 minimum net capital standard, the amendments contain the following definitions. A broker-dealer shall not be deemed to receive funds from customers if it receives checks, drafts, or other evidences of indebtedness made payable to an entity other than itself (such as another broker-dealer, escrow agent, etc.) and the receiving broker-dealer promptly . forwards such funds to the other broker-dealer or escrow agent.11 With regard to securities, a broker-dealer shall be deemed to hold securities if it does not promptly forward such securities received by the firm to a clearing firm, escrow agent or other appropriate entity.

      Finally, firms that choose not to meet the new levels, or are unable to do so, will not, as some commentators suggest. be forced to close their doors. Specifically, the lower net capital requirement afforded broker-dealers that operate under the (k)(2)(i) exemption from Rule 15c3-3 will provide many firms that currently hold the assets of their customers an alternative to the higher minimum for clearing and carrying firms. Moreover, they may elect to remain in the securities business with an even lower amount of capital and introduce their accounts to another firm.

      The Commission believes that the combined effect of the variety of options contained in the recommended amendments will allow each firm to select an appropriate amount of net capital and tailor its business activities accordingly to meet the requirement it chooses. Thus, firms will not be drawn out of the industry, and the impact on competition will be minimal. For these and the reasons stated above, the Commission is adopting the amendments regarding clearing and carrying firm net capital requirements as proposed.
      B. Dealers, Market Makers and Trading Firms

      The Commission's proposal would have raised the minimum net capital requirement applicable to dealers, market makers and trading firms to $100,000 (although market makers are subject to additional net capital requirements discussed below).
      (i) Dealers

      The types of broker-dealers that fall under the dealer category take risks that far outweigh their present minimum net capital requirements. A minimum net capital level of only $25,000 is an extremely thin cushion against the risks in a dealer's business, because of the potential for severe market volatility. Additionally, the proliferation of complex securities, including interest-only and principal-only mortgage-backed securities and various option products have added elements of risk not envisioned when the current minimum standards were adopted. There were no substantial adverse comments to the dealer proposals. Accordingly, the Commission believes firms that fall into this category should have a minimum net capital requirement of at least $100,000 and is adopting the amendments.

      For the purposes of determining whether a person is subject to the higher net capital requirements applicable to dealers, the term "dealer" for that purpose would include those persons that endorse or write over-the-counter options, and any broker-dealer that effects more than ten transactions in any one year for its own investment account, but would exclude firms that underwrite securities on a best efforts or all or none basis, those that engage in certain kinds of riskless principal trading, and certain firms engaged in the sale of redeemable shares of registered investment companies.
      (ii) Over-the-Counter Market Makers

      In addition to raising the base minimum requirements for market makers, the proposed amendments would raise the additional market maker capital requirement. Currently, securities priced $5 and below require net capital of $500 each, while securities priced above $5 require net capital of $2,500 each. Under the proposal, the amount to be maintained for securities priced under $5 per share would be raised from $500 to $1,000 per security. The ceiling on this additional net capital requirement would be raised to $1,000,000, from the present $100,000. No change to the existing capital requirement of $2,500 per share for securities priced over $5 was proposed. The Commission is adopting these amendments as proposed.12

      Market maker capital requirements have been a cause for considerable concern since at least the market break of 1987. In its Market Break Report, the Division of Market Regulation (the "Division") stated that there should be a review of the minimum amount of capital necessary to qualify as an over-the-counter market maker. The Division noted that the review should include an analysis of the amount of capital necessary for each security, as well as the appropriateness of the capital ceiling of $100,000. The Division's concern was precipitated by the cessation of business by 12 over-the-counter market makers immediately following the October 1987 market break. In some cases, the prices of the securities in which they made a market fell dramatically. Customer obligations, which in some cases were secured by the securities, became uncollectible. The Division pointed out that other broker-dealers and customers are also exposed to potential market losses when a significant market maker in a particular security fails. Other, less significant market makers may withdraw from the system or may restrict their purchases, often resulting in a free-fall in the prices of the securities.13

      The NASD reacted promptly to the 1987 market break by approving amendments to its Small Order Execution System ("SOES"), which required not only mandatory participation in the SOES for all market makers in certain securities, but also maximum SOES order size limits based on the market characteristics of the securities.14 Under mandatory SOES participation, market makers are | required to accept small orders received through the SOES system. Because the financial requirements resulting from, the mandatory SOES obligations require higher capital levels of market makers, the NASD's Quality of Markets Committee recommended that the Commission substantially increase | capital requirements for market makers.15

      Despite these recommendations, a number of commentators opposed the Commission's proposal, arguing that increases would discourage firms from making markets, resulting in reduced liquidity, particularly in lower priced stocks. The Commission believes this concern is mainly unfounded. Market makers play an integral role in the securities markets and the Commission believes it is essential for these firms to maintain sufficient capital to discharge their market making activities without disruptions that can interrupt the liquidity in a particular security. Market makers that maintain the bare minimum amount of net capital are, however, frequently unable to assume even the smallest positions in the stocks in which they make markets. Indeed, the Commission believes it is those firms that maintain the bare minimum amount of capital that pose a threat to liquidity. To the extent such a firm's capital falls below the minimum, the firm is compelled to withdraw as a market maker in some of its market making securities, which could impair the market. This has been a particular problem in the marketplace for those securities priced under $5 per share, where the failure of market making firms has resulted in the virtual elimination of a public market for many of the securities in which they made markets. When a broker-dealer holds itself out as making a market in a particular security, it should maintain sufficient capital to stand behind that commitment. That commitment is no less important in the market for securities priced below $5 per share.

      Based on these reasons, the NYSE, the NASD and the SIA supported the proposal. In fact, the SIA stated that the proposal did not go far enough. Specifically, the SIA argued that it is inappropriate to distinguish between securities priced above $5 per share from those that are priced below $5 per share in determining capital requirements. The Commission preliminarily agrees with the recommendation of the SIA and believes that la further amendment to the net capital rule is warranted.

      Therefore, the Commission, in a separate release, is proposing for comment an amendment that would raise the requirement to $2,500 per security, regardless of the price of the security.
      C. Introducing Firms
      (i) Introduction

      An introducing broker-dealer is one that has a contractual arrangement with another firm, known as the carrying or clearing firm, under which the carrying firm agrees to perform certain services for the introducing firm. Usually, the introducing firm submits its customer accounts and customer orders to the carrying firm, which executes the orders and carries the account The carrying firm's duties include the proper disposition of the customer funds and securities after trade date, the custody of customer securities and funds, and the recordkeeping associated with carrying customer accounts.16

      The practices regarding the handing of customer funds and securities vary among different introducing and clearing dealers. In many cases, the customer gives funds and securities directly to the introducing firm, which in turn is obligated to forward them to the clearing firm. In other cases, the customer sends funds and securities directly to the clearing firm.17

      The receipt of customer funds or securities by inadequately capitalized introducing firms is a major concern of both the Commission and SIPC. Recognizing this concern, the proposing release would have created three tiers of introducing firm minimum net capital requirements, based on the frequency with which the introducing firm handles customer property. Firms that routinely handle customer funds or securities would have been required to maintain $100,000 in net capital. Brokers that occasionally handle funds and securities would have been required to maintain $50,000 in minimum net capital. Firms that never receive funds or securities would remain in a $5,000 category.

      The Commission has decided to take a two-step approach to the minimum net capital requirements applicable to introducing firms. First, the Commission is abandoning the three-tier distinction that was based on the occasional versus routine receipt of securities in favor of a two-tier system which would have a $50,000 minimum for firms that receive any securities, and a $5,000 minimum for those that do not. The second phase of the Commission's action with respect to introducing firms will be the additional proposal of an amendment raising the $5,000 minimum to $25,000. Discussed more fully below are the specifics of the Commission's action and the reasons for the increases.
      (ii) Need For Increases

      The net capital rule requires introducing brokers to promptly forward all customer funds and securities to the clearing broker-dealer. Even when this requirement is complied with, as the commentators pointed out, many customers make checks payable or endorse securities directly to the introducing firm. SIPC has expressed its concern to the Commission regarding "* * * situations where the SIPC member involved in the customer protection proceeding is a broker-dealer exempt from the provisions of SEC Rule 15c3-3, and subject to less than the full net capital requirements of SEC Rule 15c3-1." SIPC reported in August 1991, that since January 1986, twenty introducing firms have become the subject of SIPC proceedings. In those proceedings, SIPC has paid $8,226,330 to satisfy customer claims and $3,405.385 for administrative expenses. SIPC has also informed the Commission that in one of these customer protection proceedings the trustee has received and is reviewing claims for customer protection of approximately $6 million.

      Although the firms that are the subjects of these proceedings were prohibited from holding customer property, they were nevertheless in a position where they were able to obtain access to customer assets through a variety of schemes. Some of the SIPC proceedings involved firms that obtained customers' funds by soliciting those funds directly from the customers for investment in a "certificate of deposit" or other instruments issued by the broker-dealer. Some SIPC proceedings involve introducing firms that misappropriated funds by instructing clearing firms to place customer funds into accounts controlled by the introducing firm. Other cases involve introducing firms that failed to transmit customer monies entrusted for investment; in these cases, introducing firms converted the customer funds by forging the endorsement on the checks given to them by customers.

      In one case, for example, principals of a firm converted $4.3 million of checks written by at least 129 customers made payable to the firm. Those funds were entrusted to tire firm for purchase of certificates of deposit and mutual funds. Instead of investing them as instructed by the customer, the principals of the firm diverted the funds for their personal use. Although the firm misappropriated $4.3 million of customer property, SIPC reimbursed customers for only $2.9 million. For the most part, most of the shortfall was due to claims that exceeded the limitations on SIPC advances.18

      Two recent Commission proceedings further illustrate the Commission's concerns. In the first, the broker misappropriated over $1.1 million of customer funds that were intended to be invested in securities. In the second, a particularly egregious case, a broker-dealer in Florida solicited money from investors by advertising, among other places, in local church flyers. Customers alleged they were purchasing certificates of deposit from the broker-dealer to be held by the broker-dealer. However, the owner of the broker dealer converted the funds, and after his scheme was discovered, committed suicide. It appears that the amount of stolen funds could reach $4 million. The case is further complicated by the fact that SIPC may not reimburse the customers on the grounds that the investments in question may be characterized as a loan to the broker-dealer.

      Investors who give funds and securities to broker-dealers do so with some degree of assurance that their property is safe when entrusted with an entity registered with and regulated by the Commission. However, many investors are not able to ascertain the difference between a registered broker-dealer that is well capitalized and one that is not, and under what circumstances SIPC coverage is provided.

      A second element of concern for the customers of introducing firms involves the customer's relationship with the clearing firm. Customers can be stranded if the introducing firm fails or closes temporarily due to a capital violation. Generally, the clearing firm will not accept orders directly from the customers because the clearing firm will consider the customers as those of the introducing firm. As a result, customers may be unable to liquidate their securities positions or open new positions until their accounts are transferred to another broker-dealer. Although higher minimums will not eliminate this risk, the increased standards will increase the likelihood that the firm can quickly find a purchaser for its assets and avoid an NASD supervised self-liquidation.

      Aside from the impact on customers, there is a risk of sudden losses to clearing firms when introducing firms fail. For example, during periods of market decline, customer accounts may become unsecured due to sharp drops in the value of securities in margin accounts or because of changes in the value of customer short option positions. If a customer fails to meet margin calls made by the clearing firm or fails to pay the settlement amount for securities it has purchased, the introducing firm, because most clearing arrangements place liability on the introducing firm for deficits in introduced accounts, will bear the loss from the default. If the introducing firm does not have adequate resources to pay the clearing firm, the clearing firm incurs the loss.19

      Two examples are illustrative. During the October 1987 market break, Haas Securities Corporation, a fully disclosed introducing broker-dealer and a market maker in eleven securities, ceased operations. As a result of unsecured customer accounts introduced by Haas, its clearing firm incurred a reduction in its net capital between $15 and $20 million.20 More recently, an introducing broker was involved in a manipulation scheme wherein three registered representatives at the introducing firm attempted to corner the market in a particular security by placing large amounts of unauthorized purchases of the security in a number of customer accounts. As a result of the manipulation, the security rose in value, but trading in the security was suspended after the scheme was discovered and never resumed. The security served as margin for debits owned by customers of the registered representatives and became worthless when trading was suspended. As a result of this occurrence, the clearing firm incurred losses in excess of $20 million. The introducing firm could not cover losses of this magnitude. At the time of the manipulation, the clearing firm was owned by another broker-dealer. Mainly as a result of the losses incurred through the manipulation, the clearing firm was acquired by another broker-dealer and then eventually liquidated. Before the liquidation, the clearing firm cleared for 154 introducing brokers.

      Indeed, many clearing firms require introducing firms to maintain net capital in excess of that required by the net capital rule (in addition to a clearing deposit) before they will transact business with an introducing firm. One firm will not clear for an introducing broker-dealer unless the firm has at least $150,000 in net capital. However, because industry practice is not uniform, weaknesses tend to develop. Assuming that risk-conscious clearing firms require their introducing firms to maintain the greatest amount of capital, the Commission is concerned that clearing firms that are not as sensitive to risk will tend to have a higher concentration of poorly capitalized introducing firms. The failure of one large introducing firm could weaken such a clearing firm, with a ripple effect that could expose other firms that clear through the same broker-dealer. If such a firm fails, not only will customers of that firm suffer, but a large number of market makers in lower priced securities might fail with it, resulting in significantly reduced liquidity in the markets for their securities.
      (iii) Interpretation of Introducing Accounts on a Fully Disclosed Basis

      There is a general misunderstanding among customers of securities firms as to the relationship between a clearing firm and an introducing firm and the responsibilities of each firm as to the customers' assets. Even in instances where those responsibilities are clearly outlined, customers are generally unable to distinguish an introducing firm from a full service broker-dealer that is authorized to maintain custody of their investment property. Customers are often not aware that their funds and securities are located at the clearing firm (rather than at the introducing firm). When an introducing firm fails, Commission staff members frequently receive inquiries from the introducing firm's customers regarding the whereabouts of their funds and securities.

      The Division has interpreted the net capital rule and Rule 15c3-3 to require that, for the purposes of the Commission's financial responsibility rules and SIPC, the introducing firm's customers should be treated as customers of the clearing firm.21 The Division has also interpreted revised paragraphs (a)(2)(i) and (a)(2)(iv) of the net capital rule to require an introducing firm, in order to fall under the terms of paragraph (a)(2)(iv), to have in place a clearing agreement with a registered broker-dealer that states, for the purposes of SIPA and the Commission's financial responsibility rules, customers are customers of the clearing, and not the introducing, firm. Furthermore, the clearing firm must issue account statements directly to customers. Each statement must contain the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding the customer's account. Finally, the account statement must disclose that customer funds or securities are located at the clearing broker-dealer, and not the introducing firm.

      An introducing firm without such an arrangement will not be considered, for the purposes of the Commission's financial responsibility rules, to be a firm that "introduce[s] transactions and accounts of customers to another registered broker or dealer that carries such accounts on a fully disclosed basis." Absent such an arrangement, the introducing firm would be required to comply with the greater minimum net capital requirements required of a clearing firm.22
      (iv) Industry Response and Commission Action

      When the amendments were proposed, the Commission was sensitive to the potential impact of the increases. Accordingly, the Commission solicited comments from the introducing firm community on their potential impact.

      Approximately 100 small broker-dealers objected to the proposals, arguing that the increases would either eliminate smaller firms, or prevent small broker-dealers from entering the industry. Other commentators objected to the size of the increases or the asserted lack of any need for them; As an alternative, a number of firms suggested that the Commission could accomplish its regulatory goals more fairly by drafting a net capital rule that would call for incremental increases for different types of business activity. For example, if a firm transacted a margin business, its minimum net capital requirement would increase by a pre-established factor. However, this approach would require the net capital rule to make dozens of distinctions that would further complicate the regulatory process. It is important for the net capital rule to be based on readily identifiable minimum classification requirements. Therefore this suggestion does not provide a workable alternative to the base requirement approach currently in place.

      It appears that the primary objection to the proposed increases concerned the costs associated with raising additional capital and the impact on competition in the industry. To assess the cost of the proposed rules, using the NASD Data, the Division examined the capitalization of the industry to determine how many firms would need to raise additional funds. The Division also estimated the approximate costs of raising the additional capital

      The NASD Data does not distinguish between introducing brokers that receive funds and securities and those that do not. The assumption was made that all firms receive customer property to assess the maximum impact of the recommended amendments. Under this assumption, the calculations demonstrate that 919 introducing brokers (out of 2,301) would need total additional capital of $25 million to comply with the new $50,000 standard, or an average of 327,180 .per firm. Based on an eight percent spread of cost of capital,23 the new standards would cost each broker an average of approximately $2,174 per year. The Commission believes this is a slight insurance premium in light of the benefits that would be derived from the increase.

      To assess the impact of the proposal on the industry, introducing firm revenue data was examined. Out of a total $4.96 billion in annual revenues generated by NASD member introducing .firms, only $304 million is accounted for by firms with less than $50,000 in net capital. In other words, the amendments would at most affect the 919 firms that account for 6.1 percent of the total introducing firm revenues.

      Thus, the data suggests the impact of the increases will not be dramatic. Notwithstanding, the Commission believes certain refinements to the original proposal are warranted. For example, a number of commentators, including the NASD, objected to the Commission's classification of minimum net capital levels based on the distinction between occasional and routine receipt of customer funds and securities.24 The NASD suggested a reconsideration of the $100,000 category which would apply to those introducing firms that routinely receive customer funds or securities. Such introducing brokers would have the same capital requirement as broker-dealers that receive funds and securities pursuant to the provisions of paragraph (k)(2)(i) of Rule 15c3-3. As the NASD pointed out, introducing firms could, without changing their capital requirement, clear accounts under the (k)(2)(i) method. To prevent this, the NASD recommended the establishment of two classifications of introducing firms: A $50,000 minimum for firms that receive securities and a $25,000 minimum level for those that do not.

      The Commission believes that the NASD's approach represents a reasonable compromise between the Commission's and the commentators' concern regarding the impact of the amendments on introducing firms. Accordingly, the three tier approach that would distinguish between occasional and routine receipt of funds and securities is not being adopted and will be supplanted by the approach recommended by the NASD.

      Therefore, the Commission is adopting the proposal that would increase the minimum net capital requirement of introducing firms that receive securities to $50,000. The Commission is also adopting, on a temporary basis, the proposed $5,000 minimum requirement. Under the approach adopted by the Commission, an introducing broker-dealer that receives customer chunks made payable to itself would be subject to a $250,000 minimum net capital requirement. An introducing broker-dealer that receives securities as well as customer checks made payable to its clearing firm or other appropriate third party (e.g., escrow agent) that it promptly forwards to such third party would be subject to a minimum net capital requirement of $50,000. An introducing broker-dealer that receives no securities and only receives customer checks made payable to appropriate third parties would he subject to a $5,000 minimum net capital requirement.23

      In a separate release, the Commission is proposing for comment the additional amendment that would raise the net capital requirements of this second tier of introducing firms to $25,000. The Commission considers the increased requirements to be more reasonably related to the level of capital needed to maintain successfully a securities business.

      In addition to raising the base minimum capital requirements, the Commission's original proposal would have required an introducing firm to maintain additional net capital equal to one quarter of one percent of the customer debit balances introduced to its clearing firm. This requirement was designed to further address the situation where clearing firms have their capital endangered by the failure or financial difficulty of an introducing firm. The commentators, including the NASD, pointed out that the requirement would be difficult to calculate, and therefore difficult to enforce. Moreover, it would add very little to the capital requirements of most introducing firms. Based on these comments, the Commission has decided not to adopt this proposal.

      The final component of the original proposal with regard to introducing firms was an amendment that would allow firms to participate in underwritings in which other members of the dealer group have firm commitments (an activity not allowed the current $5,000 broker-dealer) so long as the introducing firm is not the statutory underwriter, but a marketing agent with no commitment to purchase any of the securities. The rule amendments make it clear that this is a dealer activity (that would ordinarily subject the firm to b minimum requirement of $100,000), but permit introducing firms that maintain minimum net capital of at least $50,000 to engage in this activity.

      In conclusion, the Commission believes it is appropriate to raise the minimum net capital requirements for introducing firms in the amounts indicated. The Commission believes the increases are justified because of the large amounts of customer assets handled by introducing firms, and the impact such firms' failures can have on customers and the SEPC fund. Permitting undercapitalized introducing firms to handle, even for a short period of time, line assets of investors has proven to be a regulatory problem that the Commission believes will be alleviated by requiring a greater cushion of net capital to insulate customers from loss. Finally, the Commission notes that it is taking today's action at the request of the NASD, which is the primary supervisory entity for the majority of the firms affected by the increases, and SIPC, which serves as the investor's last resort for recovery in broker-dealer failures.
      D. Other Broker-Dealers

      This section of the release will address the minimum net capital treatment for all other categories of broker-dealers not specifically referred to above.
      (i) Mutual Fund Firms

      Under the Commission's proposal, the minimum net capital requirement applicable to broker-dealers that limit their activities to transactions in shares of registered investment companies, and which receive customer funds or securities, would increase from $2,500 to $23,000. For those mutual fund firms that do not handle any customer funds or securities, and are not direct wire order firms, a $5,000 minimum was proposed. The Commission is adopting these amendments.

      The firms that commented on the increase from the current $2,500 minimum to $25,000 were generally opposed to it. These firms feared that increasing minimum capital requirements would eliminate firms and stifle competition in the mutual fund industry. However the Commission considers a capital requirement of $2,500 to be far too small for a firm that handles funds and securities. Moreover, the NASD Data does not indicate that the proposed increases would have a dramatic effect on competition. The Division has calculated that of a total 409 NASD mutual fund firms, 195 firms would require a total of $3 million or an average of $15,325 each to meet the $25,000 level. These firms generated revenues of .$15.6 million, which represented only 1.2 percent of the total $1.31 billion in revenues produced by all NASD member mutual fund firms during the last year.
      (ii) Best Efforts Underwriters

      Under the current rule, firms that participate, as a broker or dealer, in underwritings on a "best efforts" basis and that promptly forward all customer funds and securities to an issuer or an independent escrow agent designated for the underwriting are required to maintain minimum net capital of only $5,000. In effect, these firms are treated as introducing firms. Currently, broker-dealers that sell direct participation programs in real estate syndications also many avail themselves of this standard, so long as any funds or securities are promptly forwarded to an issuer or escrow agent. The original proposal did not propose an increase in minimum capital requirements for these firms; rather it added a provision which prohibited these firms from receiving any customer funds or securities. This aspect of the proposal is being adopted.
      (iii) Miscellaneous Brokers

      The original release did not propose any increases applicable to the residual category of broker dealers that would include broker-dealers that are tangentially related to the securities business, such as firms that act as. finders for potential merger and acquisition opportunities on behalf of their clients. Such firms do not take customer orders, hold customer funds or securities or execute customer trades, yet must register as broker-dealers with the Commission because they accept compensation based upon a percentage of securities transactions. Firms with this low required minimum will be those that cannot be classified in any of the categories enumerated above. This category also would include floor brokers on the national securities exchanges.
      (iv) Further Proposals

      As to each of the categories of firms described in paragraphs (i) through (iii) above, in a separate release, the Commission is proposing for comment an increase in the minimum net capital requirements to $10,000.
      E. Phase-In Schedule

      Because of the burden that the amendment may have on the industry, the proposal contained a provision that would have staggered the increases over a period of four years. Some commentators suggested that the phase-in schedule was unnecessary. Others suggested that the time period should be reduced, although others recommended an increase in time. The Commission has decided to adopt a modified phase-in period of one year, commencing six months from the effective date. The Commission considers this to be a fair period of time within which additional capital could be acquired, particularly since the proposal has been outstanding since 1989. The timing of the increases is summarized below:
      i. Firms That Carry Customer Accounts (Aggregate Indebtedness Standard)
      a. Current Rule: $25,000
      b. By 6/30/93: $100,000
      c. By 12/31/93: $175,000
      d. By 6/30/94: $250,000
      ii. Firms That Elect The Alternative Standard
      a. Current Rule: $100,000
      b. By 6/30/93: $150,000
      c. By 12/31/93: $200,000
      d. By 6/30/94: $250,000
      iii. Clearing Firms That Do Not Generally Maintain Custody of Customer Funds or Securities
      a. Current Rule: $25,000
      b. By 6/31/93: $50,000
      c. By 12/31/93: 575,000
      d. By 6/30/94: $100,000
      iv. Mutual Fund Dealers That Receive Customer Funds
      a. Current Rule: $2,500
      b. By 6/30/93: $10,000
      c. By 12/31/93: 517,500
      d. By 6/30/94: $25,000
      v. Mutual Fund Dealers That Do Not Receive Customer Funds
      a. Current Rule: $2,500
      b. By 6/30/93: $3,300
      c. By 12/31/93: 54,100
      d. By 6/30/94: 55,000
      vi. Introducing Firms That Receive Customer Securities
      a. Current Rule: $5,000
      b. By 6/30/93: $20,000
      c. By 12/31/93: 535,000
      d. By 6/30/94: 550,000
      The Commission's original proposal, in addition to addressing the minimum net capital standards discussed above, also contained proposed rule amendments with respect to equity haircuts and certain aggregate indebtedness charges. The following sections of this release will address these topics.
      III. Election of the Alternative Standard

      The Commission proposed to make the alternative available only to firms that clear and carry customer transactions. That would have altered the present rule which allows trading firms and introducing firms to elect the alternative method of calculating net capital. After careful consideration, the Commission has determined to make the alternative standard available to all firms.

      The Commission believes the amendment that would have prevented the election of the alternative standard by firms that do not carry customer accounts is not appropriate for several reasons. First, a firm could easily render the prohibition ineffective by accepting one customer account. Secondly, under the amendments as adopted, a firm must maintain at least $250,000 in order to compute under the alternative.26 The Commission believes that the $250,000 capital requirement will provide sufficient cushion to compensate for the additional capital that would have been required for those firms under the aggregate indebtedness standard. Indeed, a firm will have to have more than approximately $3.8 million in aggregate indebtedness before its net capital requirement would exceed the $250,000 minimum. Finally, the Commission's concern with respect to leverage that can be attained by trading firms was addressed by the Commission's recent adoption of a new-early warning level under paragraph (e) of the net capital rule based on 25 percent of haircuts. That early warning level change will address some of the Commission's concerns and constrain firms with large trading positions from removing capital from the broker-dealer in the event of financial distress.
      IV. Equity Securities Haircuts
      A. General

      The net capital rule provides two separate methods for calculating haircuts related to a broker-dealer's equity securities positions. The method used by a broker-dealer depends on the election the broker-dealer makes with respect to its net capital requirement. A firm calculating its net capital requirement under the basic method incurs a haircut equal to 30 percent of the market value of the greater of its long or short positions, plus 15 percent of the lesser positions, but only to the extent that those positions exceed 25 percent of the market value of the greater of the long or short positions. In effect, the first 25 percent of the lesser position incurs no haircut.27

      Under the current rule, a broker-dealer electing the alternative method of computing net capital incurs a 15 percent haircut on its long equity securities positions. That haircut is increased by 30 percent of the broker-dealer's short equity positions, but only to the extent those short positions exceed 25 percent of the long positions,28

      The basis for the distinction between long and short positions is, for haircut purposes, no longer valid. The distinctions based upon the method chosen are, the Commission believes, even less significant when the increases to the minimum requirements are taken into account. The premise underlying the alternative method of calculating haircuts was that long positions have to be financed by an outside entity that will demand more margin than the 15 percent haircut. Short positions, by contrast, are self-financing.

      Broker-dealers are not necessarily constrained by the ability to finance their long positions by a bank or another broker-dealer. For example, broker-dealers are able to receive cash collateral in excess of the market value of the long position by lending the security to another broker-dealer. Moreover, except for situations such as tender offers, the long position would seem to be no less volatile or damaging to the broker-dealer than the short position.

      One commentator expressed the view that, given the volatility of the equity markets, all haircuts should remain at 30 percent. However, the Commission believes that a 15 percent haircut provides an adequate safeguard and is adopting the proposal. Thus, under the amended rule, all broker-dealers will incur a deduction of 15 percent on the market value of the greater of the long or short equity position, and a deduction of 15 percent on the market value of the lesser position, but only to the extent this lesser position exceeds 25 percent of the greater position.29

      In addition to standardizing the deduction for equity securities positions under the net capital rule, the proposal would have required broker-dealers to apply the equity securities haircut (15 percent), rather than the lower, government securities haircut (6 percent), to their positions in interest and principal only instruments. In response to this proposal, the Public Securities Association submitted data suggesting that a lower haircut should be applied. The Commission is not adopting this amendment, and will await a further recommendation by the Commission staff in this regard.
      B. Undue Concentration Charge

      Paragraphs (c)(2)(vi)(M) and (f)(iii) currently include extra deductions for securities positions that are large relative to a firm's net capital. These "undue concentration charges" currently vary slightly depending on the firm's election of either the basic or alternative method. The Commission's proposal would eliminate this difference, and standardize the deduction, so that all concentration charges would be calculated according to the method previously set forth in paragraph (f) of the rule. There were no comments on this aspect of the proposal; therefore, the Commission is adopting this amendment as proposed.30
      C. Contractual Commitments

      The Commission's proposal, although it would standardize equity securities haircuts at 15 percent, would have nonetheless required a 30 percent charge for the contractual commitment haircut in certain securities; The Commission is adopting this amendment as proposed. Therefore, the contractual commitment haircut applicable to equity securities shall remain at 30 percent unless the class and issue of the securities are listed on. a national securities exchange or are designated as NASDAQ National Market System Securities.
      V. Aggregate Indebtedness

      The aggregate indebtedness test has been included in the net capital rule since its adoption in 1942. The term aggregate indebtedness includes all of the liabilities and/or obligations (actual or otherwise) of a broker-dealer. The test applies to broker-dealers computing net capital under the basic method and limits the leverage that they are able to attain. The rule however, specifically excludes from aggregate indebtedness certain prescribed liabilities. In the two classes of liabilities described below, the Commission believes the 6% percent aggregate indebtedness charge is not appropriate, particularly in light of the increases in the minimum requirements. Therefore, the Commission's proposal would have reduced the 6% percent charge to one percent in the two areas discussed below. Both of these amendments are -being adopted as proposed.
      A. Mutual Fund Payables

      Currently, the net capital rule requires a broker-dealer that owes money to a mutual fund in connection with a purchase of shares of that fund to include that amount in aggregate indebtedness even if offset by a receivable from another broker-dealer related to thattransaction.31

      Currently, the net capital rule requires a charge of 6% percent on these mutual fund payables. The Commission's proposal would lower this deduction to one percent of the liability amount when an offset from the mutual fund exists. Other than the request for clarification discussed in the following paragraph, the Commission received no comments on this amendment, and is adopting it as proposed.

      A number of commentators wrote to the Commission requesting clarification in the method of computation. Specifically, the commentators questioned why the proposed rule amendment contained an 85 percent aggregate indebtedness exclusion when the narrative description of the rule change in the proposing release described a one percent aggregate indebtedness charge. The answer is that 6% percent of .15 (remaining after .85 is deducted from one) gives the same result as one percent of one. The method chosen for reducing the charge was designed for consistency with the present status of (he rule.
      B. Stock Loan Payables

      A stock loan payable is a liability arising from the receipt of cash collateral from a person who borrows securities from the broker-dealer. The payable is considered aggregate indebtedness even if the securities that were loaned were borrowed from another broker-dealer.32 The current rule requires a 6% percent charge on these items. As with mutual fund receivables, the Commission's proposal would reduce this charge to one percent.

      Given the matched nature of these : related payables and receivables, the Commission does not believe that the risk merits a charge of 6% percent on the dollar amount of the liability; therefore, the Commission is adopting the amendment as proposed.
      VI. Technical Amendments

      Because of the amendments to the minimum net capital requirements and equity securities haircuts, the Commission is merging paragraph (f) into paragraph (a) of the rule. As a result, the rule amendments include several technical changes to the rule.

      For example, all references to paragraph (f) are deleted and new references to appropriate rule sections e substituted. Other examples include the amendments to the concentration charges under paragraph (c)(2)(vi)(M) and the contractual commitment charge under paragraph (c)(2)(viii). The amendments also delete a provision from paragraph (c)(2)(ix) of Rule 15c3-1 that expired on January 1, 1983.
      VII. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis ("Analysis"); in accordance with 5 U.S.C. 603 regarding the amendments. The Analysis notes that the objective of the amendments is to further the purposes of the various financial responsibility rules that provide safeguards with respect to the financial responsibility and related practices of brokers-dealers. The Analysis states that the Commission did not receive any comments concerning the Initial Regulatory Flexibility Analysis. A copy of the Analysis may be obtained by contacting Roger G. Coffin, Division of Market Regulation, Securities and Exchange Commission, Washington, DC 20549, (202J 272-7375.
      VIII. Statutory Analysis

      Pursuant to the Securities Exchange Act of 1934 and particularly sections 15(c)(3), 17 and 23 thereof, 15 U.S.C. 78o(c)(3), 78q and 78w, the Commission is adopting amendments to § 240.15c3-1 of title 17 of the Code of Federal Regulations in the manner set forth below.
      IX. List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.
      X. Text of the Amendments

      In accordance with the foregoing, title 17, chapter II, part 240 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 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, 79f, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-3, and 80b-11, unless otherwise noted.
      2. Section 240.15c3-1 is amended by removing paragraph (f), removing the word "and" from paragraph (c)(1)(x)(i), removing and reserving paragraphs (a)(3)(a)(5) and (c)(2)(vi)(I), adding paragraphs (c)(1)(xiv) and (c)(1)(xv) and revising paragraphs (a) introductory text, (a)(I), (a)(2), (a)(4), (a)(6)(i), (a)(7)(i), (a)(9), (c)(1)(xiii), (c)(2)(i)(C)(1), (c)(2)(iv)(B), (c)(2)(iv)(P)(3)(1)(B) and (C), (c)(2)(vi) introductory text, (c)(2)(vi)(A)(5), (c)(2)(vi)(J) and (M)(c)(2)(viii), (c)(2)(ix)(c)(2)(x)(A)(2) through (5), (c)(9), and (c)(10) to read as follows:

      § 240.15c3-1. Net capital requirements for brokers or dealers.
      (a) Every broker or deafer shall at all times have and maintain net capital no less than the greater of the highest minimum requirement applicable to its ratio requirement under paragraph (a)(1) of this section, or to any of its activities under paragraph (a)(2) of this section. Each broker or dealer also shall: comply with the supplemental requirements of paragraphs (a)(4) and (a)(9) of this section, to the extent either paragraph is applicable to its. activities. In addition, a broker or dealer shall maintain net capital of not less than its own net capital requirement plus the sum of each broker's or dealer's subsidiary or affiliate minimum net capital requirements, which is consolidated; pursuant to Appendix C, § 24Q.15c3-1c.
      Ratio Requirements

      Aggregate Indebtedness Standard
      (1)(i) No broker or dealer, other than one that elects the provisions of paragraph (a)(1)(ii) of this section, shall permit its aggregate indebtedness to all other persons to exceed 1500 percent of its net capital (or 800 percent of its net capital for 12 months after commencing business as a broker or dealer).
      Alternative Standard
      (ii) A broker or dealer may elect not to be subject to the Aggregate Indebtedness Standard of paragraph (a)(1)(i) of this section. That broker or dealer shall not permit its net capital to be less than the greater of $250,000 or 2 percent of aggregate debit items computed in accordance with the Formula for Determination of Reserve Requirements for Brokers and Dealers (Exhibit A to Rule 15c3-3, § 240.15c3-3a). Such broker or dealer shall notify its Examining Authority, in writing, of its election to operate under this paragraph (a)(1)(ii). Once 3 broker or dealer has notified its Examining Authority, it shall continue to operate under, this paragraph unless a change is approved upon application to the Commission. A broker or dealer that elects this standard and is not exempt from Rule 15c3-3 shall:
      (A) Make the computation required by § 240.15c3-3(e)f and set forth in Exhibit A. § 24Q.15c3-3a, on a weekly basis and, in lieu of the 1 percent reduction of certain debit items required by Note E (3) in the computation of its Exhibit A requirement, reduce aggregate debit items in such computation by 3 percent;
      (B) Include in Items 7 and 8 of Exhibit A, § 240.15c3-3a, the market value of items specified therein more than 7 business days; old;
      (C) Exclude credit balances in accounts representing amounts payable for securities not yet received from the issuer or its agent which securities are specified in paragraphs (c)(2)(vi)(A) and (E) of this section and any related debit items from the Exhibit A requirement for 3 business days; and
      (D) Deduct from net worth in computing net capital 1 percent of the contract value of all failed to deliver contracts or securities borrowed that were allocated to failed to receive contracts of the same issue and which thereby were excluded from Items 11 or 12 of Exhibit A, § 24B.15c3-3a.
      Futures Commission Merchants
      (iii) No broker or dealer registered as a futures commission merchant shall permit its net capital to be less; than the greater of its requirement under paragraph (a)(1)(i) or (ii) of this section, or 4 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the customer's account).
      Minimum Requirements

      See Appendix E (§ 240.15c3-1E) for temporary minimum requirements.

      Brokers or Dealers That Carry Customer Accounts
      (2)(i) A broker or deafer (other than one described in paragraphs (a)(2)(ii) or (a)(8) of this section) shall maintain, net capital of not less than $250,000 if it carries customer or broker or dealer accounts and receives or holds funds or securities for those persons. A broker or dealer shall be deemed to receive funds or to carry customer or broker or dealer accounts and to receive funds from those persons if, in connection with its activities as a broker or dealer, it receives cheeks, drafts or other evidences of indebtedness made payable to itself or persons other than the requisite registered broker or dealer carrying the account of a customer, escrow agent, issuer, underwriter, sponsor, or other distributor of securities. A broker or dealer shall be deemed to hold securities for, or to carry customer or broker or dealer accounts, and hold securities of, those persons if it does not promptly forward or promptly deliver all of the securities of customers or of other brokers or dealers received by the firm in connection with its activities as a broker or dealer. A broker or dealer, without complying with this paragraph (a)(2)(i), may receive securities only if its activities conform with the provisions of paragraphs (a)(2) (iv) or (v) of this section, and may receive funds only In connection with the activities described in paragraph (a)(2)(v) of this section.
      (ii) A broker or dealer that is exempt from the provisions of § 240.15c3-3 pursuant to paragraph (k)(2)(i) thereof shall maintain net capital of not less than $100,000.
      Dealers
      (iii) A dealer shall maintain net capital of not less than $100,000. For the purposes of this section, the term "dealer" includes:
      (A) Any broker or dealer that endorses or writes options otherwise than on a registered national securities exchange or a facility of a registered national securities association; and
      (B) Any broker or dealer that effects more than ten transactions in any one calendar year for its own investment account. This section shall not apply to those persons engaging in activities described in paragraphs (a)(2)(v), (a)(2)(vi) or (a)(8) of this section, or to those persons whose underwriting activities are limited solely to acting as underwriters in best efforts or all or none underwritings in conformity with paragraph (b)(2) of §240.15c2-4, so long as those persons engage in no other dealer activities.
      Brokers or Dealers That Introduce Customer Accounts And Receive Securities
      (iv) A broker or dealer shall maintain net capital of not less than $50,000 if it introduces transactions and accounts of customers or other brokers or dealers to another registered broker or dealer that carries such accounts on a fully disclosed basis, and if the broker or dealer receives but does not hold customer or other broker or dealer securities. A broker or dealer operating under this paragraph (a)(2)(iv) of this section may participate in a firm commitment underwriting without being subject to the provisions of paragraph (a)(2)(iii) of this section, but may not enter into a commitment for the purchase of shares related to that underwriting.
      Brokers or Dealers Engaged in the Sale of Redeemable Shares of Registered Investment Companies and Certain Other Share Accounts
      (v) A broker or dealer shall maintain net capital of not less than $25,000 if it acts as a broker or dealer with respect to the purchase, sale and redemption of redeemable shares of registered investment companies or of interests or participations in an insurance company separate account directly from or to the issuer on other than a subscription way basis. A broker or dealer operating under this section may sell securities for the account of a customer to obtain funds for the immediate reinvestment in redeemable securities of registered investment companies. A broker or dealer operating under this paragraph (a)(2)(v) must promptly transmit all funds and promptly deliver all securities received in connection with its activities as a broker or dealer, and may not otherwise hold funds or securities for, or owe money or securities to, customers.
      Other Brokers or Dealers
      (vi) A broker or dealer that does not receive, directly or indirectly, or hold funds or securities for, or owe funds or securities to, customers and does not carry accounts of, or for, customers and does not engage in any of the activities described in paragraphs (a)(2) (i) through (v) of this section shall maintain net capital of not less than $5,000. A broker or dealer operating under this paragraph may engage in the following dealer activities without being subject to the requirements of paragraph (a)(2)(iii) of this section:
      (A) In the case of a buy order, prior to executing such customer's order, it purchases as principal the same number of shares or purchases shares to accumulate the number of shares necessary to complete the order, which shall be cleared through another registered broker or dealer or
      (B) In the case of a sell order, prior to executing such customer's order, it sells as principal the same number of shares or a portion thereof, which shall be cleared through another registered broker or dealer.
      (3) [Reserved].
      Capital Requirements for Market Makers
      (4) A broker or dealer engaged in activities as a market maker as defined in paragraph (c)(8) of this section shall maintain net capital in an amount not less than $2,500 for each security in which it makes a market (unless a security in which it makes a market has a market value of $5 or less, in which event the amount of net capital shall be not less than $1,000 for each such security) based on the average number of such markets made by such broker or dealer during the 30 days immediately preceding the computation date. Under no circumstances shall it have net capital less than that required by the provisions of paragraph (a) of this section, or be required to maintain net capital of more than $1,000,000 unless required by paragraph (a) of this section. (5) [Reserved].
      Market Makers, Specialists and Certain Other Dealers
      (6)(i) A dealer who meets the conditions of paragraph (a)(6)(ii) of this section may elect to operate under this paragraph (a)(6) and thereby not apply, except to the extent required by this paragraph (a)(6), the provisions of paragraphs (c)(2)(vi) or Appendix A (§ 240.15c3-ia) of this section to market maker and specialist transactions and. in lieu thereof, apply thereto the provisions of paragraph (a)(6)(iii) of this section.
      * * * * *

      Self-Clearing Options Specialists
      (7)(i) A dealer who meets the conditions of paragraph (a)(7)(ii) of this section may elect to operate under this paragraph (a)(7) and thereby not apply, except to the extent required by this paragraph (a)(7), the provisions of paragraphs (c)(2)(vi), (c)(2)(x), and (c)(2)(xi) of this section or Appendix A (§ 240.15c3-1a) to this section and. in lieu thereof, apply the provisions of paragraph (a)(7)(iii) of this section.
      * * * * *

      Certain Additional Capital Requirements for Brokers or Dealers Engaging in Reverse Repurchase Agreements
      (9) A broker or dealer shall maintain net capital in addition to the amounts required under paragraph (a) of this section in an amount equal to 10 percent of:
      (i) The excess of the market value of United States Treasury Bills, Bonds and Notes subject to reverse repurchase agreements with any one party over 105 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that party;
      (ii) The excess of the market value of securities issued or guaranteed as to principal or interest by an agency of the United States or mortgage related securities as defined in section 3(a)(41) of the Act subject to reverse repurchase agreements with any one party over 110 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that party; and
      (iii) The excess of the market value of other securities subject to reverse repurchase agreements with any one party over 120 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that party.
      * * * * *
      (c)* * *
      (1) * * *
      Exclusions From Aggregate indebtedness
      (xiii) Deferred tax liabilities;
      (xiv) Eighty-five percent of amounts payable to a registered investment company related to fail to deliver receivables of the same quantity arising out of purchases of shares of those registered investment companies; and
      (xv) Eighty-five percent of amounts payable against securities loaned for which the broker or dealer has receivables related to securities of the same class and issue and quantity that are1 securities borrowed by the broker or dealer.
      Net Capital
      (2) * * *
      (i) * * *
      (C) * * *
      (1) The aggregate amount resulting from applying to the amount of the deductions computed in accordance with paragraph (c)(2)(vi) of this section and Appendices A and B, § 240.15c3-1a and 240.15c3-1b, the appropriate Federal and State tax rate(s) applicable to any unrealized gain on the asset on which the deduction was computed;
      * * * * *
      (iv)(A) * * *
      Certain Unsecured and Partly Secured Receivables
      (B) All unsecured advances and loans; deficits in customers' and non-customers' unsecured and partly secured notes; deficits in special omnibus accounts maintained in compliance with the requirements of 12 CFR 220.10 of Regulation T under the Securities Exchange Act of 1934, or similar accounts carried on behalf of another broker or dealer, after application of calls for margin, marks to the market or other required deposits that are outstanding 5 business days or less; deficits in customers' and non-customers' unsecured and partly secured accounts after application of calls for margin, marks to the market or other requited deposits that are outstanding 5 business days or lass, except deficits in cash accounts as defined in 12 CFR 220.8 of Regulation T under the Securities Exchange Act of 1934 for which not more than one extension respecting a specified securities transaction has been requested and granted, and deducting for securities carried in any of such accounts the percentages specified in paragraph (c)(2)(vi) of this section or Appendix A (§ 240.15c3-1a); the market value of stock loaned in excess of the value of any collateral received therefor; receivables arising out of free shipments of securities (other than mutual fund redemptions) in excess of $5,000 per shipment and all free shipments (other than mutual fund redemptions) outstanding more than 7 business days, and mutual fund redemptions outstanding more than 16 business days; any collateral deficiencies in secured demand notes as defined in Appendix D (§ 240.15c3-1d);
      * * * * *
      (F) * * *
      (3)(i)(A) * * *
      (B) The excess of the aggregate repurchase agreement deficits with any one party over 25 percent of the broker or dealer's net capital before the application of paragraph (c)(2)(vi) of this section (less any deduction taken with respect to repurchase agreements with that party under paragraph (c)(2)(iv)(F)(3)(i)(A) of this section) or, if greater;
      (C) The excess of the aggregate repurchase agreement deficits over 300 percent of the broker's or dealer's net capital before the application of paragraph (c)(2)(vi) of this section.
      * * * * *

      Securities Haircuts
      (vi) Deducting the percentages specified in paragraphs (c)(2)(vi) (A) through (M) of this section (or the deductions prescribed for securities positions set forth in Appendix A (§ 240.15c3-1a) of the market value of all securities, money market instruments or options in the proprietary or other accounts of the broker or dealer.
      (A)(4) * * *
      (5) In the case of a Government securities dealer that reports to the Federal Reserve System, that transacts business directly with the Federal Reserve System, and that maintains at all times a minimum net capital of at least $50,000,000, before application of the deductions provided for in paragraph (c)(2)(vi) of this section, the deduction for a security issued or guaranteed, as to principal or interest by the United States or any agency thereof shall be 75 percent of the deduction otherwise computed under paragraph (c)(2)(vi)(A) of this section.
      * * * * *
      (I) (Reserved).
      All Other Securities
      (J) In the case of all securities or evidences of indebtedness, except those described in Appendix A, § 240.15c3-1a, which are not included in any of the percentage categories enumerated in paragraphs (c)(2)(vi) (A) through (H) of this section or paragraph (c)(2)(vi)(K)(ii) of this section, the deduction shall be 15 percent of the market value of the greater of the long or short positions and to the extent the market value of the lesser of the long or short positions exceeds 25 percent of the market value of the greater of the long or short positions, the percentage deduction on such excess shall be 15 percent of the market value of such excess. No deduction need be made in the case of:
      (1) A security that is convertible into or exchangeable for another security within a period of 90 days, subject to no conditions other than the payment of money, and the other securities into which such security is convertible or for which it is exchangeable, are short in the accounts of such broker or dealer, or
      (2) A security that has been called for redemption and that is redeemable within 90 days.
      * * * * *

      Undue Concentration
      (M)(1) In the case of money market instruments, or securities of a single class or series of an issuer, including any option written, endorsed or held to purchase or sell securities of such a single class or series of an issuer (other than "exempted securities" and redeemable securities of an investment company registered pursuant to the Investment Company Act of 1940), and securities underwritten (in which case the deduction provided for herein shall be applied after 11 business days), which are long or short in the proprietary or other accounts of a broker or dealer, including securities that are collateral to secured demand notes defined in Appendix D, § 240.15c3-1d, and that have a market value of more than 10 percent of the "net capital" of a broker or dealer before the application of paragraph (c)(2)(vi) of this section or Appendix A, § 24G.15c3-1a, there shall be am additional deduction from net worth and/or the Collateral Value for securities collateralizing a secured demand note defined in Appendix D, § 240.15c3-1d, equal to 50 percent of the percentage deduction otherwise provided by this paragraph (c)(2)(vi) of this section or Appendix A, § 240, 15c3-1a, on that portion of the securities position in excess of 10 percent of the "net capital" of the broker or dealer before the application of paragraph (c)(2)(vi) of this section and Appendix A, § 240.15c3-1a. In the case of securities described in paragraph (c)(2)(vi)(J), the additional deduction required by this paragraph (c)(2)(vi)(M) shall be 15 percent.
      (2) This paragraph (c)(2)(vi)(M) shall apply notwithstanding any long or short position exemption provided for in paragraph (c)f 2)(vi)(J) of this section (except for long or short position exemptions arising out of the first proviso to paragraph (c)(2)(vi)(J)) and the deduction on any such exempted position shall be 15 percent of that portion of the securities position in excess of 10 percent of the broker or dealer's net capital before the application of paragraph (c)(2)(vi) of this section and Appendix A,§ 240.15c3-1a.
      (3) This paragraph (c)(2)(vi)(M) shall be applied to an issue of equity securities only on the market value of such securities in excess of $10,000 or the market value of 500 shares, whichever is greater, or $25,000 in the case of a debt security.
      (4) This paragraph (c)(2)(vi)(M) will be applied to an issue of municipal securities having the same security provisions, date of issue, interest rate, day, month and year of maturity only if such securities have a market value in excess of $500,000 in bonds ($5,000,000 in notes) or 10 percent of tentative net capital, whichever is greater, and are held in position longer than 20 business days from the date the securities are received by the syndicate manager from the issuer.
      (5) Any specialist that is subject to a deduction required by this paragraph (c)(2)(vi)(M), respecting its specialty stock, that can demonstrate to the satisfaction of the Examining Authority for such broker or dealer that there is sufficient liquidity for such specialist's specialty stock and that such deduction need not be applied in the public interest for the protection of investors, may upon a proper showing to such Examining Authority have such undue concentration deduction appropriately decreased, but in no case shall the deduction prescribed in paragraph (c)(2)(vi)(J) of this section above be reduced. Each such Examining Authority shall make and preserve for a period of not less than 3 years a record of each application granted pursuant to this paragraph (c)(2)(vi)(M)(5), which shall contain a summary of the justification for the granting of the application.
      * * * * *

      Open Contractual Commitments
      (viii) Deducting, in the case of a broker or dealer that has open contractual commitments (other than those option positions subject to Appendix A, § 240.15c3-1a), the -respective deductions as specified in paragraph (c)(2)(vi) of this section or Appendix B, § 240.15c3-1b, from the value (which shall be the market value whenever there is a market) of each net long and each net short position contemplated by any open contractual commitment in the proprietary or other accounts of the broker or dealer.
      (A) The deduction for contractual commitments in those securities that are treated in paragraph (c)(2)(vi)(J) of this section shall be 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.
      (B) A broker or dealer that maintains in excess of $250,000 of net capital may add back to net worth up to $150,000 of any deduction computed under this paragraph (c)(2)(viii)(B).
      (C) The deduction with respect to any single commitment shall be reduced by the unrealized profit in such commitment, in an amount not greater than the deduction provided for by this paragraph (or increased by the unrealized loss), in such commitment, and in no event shall an unrealized profit on any closed transactions operate to increase net capital.
      (ix) Deducting from the contract value of each failed to deliver contract that is outstanding five business days or longer (21 business days or longer in the case of municipal securities) the percentages of the market value of the underlying security that would be required by application of the deduction required by paragraph (c)(2)(vi) of this section. Such deduction, however, shall be increased by any excess of the contract price of the failed to deliver contract over the market value of the underlying security or reduced by any excess of the market value of the underlying security over the contract value of the failed to deliver contract, but not to exceed the amount of such deduction. The designated examining authority for the broker or dealer may, upon application of the broker or dealer, extend for a period up to 5 business days, any period herein specified when it is satisfied that the extension is warranted. The designated examining authority upon expiration of the extension may extend for one additional period of up to 5 business days, any period herein specified when it is satisfied that the extension is warranted.
      (x)(A) * * *
      (2) In the case of a bona fide hedged position as defined in this paragraph (c)(2)(x)(C) involving a long position in a security, other than an option, and a short position in a call option, the deduction shall be 15 percent (or such other percentage required by paragraphs (c)(2)(vi)(A) through (K) of this section) of the market value of the long position reduced by any excess of the market value of the long position over the exercise value of the short option position. In no event shall such reduction operate to increase net capital.
      (3) In the case of a bona fide hedged position as defined in this paragraph (c)(2)(x)(C) involving a short position in a security, other than an option, and a long position in a call option, the deduction shall be the lesser of 15 percent of the market value of the short position or the amount by which the exercise value of the long option position exceeds the market value of the short position; however, if the exercise value of the long option position does not exceed the market value of the short position, no deduction shall be applied.
      (4) In the case of a bona fide hedged position as defined in this paragraph (c)(2)(x)(C) involving a short position in a security other than an option, and a short position in a put option, the deduction shall be 15 percent (or such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of this section) of the market value of the short security position reduced by any excess of the exercise value of the short option position over the market value of the short security position. No such reduction shall operate to increase net capital.
      (5) In the case of a bona fide hedged position as defined in this paragraph (c)(2)(x)(C) involving a long position in a security, other than an option, and a long position in a put option, the deduction shall be the lesser of 15 percent of the market value of such long security position or the amount by which the market value of such long security position exceeds the exercise value of the long option position. If the market value of the long security position does not exceed the exercise value of the long option position, no deduction shall be applied.
      Promptly Transmit and Deliver
      (9) A broker or dealer is deemed to "promptly transmit" all funds and to "promptly deliver" all securities within the meaning of paragraphs (a)(2)(i) and (a)(2)(v) of this section where such transmission or delivery is made no later than noon of the next business day after the receipt of such funds or securities; provided, however, that such prompt transmission or delivery shall not be required to be effected prior to the settlement date for such transaction.
      Promptly Forward.
      (10) A broker or dealer is deemed to "promptly forward" funds or securities within the meaning of paragraph (a)(2)(i) of this section only when such forwarding occurs no later than noon of the next business day following receipt of such funds or securities.
      * * * * *
      3. § 240.15c3-1a is amended by revising paragraphs (c)(1) through (c)(5), (c)(7), (c)(9) and (c)(10) to read as follows:

      §240.15c3-1a Options (Appendix A to 17 CFR 240.15c3-1).

      * * * * *
      (c) * * * Uncovered Calls
      (1) Where a broker or dealer is short a call, deducting, after the adjustment provided for in paragraph (b) of this Appendix A, 15 percent (or such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of §240.15c3- 1) of the current market value of the security underlying such option reduced by any excess of the exercise value of the call over the current market value of the underlying security. In no event shall the deduction provided by this paragraph be less than $250 for each option contract for 100 shares.
      Uncovered Puts
      (2) Where a broker or dealer is short a put. deducting, after the adjustment provided for in paragraph (b) of this Appendix A, 15 percent (or such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of § 240.15c3- 1) of the current market value of the security underlying the option reduced by any excess of the market value of the underlying security over the exercise value of the put. In no event shall the deduction provided by this paragraph be less than $250 for each option contract for 100 shares.
      Covered Calls
      (3) Where a broker or dealer is short a call and long equivalent units of the underlying security, deducting, after the adjustments provided for in paragraph (b) of this Appendix A, 15 percent (or such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of § 240.15c3-1) of the current market value of the underlying security reduced by any excess of the current market value of the underlying security over the exercise value of the call. No reduction under this paragraph shall have the effect of increasing net capital.
      Covered Puts
      (4) Where a broker or dealer is short a put and short equivalent units of the underlying security, deducting, after the adjustment provided for in paragraph (b) of this Appendix A, 15 percent (or such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of § 240.15c3-1) of the current market value of the underlying security reduced by any excess of the exercise value of the put over the market value of the underlying security. No such reduction shall have the effect of increasing net capital.
      Conversion Accounts
      (5) Where a broker or dealer is long equivalent units of the underlying security, long an unlisted put written or endorsed by a broker or dealer and short an unlisted call in its proprietary or other accounts, deducting 5 percent (or 50 percent of such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of § 240.15c3-1) of the current market value of the underlying security.
      * * * * *

      Long Over-the-counter Options
      (7) Where a broker or dealer is long an unlisted put or call endorsed or written by a broker or dealer, deducting 15 percent (or such other percentage required by paragraphs (c)(2)(vi) (A) through (K) of §240.15c3-1) of the market value of the underlying security, not to exceed any value attributed to such option in paragraph (c)(2)(i) of §240.15c3-1.
      * * * * *

      Certain Security Positions With Offsetting Options
      (9) Where a broker or dealer is long a security for which it is also long a listed put (such broker or dealer may in addition be short a call), deducting, after the adjustments provided in paragraph (b) of this Appendix A, 15 percent of the market value of the long security position not to exceed the amount by which the market value of equivalent units of the long security position exceeds the exercise value of the put. If the exercise value of the put is equal to or exceeds the market value of equivalent units of the long security position, no percentage deduction shall be applied.
      (10) Where a broker or dealer is short a security for which he is also long a listed call (such broker or dealer may in addition be short a put), deducting, after the adjustments provided in paragraph (b) of this Appendix A. 15 percent of the market value of the short security position not to exceed the amount by which the exercise value of the long call exceeds the market value of equivalent units of the short security position. If the exercise value of the call is less than or equal to the market value of equivalent units of the short security position no percentage deduction shall be applied.
      * * * * *
      4. § 240.15c3-1c is amended by revising paragraph (b)(1). to read as follows:

      § 240.15c3-1c Consolidated Computations of Net Capital and Aggregate Indebtedness for Certain Subsidiaries and Affiliates (Appendix C to 17 CFR 240.15c3-1).

      * * * * *

      Required Counsel Opinions
      (b)(1) If the consolidation, provided for in paragraph (a) of this section, of any such subsidiary or affiliate results in the increase of the broker's or dealers's net capital and/or the decrease of the broker's or dealer's minimum net capital requirement under paragraph (a) of §240.15c3-1 and an opinion of counsel described in paragraph (b)(2) of this section has not been obtained, such benefits shall not be recognized in the broker's or dealer's computation required by this section.
      * * * * *
      5. § 240.15c3-1d is amended by revising paragraphs (a)(2)(iii), (b)(6)(iii), (b)(7) (b)(8) (b)(10)(iii)(B), (c)(2), (c)(5)(i), and (c)(5)(ii)(A) to read as follows:

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

      * * * * *
      (a)(2) * * *
      (iii) The term "Collateral Value" of any securities pledged to secure a secured demand note shall mean the market value of such securities after giving effect to the percentage deductions set forth in paragraph (c)(2)(vi) of §240.15c3-1 except for paragraph (c)(2)(vi)(J). In lieu of the deduction under (c)(2)(vi)(J), the broker or dealer shall reduce the market value of the securities pledged to secure the secured demand note by 30 percent.
      * * * * *
      (b)(8) * * *
      (iii) The secured demand note agreement also may provide that, in lieu of the procedures specified in the provisions required by paragraph (b)(6)(ii) of this section, the lender with the prior written consent of the broker or dealer and the Examining Authority for the broker or dealer may reduce the unpaid principal amount of the secured demand note. After giving effect to such reduction, the aggregate indebtedness of the broker or dealer may not exceed 1000 percent of its net capital or, in the case of a broker or dealer operating pursuant to paragraph (a)(1)(ii) of § 240.15c3-1, net capital may not be less than 5 percent of aggregate debit items computed in accordance with § 240.15c3-3a, or, if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater. No single secured demand note shall be permitted to be reduced by more than 15 percent of its original principal amount and after such reduction no excess collateral may be withdrawn. No Examining Authority shall consent to a reduction of the principal- amount of a secured demand note if, after giving effect to such reduction, net capital would be less than 120 percent of the minimum dollar amount required by § 240.15c3-1.
      Permissive Prepayments
      (7) A broker or dealer at its option but not at the option of the lender may, if the subordination agreement so provides, make a Payment of all or any portion of the Payment Obligation thereunder prior to the scheduled maturity date of such Payment Obligation (hereinafter referred to as a "Prepayment"), but in no event may any Prepayment be made before the expiration of one year from the date such subordination agreement became effective. This restriction shall not apply to temporary subordination agreements 'hat comply with the provisions of paragraph (c)(5) of this Appendix D. No Prepayment shall be made, if, after giving effect thereto (and to all Payments of Payment Obligations under any other subordinated agreements then outstanding the maturity or accelerated maturities of which are scheduled to fell due within six months after the date such Prepayment is to occur pursuant to this provision or on or prior to the date on which the Payment Obligation in respect of such Prepayment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of the broker or dealer, either aggregate indebtedness of the broker or dealer would exceed 1000 percent of its net capital or its net capital would be less than 120 percent of the minimum dollar amount required by § 240.15c3-1 or, in the case of a broker or dealer operating pursuant to paragraph (a)(1)(ii) of § 240.15c3-1, its net capital would be less than 5 percent of its aggregate debit items computed in accordance with § 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by paragraph (a)(1)(ii) of § 240.15c3-1. Notwithstanding the above, no Prepayment shall occur without the prior written approval of the Examining Authority for such broker or dealer.
      Suspended Repayment
      (8)(i) The Payment Obligation of the broker or dealer in respect of any subordination agreement shall be suspended and shall not mature if, after giving effect to Payment of such Payment Obligation (and to all Payments of Payment Obligations of such broker or dealer under any other subordination agreement(s) then outstanding that are scheduled to mature on or before such Payment Obligation) either (A) the aggregate indebtedness of the broker or dealer would exceed 1200 percent of its net capital, or in the case of a broker or dealer operating pursuant to paragraph (a)(1)(ii) of § 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with § 240.15c3-3a or, if registered as a futures commission merchant 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in die option customer's account), if greater, or (B) its net capital would be less than 120 percent of the minimum dollar amount required by § 240.15c3-1 including paragraph (a)(1)(ii), if applicable. The subordination agreement may provide that if the Payment Obligation of the broker or dealer thereunder does not mature and is suspended as a result of the requirement of this paragraph (b)(8) for a period of not less than six months, the broker or dealer shall thereupon commence the rapid and orderly liquidation of its business, but the right of the lender to receive Payment, together with accrued interest or compensation, shall remain subordinate as required by the provisions of § 240.15c3-1 and § 240,15c3-1d.
      * * * * *
      (10)(ii) * * *
      (B) The aggregate indebtedness of the broker or dealer exceeding 1500 percent of its net capital or, in the case of a broker or dealer that has elected to operate under paragraph (a)(1)(ii) of § 240.15c3-1, its net capital computed in accordance therewith is less than 2 percent of its aggregate debit items computed in accordance with §240.15c3-3a or, if registered as a futures commission merchant, 4 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater, throughout a period of 15 consecutive business days, commencing on the day the broker or dealer first determines and notifies the Examining Authority for the broker or dealer, or the Examining Authority or the Commission first determines and notifies the broker or dealer of such fact;
      * * * * *
      (c) * * *
      Notice of Maturity or Accelerated Maturity
      (2) Every broker or dealer shall immediately notify the Examining Authority for such broker or dealer if, after giving effect to all Payments of Payment Obligations under subordination agreements then outstanding that are then due or mature within the following six months without reference to any projected profit or loss of the broker or dealer either the aggregate indebtedness of the broker or dealer would exceed 1200 percent of its net capital or its net capital would be less than 120 percent of the minimum dollar amount required by § 240.15c3-1, or, in the case of a broker or dealer operating pursuant to paragraph (a)(1)(ii) of § 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with § 240.15c3-3a, or, if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater, or less than 120 percent of the minimum dollar amount required by paragraph (a)(1)(ii) of §240.1563-1.
      * * * * *

      Temporary and Revolving Subordination Agreements
      (5)(i) For the purpose of enabling a broker or dealer to participate as an underwriter of securities or other extraordinary activities in compliance with the net capital requirements of § 240.15c3-1, a broker or dealer shall be permitted, on no more than three occasions in any 12 month period, to enter into a subordination agreement on a temporary basis that has a stated term of no more than 45 days from the date such subordination agreement became effective. This temporary relief shall not apply to a broker or dealer if, at such, time, it is subject to any of the reporting provisions of § 240 17a-11, irrespective of its compliance with such provisions or if immediately prior to entering into such subordination agreement, either
      (A) The aggregate indebtedness of the broker or dealer exceeds 1000 percent of its net capital or its net capital is less than 120 percent of the minimum dollar amount required by § 240.15c3-1, or
      (B) In the case or a broker or dealer operating pursuant to paragraph (a)(1)(ii) of § 240.15c3-1, its net capital is less than 5 percent of aggregate debits computed in accordance with §240.15c3-1, or, if registered as a futures commission merchant, less than 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater, or less than 120 percent of the minimum dollar amount required by paragraph (a)(1)(ii) of this section, or
      (C) The amount of its then outstanding subordination agreements exceeds the limits specified in paragraph (d) of § 240.15c3-1. Such temporary subordination agreement shall be subject to all other provisions of this Appendix D.
      (ii) * * *
      (A) After giving effect thereto (and to all Payments of Payment Obligations under any other subordinated agreements then outstanding, the maturity or accelerated maturities of which are scheduled to fall due within six months after the date such prepayment is to occur pursuant to this provision or on or prior to the date on which the Payment Obligation in respect of such prepayment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of the broker or dealer, either aggregate indebtedness of the broker or dealer would exceed 900 percent of its net capital or its net capital would be less than 200 percent of the minimum dollar amount required by § 240.15c3-1 or, in the case of a broker or dealer operating pursuant to paragraph (a)(1)(ii) of § 240.15c3-1, its net capital would be less than 6 percent of aggregate debit items computed in accordance with § 240.15c3-3a, or, if registered as a futures commission merchant, 10-percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater, or its net capital would be less than 200 percent of the minimum dollar amount required by paragraph (a)(1)(ii) of this section or
      * * * * *
      6. § 240.15c3-1e is added to read as follows:

      §240.15c3-1e Temporary Minimum Requirements (Appendix E to 17 CFR 240.15c3-1 e).

      Brokers or Dealers That Carry Customer Accounts Aggregate Indebtedness Standard
      (a) A broker or dealer that falls within the provisions of paragraph (a)(2)(i) of § 240.15c3-1 and computes its required net capital under § 240.15c3-1(a)(1)(i) shall maintain net capital not less than the greater of the amount computed under the paragraph (a)(1)(i) or:
      (1) $25,000 until June 30, 1993;
      (2) $100,000 on July 1, 1993, until December 31, 1993;
      (3) $175,000 on January 1, 1994, until June 30, 1994; and
      (4) $250,000 on July 1, 1994.
      Brokers or Dealers That Elect the Alternative Standard
      (b) A broker or dealer that elects the provisions of § 240.15c3-1(a)(1)(ii) shall maintain net capital of not less than the greater of the amount computed under the paragraph (a)(1)(ii) or:
      (1) $100,000 until June 30, 1993:
      (2) $150,000 on July 1, 1993, until December 31, 1993;
      (3) $200,000 on January 1, 1994, until June 30, 1994; and
      (4) $250,000 on July 1, 1994.
      Broker or Dealers That are Exempt From Securities Exchange Act Rule 15c3-3 Under Paragraph (k)(2)(i) and Dealers
      (c) A broker or dealer that falls within the provisions of § 240.15c3-1(a)(2) (ii) or (iii) and computes its required net capital under § 240.15c3-1(a)(1)(i) shall maintain net capital not less than the greater of the same computed under § 240.15c3-1(a)(1)(i) or:
      (1) $25,000 until June 30, 1993;
      (2) $50,000 on July 1, 1993, until December 31, 1993;,
      (3) $75,000 on January 1, 1994, until June 30, 1994; and
      (4) $100,000 on July 1, 1994.
      Brokers or Dealers That Introduce Customer Accounts and Receive Securities
      (d) An introducing broker that falls within the provisions of § 240.15c3-1(a)(2)(iv) and computes its required net capital under § 240.15c3-1(a)(1)(i) shall maintain net capital of not less than the greater of the amount computed under §240.15c3-1(a)(1)(i)or:
      (1) $5,000 until June 30, 1993;
      (2) $20,000 on July 1, 1993, until December 31, 1993;
      (3) $35,000 on January 1, 1994, until June 30, 1994; and
      (4) $50,000 on July 1, 1994.
      Brokers or Dealers Engaged in the Sale of Redeemable Shares of Registered Investment Companies and Certain Other Share Accounts
      (e) A broker or dealer that falls within the provisions of § 240.15c3-1(a)(2)(v) and computes its required net capital under § 240.15c3-1(a)(1)(i) shall maintain net capital of not less than the greater of the amount computed under § 240.15c3-1(a)(1)(i) or:
      (1) $2,500 until June 30, 1993;
      (2) $10,000 on July 1, 1993, until December 31, 1993;
      (3) $17,500 on January 1, 1994, until June 30, 1994; and
      (4) $25,000 or July 1, 1994.
      Other Brokers or Dealers
      (f) A broker or dealer that falls within the provisions of § 240.15c3-1(a)(2)(vi), computes its required net capital under § 240.15c3-1(a)(1)(i) and is not otherwise subject to a $5,000 minimum net capital requirement shall maintain net capital of not less than the greater of the amount computed under §240.15c3-1(a)(1)(i)or:
      (1) $2,500 until June 30, 1993;
      (2) $3,300 on July 1, 1993, until December 31, 1993;
      (3) $4,100 on January 1, 1994, until June 30, 1994; and;
      (4) $5,000 on July 1, 1994.

      Dated: November 24, 1992.

      By the Commission.

      Margaret H. McFarland,

      Deputy Secretary:

      [FR Doc. 92-29031 Filed 12-1-92; 8:45 am]

      BILLING CODE M10-01-M


      1 Securities Exchange-Act Release No. 27249 (September 15, 1989). 54 FR 40395 (October 2, 1968). All comments are available in File No. 57-28-88 at the Commission's Public Reference Room, 450 Fifth Street NW, Washington, DC 20545.

      2 Generally, net capital, as defined by Rule 15c3- 1, is a broker-dealer's net worth plus liabilities - subordinated in accordance with Appendix D of the rule, minus assets "not readily convertible into cash" and certain percentages, or haircuts, of a firm's securities and commodities positions.

      3 Self-liquidation of a securities firm in or approaching financial, difficulty is specifically contemplated by section 5(a)(2) of the Securities Investor Protection Act of 1970 ("SIPA").

      4 See Securities Exchange Act Rule 15c3-1(a)(2); 17 CFR 240.15c3-(a)(2).

      5 Under paragraph (k)(2)(i) of Rule 15c3-3. a broker-dealer that does not carry margin accounts, promptly transmits all customer funds and securities to a carrying firm and effectuates all financial transactions with customers through a specially designated bank account is exempt from the possession and control and Reserve Formula requirements of the customer protection rule.

      6 See National Futures Association Amendments to NFA Financial Requirements Sections 1 and 6, January 25, 1990. (Nat'l Fut. Ass'n Man. (P-H) ¶ ¶ 7011 and 7041. NFA Financial Requirements sections 1 and 6. The NFA is a self regulatory organization composed of futures commission merchants, commodity pool operators, commodity exchanges, banks and other organizations that is responsible for regulating the financial responsibility of its members.

      7 See Options Clearing Corp. Guide (CCH) Rules 301(a) and 302(a).

      8 See Nat'l Sec. Clearing Corp. Rules Addendum B ¶ I.B.1-a.

      9 Several commentators objected to the Commission's characterization of the risks created by clearing firms. These firms argued that the Commission should draw distinctions based on the manner in which clearing firms hold their customer securities in order to allow firms that hold customer securities in non-negotiable form to operate under reduced minimum. Presumably, this means that the broker-dealer would have no powers of attorney. The Commission does not believe that developing a minimum requirement containing such a distinction would be a practical solution. It would be virtually impossible to examine for compliance with this type of a requirement. If a clearing firm is holding hundreds of customer securities, examiners would have to inspect for powers of attorney for each customer. Furthermore, the essential risks inherent in allowing firms with little capital to hold securities would still be present under such a scheme. If it means that the broker-dealer would hold powers of attorney, the practical effect of this arrangement diminishes the distinction that the commentators would draw in the way securities are held at the firm. In the event of a SIPC liquidation, these securities are treated as part of the fungible bulk that is shared by all customers in a pro rata form (See SIPA Section 8), although SIPC would make every effort to return specific securities to customers.

      l0 None of the firms designated to the NYSE appear to have a problem meeting the new minimum requirements.

      11 The term "promptly forward" is defined in the net capital rule to mean when "such transmission or delivery is made no later than noon of the next business day after the receipt of such funds or securities." Rule 15c3-1(c)(9).

      12 Separately, the Commission is proposing for comment an amendment that would require market makers to maintain capital of $2,500 per share, regardless of the price of the security.

      13 See the October 1987 Market Break, a Report by the Division of Market Regulation of the U.S. Securities and Exchange Commission, February 1988, (the "Market Break Report") pp. 5-11,12 and 115.

      14 See File No. SR-NASD-BB-1, Securities Exchange Act Release No. 25791 (June 9, 1988).

      15 See Report of the Special Committee of the Regulatory Review Task Force on the Quality of Markets, NASD publication, 1988, p. 15.

      16 A fully disclosed introducing arrangement should be distinguished from an omnibus clearing arrangement where the clearing firm maintains one account for all the customer transactions of the introducing firm. In an omnibus relationship, the clearing firm does not know the identity of the customers of the introducing firm. In a fully-disclosed clearing arrangement, the clearing firm knows the names, addresses, securities positions and other relevant data as to each customer. Far the purposes of the net capital rule, broker-dealers that introduce accounts on an omnibus basis are considered clearing firms.

      17 Under paragraph (a)(2) of the net capital rule, introducing firms are prohibited from holding funds or securities for customers. They are required to promptly forward all funds and securities they receive to their carrying firm, hi addition to these requirements, in order to take advantage of the $5,000 minimum, fully disclosed introducing firms must have a clearing agreement that states that for purposes of SIPA and the financial responsibility rules, the introduced customer accounts are the responsibility of the carrying firm. See Letter from Richard G. Ketchum, Director, Division of Market Regulation of David Marcus, New York Stock Exchange, January 14, 1985, ("Ketchum Letter"). Despite this requirement, SIPC exposure can result from the failure of an introducing firm in possession of customer property.

      18 Undersection 9 of SIPA, when the amount of customer property present in a failed Em is insufficient to meet the claims of customers, SIPC must make advances to customers to cover the shortfall in each customer's claim. These advances are limited to a total of $500,000 of cash and securities per customer, with a $190,000 limitation on claims for cash.

      19 In imposing sanctions on an introducing firm for failing to disclose to its carrying firm material facts as to the credit worthiness of one of its customers, the Commission recognized the potential credit exposure of clearing firms and stated: "It is true that [the introducing firm] had a contractual obligation to indemnify [the clearing broker] for losses. However, considering [the introducing firm's] small net capital "there was a substantial likelihood that the clearing brokers would themselves nave to bear all or part of any potential losses." In re Boylan, Securities Exchange Act Release No. Ifl37i8 at 45 n.33 (January 14, 1982).

      20 See Market Break Report at pg. 5-11.

      21 See Ketchum Letter, supra note 17.

      22 Additionally, in order to take advantage of the revised $5,000 minimum net capita! requirement, introducing firms will be required to notify their customers that the firm is prohibited from receiving funds (other than checks made out to third parties) or securities.

      23 For a discussion of the cost of capital, see section 2(B) (iii) supra.

      24 The NASD, the self-regulatory organization charged with overseeing the bulk of introducing firms, generally endorsed the new requirements.

      25 It should be noted that the $5,000 standard adopted today differs from the previous $5,000 requirement. Under the new rule, introducing firms will be prohibited from receiving customer securities and funds (other than checks payable to third parties). It will be necessary for these firms to develop procedures to insure that they do not receive customer securities or checks made payable to themselves.

      26 The rule amendments also require a broker-dealer to notify its designated examining authority of its election to select the alternative standard; the rule previously required the broker-dealer to notify the appropriate Regional Office of the Commission.

      27 For example: Position: Long, $1,000,000; Short. 5500,000. Haircut: Long, $300,000; Short, $37,500 (15% of $250,000); Total, $337,500.

      28 For example: Position: Long, $1,000,000; Short, $500,000, Haircut: Long, $150,000; Short, $75,500 (30% of $250,000); Total, $225,000.

      29As proposed, this lowered haircut would have been available to firms only when they crossed the $100,000 net capital threshold. However, the NASD suggested that this would be difficult to monitor. Based on this recommendation the Commission is not adopting this amendment The contractual commitment haircut will remain at 30 percent for initial public offerings. Similarly, the haircut assessed for receivables arising in conjunction with subordinated loans will remain at 30 percent.

      30 A broker-dealer is also required to deduct the portion of a long equity securities position that it holds that is large in relation to the trading volume for that security. This is generally referred to as the "blockage test".

      31 This payable arises out of a purchase of shares by the broker-dealer directly from the fund for another broker-dealer (presumably for the other broker-dealer's customer). The first broker-dealer owes money to the fund secured by the investment company shares. The second broker-dealer owes money to the first broker-dealer. The debt on the first broker-dealer's books is offset by a receivable from the second broker-dealer, classified generally as a fail to deliver. That receivable is also secured by the mutual fund shares, since delivery of the shares will not occur until payment of the obligation by the second broker-dealer.

      32 When one broker-dealer lends securities to another broker-dealer, the lending broker-dealer generally receives cash collateral in-excess of the value of the securities lent. For financial statement purposes, the lending broker-dealer accounts for the cash collateral as a liability, since that broker-dealer must repay the funds to the borrowing broker-dealer upon return of the securities.

      Much of the stock lent by broker-dealers to other broker-dealers is borrowed from a third broker-dealer or other person. If a broker-dealer borrows stock through a stock loan transaction collateralized by cash, the borrowing broker-dealer accounts for the collateral in its financial statements as a receivable from the lending person.


      Federal Register / Vol. 57, No. 232 / Wednesday, December 2, 1992 / Proposed Rules

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-31512; File No. S7-36-92]

      KIN 3235-AD79

      Net Capital Rule

      AGENCY: Securities and Exchange

      Commission.

      ACTION: Proposed rule amendments.

      SUMMARY: The Securities and Exchange Commission is proposing for comment amendments to its net capital rule under the Securities Exchange Act. The proposal would raise the base minimum net capital requirements applicable to broker-dealers that introduce customer accounts but do not receive customer securities to $25,000. The minimum net capital requirement applicable to other classes of broker-dealers that never receive customer securities would be increased from $5,000 to $10,000. Broker-dealers that make markets in securities would be required to maintain net capital equal to $2,500 for each security in which they make a market regardless of the price of the security.

      The proposed amendments are designed to strengthen the Commission's financial responsibility rules and are intended to improve the commission's ability to protect the customers and creditors of a broker-dealer in the event of the broker-dealer's insolvency. The Commission requests comment on the proposed amendments. DATES: Comments to be received on or before February 5, 1993. ADDRESSES: Persons wishing 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 comment letters should refer to File No. S7-36-92. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549.

      FOR FURTHER INFORMATION CONTACT:

      Michael A. Macchiaroli, (202) 272-2904, Michael P. Jamroz, (202) 272-2372, or Roger G. Coffin, (202) 272-7375, Division of Market Regulation, 450 Fifth Street, NW., Washington, DC 20549.

      Table of Contents

      I. Introduction
      A. The Commission's Proposal and Commission Action
      B. Brief Summary of Comments
      II. The Net Capital Rule
      III. Proposals Based on Firm Type
      A. Introducing Firms
      (i) Introduction
      (ii) Need for Increases [in] Industry Impact
      B. Over-the-Counter Market Makers
      C. Mutual Fund and all other Broker-Dealers
      IV. Phase-In Schedule
      V. Summary of Initial Regulatory Flexibility Analysis
      VI. Statutory Analysis
      VII. List of Subjects in 17 CFR Part 240 VIII. Text of the Proposed Amendments

      SUPPLEMENTARY INFORMATION:

      I. Introduction
      A. The Commission's Proposal and Summary of Commission Action

      On September 15, 1989, the Commission issued a release requesting comment on proposed increases to the minimum net capital requirements applicable to broker-dealers.1 The Commission was concerned that the minimum net capital requirements, which in some cases dated back to 1972, were no longer adequate.

      In that release, the Commission proposed increases in the minimum capital requirements for registered broker-dealers, based on the nature of the business of the firm, and the extent to which the broker-dealer has contact with customer securities. For example, firms that carry customer accounts would have been required to maintain at least $250,000 of net capital. Firms that introduce customer accounts to other broker-dealers would have been required to maintain minimum net capital of $100,000 or $50,000, depending upon whether the firm routinely or occasionally received securities. Under the proposal, broker-dealers that do not receive securities would have been allowed to maintain minimum net capital of $5,000. The Commission is separately adopting most of the amendments set forth in the 1989 proposal.2 This release proposes for comment additional increases to the minimum net capital requirements applicable to certain broker-dealers in securities.
      B. Brief Summary of Comments

      The Commission received almost 275 letters in response to the proposed rule changes. The majority of the commentators objected generally to the proposed increases in minimum net capital requirements. Most of the commentators objected to the proposed increases to the net capital requirements for introducing and mutual fund broker-dealers. Primarily, these firms feared that an increase in minimum net capital requirements would restrict entry into the securities business and would force existing entities to close. Another common complaint was that the proposal discriminated against smaller firms in favor of larger enterprises without sufficient justification.

      Self-regulatory organizations and other groups including the New York Stock Exchange ("NYSE"), the Securities Industry Association ("SIA"), the American Bar Association, the Chicago Bar Association, the Philadelphia Stock Exchange ("Fhlx"), and the Midwest Stock Exchange generally supported the Commission's proposal. These commentators acknowledged the need to increase minimum net capital requirements and supported the general concerns set forth in the release proposing the amendments for comment.

      The National Association of Securities Dealers ("NASD"), made specific recommendations with respect to the level of capital that should be required of introducing broker-dealers and other categories of broker-dealers that do not handle customer securities. As described further in the Commission's adopting release and in this release, the NASD's recommendation has, in large part, served as the framework for the requirements applicable to introducing and mutual fund firms that are being implemented.
      II. The Net Capital Rule

      The Commission's net capital rule requires that every registered broker-dealer maintain a certain specified minimum level of net capital.3 The rule requires registered broker-dealers to maintain sufficient liquid assets to enable those firms that fall below the minimum net capital requirements to liquidate in an orderly fashion without the need for a formal proceeding. The rule prescribes required minimum levels based both upon the method the firm adopts in computing its net capital, and the type of securities business it conducts. These levels were designed to address the risks perceived in the different types of businesses engaged in by broker-dealers. For example, if a broker-dealer carries no customer accounts and limits its business to certain specified activities, it needs to maintain only $5,000 in net capital. One of the specified activities permitted is ., the introducing, on a fully disclosed basis, of customer accounts to another broker-dealer that clears and carries the accounts.,

      The net capital rule recognizes that other categories of broker-dealers because of the nature of the business they transact, require more net capital than introducing brokers. For example,, if a broker-dealer makes markets in securities, it must maintain the greater of: its base minimum net capital requirement; or $2,500 for each security priced over $5 in which it makes a market, plus $500 for each security priced $5 or less in which it makes a market.4 Unless required to do so because of the market maker's ratio requirement, regardless of how many securities in which it makes a market, the firm is not currently required to maintain net capital greater than $100,000 to support its market making activities.5 In conjunction with the amendments contained in the adopting release, the Commission has preliminarily decided to propose for comment the following amendments.
      III. Proposals Based on Firm Type A.
      A. Introducing Firms
      (i) Introduction

      Under the version of Rule 15c3-1 in effect prior to the effectiveness of the amendments to the minimum net capital requirements, an introducing firm was required to maintain only $5,000 in net capital6 Previously, an introducing firm maintaining only $5,000 in net capital was able to handle funds or securities in a variety of ways. In many cases, customers give funds or securities directly to the introducing firm, which is obligated to forward them to the clearing firm. In other cases, customers send property directly to the clearing firm..

      Under the amendments being adopted by the Commission, introducing firms will be required to maintain either $50,000 or $5,000 in net capital, depending on whether the firm receives its customers' securities. Under the amended rule, the $50,000 minimum is applicable to introducing firms even if the firm receives securities or checks made payable to the clearing firm or other responsible parties (e.g., an escrow agent). However, in order to be classified, for the purposes of the Commission's financial responsibility rules, as a firm that introduces accounts on a fully disclosed basis, an introducing firm must follow certain procedures.7 In order to operate under the new $5,000 minimum requirement, introducing firms must not receive securities in any form (except by customer error).

      Notwithstanding this prohibition, the Commission believes that the $5,000 requirement provides an inadequate standard for customer safety, as the procedures involving the disposition of customer funds or securities by inadequately capitalized introducing firms is a primary concern of both the Commission and SIPC. The NASD, the primary regulator for most introducing firms, shared this concern, and suggested in its comment letter to the Commission's original proposal, that the Commission establish two categories of introducing firm minimum requirements: A $50,000 requirement for firms that receive customer securities; and a $25,000 for those that do not. The Commission preliminarily believes the NASD's recommendation is valid, is proposing these amendments accordingly.
      (ii) Need for Increases

      The Commission believes it is appropriate to increase the minimum net capital requirement for introducing firms to $25,000 for numerous reasons. Customers of an introducing firm, for example, can be harmed in several ways. First, even when introducing firms are prohibited from receiving customer funds and securities, customers can be exposed to loss. Although these introducing firms would not be permitted to receive customer property (other than checks made payable to appropriate third parties) under the amended rule, they are nevertheless able to obtain access to customer funds and securities.

      Introducing firms frequently place customer orders with clearing firms and are therefore able to direct movements of customer funds and securities when those orders are placed. In this regard, customers are usually unable to distinguish from a broker-dealer that is allowed to receive funds and securities and one that is not. In many cases, the customer's sole contact with the securities industry is the registered representative at the introducing firm Retail investors often place heavy reliance on the registered representative for investment advice and as such, trust their representatives,

      A second element of concern for the customers of introducing firms involves the customers' relationship with the clearing firm. Investors can be stranded if the introducing firm fails or closes temporarily due to a capital violation. Generally, the clearing firm will not accept orders directly from the customers because the clearing firm will consider the customers as those of the introducing firm. As a result, customers may be unable to liquidate their securities positions or open new positions until their accounts are transferred to. another broker-dealer.

      Although higher minimums will not eliminate the risk of this occurring, greater minimum net capital requirements will increase the chances that a failed introducing firm can quickly find a purchaser for its assets and therefore avoid a liquidation.

      A final risk to customers exists in cases of fraud or theft. Because the introducing firm can control the disposition of the customer's property at the clearing firm, it can convert those assets to its own benefit. Recently, the Commission considered the case of the principal of an introducing broker-dealer that directed wire transfers of customer funds from accounts at a clearing firm to his account without customer authorization. The total amount of misappropriation exceeded $1.1 million.
      (iii) Industry Impact

      The Commission is aware of the potential impact on the industry increases to minimum capital requirements can have. Indeed, in response to the Commission's first proposal, many commentators objected that the increases would eliminate existing firms and prevent broker-dealers from entering the industry.8 To address these concerns, the Division of Market Regulation (the "Division") analyzed financial data pertaining to introducing firms supplied by the NASD staff ("NASD Data"). To assess the cost of the proposed rules, the Division examined the capitalization of the industry. The Division also estimated the approximate costs of raising the additional capital. While a precise estimate of the costs is difficult, if not impossible to predict, estimates based on the relative cost of capital demonstrate that the proposed amendments will not be unduly burdensome for introducing firms.9

      The NASD Data does not distinguish between introducing brokers that receive funds and securities and those that do not. Therefore, the Division assumed that ail NASD introducing firms elected to operate under the proposed $25,000 standard instead of the $50,000 level that will ultimately be required. This analysis reveals, as of the end of 1991, 560 introducing brokers (out of a total of 2,301 NASD member introducing firms) would need a total of $6.2 million to comply with the proposed $25,000 standard, or an average of $11,114 for each firm. Based on an eight percent spread of cost of capital, the new standard would cost each broker an average of approximately $890 per year. The Commission believes this is a slight insurance premium in light of the benefits that would be derived from the increase.

      Moreover, to assess the impact of the proposal on the industry, introducing firm revenue data was examined. Out of a total $5 billion in annual revenues generated by NASD member introducing firms in 1991, only $119 million is accounted for by firms with less than $25,000 in net capital. In other words, assuming all NASD introducing firms would fall under the $25,000 standard, the proposed amendments would only affect the 560 firms that account for 2.4 percent of the total introducing firm revenues. In light of this data, and the regulatory concerns described above, the Commission believes an increase to $25,000 is warranted and realistic. The Commission requests comment on the proposed increase, including comment on whether any additional safeguards or increases would be appropriate.
      B. Over-the-Counter Market Makers

      Under the net capital rule, a market maker's minimum requirement is the greater of its base minimum requirement or the amount determined on a per security basis. The net capital rule distinguishes between securities priced $5 and above, and requires net capital of $2,500 for those securities priced over $5. Under the amendments adopted by the Commission, the per security requirement for securities priced at $5 or less was increased from $500 to $1,000. No change was made to the requirement for those priced above $5.10

      Notwithstanding these amendments, the Commission is concerned that the per security requirements for market makers are still too low. Thus, the Commission believes an additional proposal that will standardize the additional market maker capital requirement at $2,500 per security, regardless of the price of the security, is necessary.

      The proposal to standardize the per security market maker capital requirement at $2,500 would eliminate a distinction that the Commission no longer believes is valid. When a broker-dealer holds itself out as making a market in a particular security, it should maintain sufficient capital to stand behind that commitment. That commitment is no less important in the market for securities priced at less than $5. In fact, market makers that maintain the minimum amount of net capital required by the Commission are frequently unable to assume even the smallest number of positions in the stocks in which they make markets.

      The Commission believes that these market makers can pose a threat to overall market liquidity. When a thinly capitalized market maker's capital falls below its minimum net capital requirement, the firm is compelled to withdraw as a market maker in some of its market making securities. This has been a problem particularly in the marketplace for securities priced under $5 per share. This segment of the marketplace has been beset with broker-dealer failures, many of which have involved the failure of market making firms leading to the virtual elimination of a public market for many securities. The Commission believes that requiring a greater cushion of net capital for lower priced securities will reduce the frequency of these occurrences by insuring that market makers have the wherewithal to take meaningful positions in the securities in which they make markets.

      Moreover, the Commission's experience is that the price per share of a security does not provide a useful indicia of the risk inherent in positions in that security. Far from discouraging market making activity in lower priced securities, the Commission believes that the proposed amendment will benefit the market for securities priced less than $5 by adding depth and liquidity. Therefore, the Commission is proposing for comment an amendment that would require $2,500 for all securities in which a firm makes a market, regardless of price.
      C. Mutual Fund Broker-Dealers and All Other Broker-Dealers

      The amendments to Rule 15c3-1 contained in the adopting release raise the net capital requirement for broker-dealers that limit their activities to transactions in shares of registered investment companies and receive, but promptly transmit funds and securities, to $25,000. Mutual fund firms that do not receive customer funds or securities were permitted to remain in a $5,000 category. The Commission believes that an additional increase (to $10,000) for mutual fund broker-dealers that operate on a subscription way basis is necessary.

      The Commission preliminarily believes that a minimum net capital requirement of only $5,000 is too low for a registered broker-dealer that conducts a business with the investing public. The protections afforded customers and creditors of a firm with such minimal capital is negligible. Furthermore, the Commission believes the increase is justified given the pace of inflation since the time this level was adopted.

      The Commission therefore is proposing for comment an amendment to paragraph (a)(2)(vi) of the net capital rule that would raise the minimum requirement for all categories of broker-dealers that do not receive customer funds or securities (including mutual fund firms that operate other than on a wire order basis) to $10,000. The Commission wishes to emphasize that any receipt of funds or securities by firms operating under this category (except by customer error) will cause its minimum net capital requirement to increase from $10,000 to $25,000. It will become incumbent on these firms, therefore, to develop procedures to prevent their customers from transmitting funds or securities to the firm.

      The proposed $10,000 minimum level will also apply to all other broker-dealers that do not fall into the introducing, mutual fund, or some other category. The Commission believes that this residual category of broker-dealers pose reduced risks to customers and should have reduced net capital requirements. This proposed increase will therefore affect all firms that do not fit into any of the categories specified in the net capital rule.

      This category includes broker-dealers that do not take customer orders, hold customer funds or securities, or execute customer trades, yet are required to register as broker-dealers with the Commission because of the nature of their business activities. Firms that fall into this category include enterprises that identify and locate potential merger or acquisition opportunities on behalf of a third party and earn a percentage based fee. For this residual category of broker-dealer, the Commission also is proposing a minimum net capital requirement of $10,000. The prohibition against receipt of customer funds or securities will apply to these firms as well. Finally, other firms, such as floor brokers, which currently may avail themselves of the $5,000 minimum net capital category, also will fall into the proposed $10,000 category.

      As with introducing firms, the Division analyzed industry capitalization data to assess the impact of the proposed increased requirements. For mutual fund firms, the NASD Data does not again, distinguish between firms that receive customer property and those that do not. Assuming all 409 NASD firms specializing in mutual fund activities in 1991 elected to operate under the $10,000 standard, 118 would require additional capital to do so. These firms would need $481,993, or an average of $4,085 per firm to comply with the proposed increase. Assuming an 8 percent cost of capital, the proposed amendment would cost those firms, on average, $327 per year to obtain the funds necessary for compliance. Finally, during 1991, NASD mutual fund firms collected revenues of $1,308 billion. Of that amount, only $6 million, or .46 percent was attributable to firms that maintained net capital below the proposed requirements.

      In the residual category of firms that would be affected by the proposal, the largest grouping are those firms that specialize in best efforts underwritings. Of the 989 NASD member firms that conduct this activity, 358 would need a total of $946,000, or an average of $2,640 per firm, to comply with a $10,000 minimum requirement. Based on an 8 percent cost of capital, the proposed amendments would cost those firms only approximately $210 per year to comply. Finally, during 1991, this category of firms produced revenues of $497 million. Of that amount, $20 million, or only 4 percent, was attributable to firms that did not maintain $10,000 in net capital.
      IV. Phase-In Schedule

      Because the new minimum capital standards will require some broker-dealers to acquire additional capital, the Commission proposes that the increases be staggered over a period of one year, beginning six months from the effective date. The Commission notes that the first proposing release contained a four year phase-in provision. However, the Commission believes eighteen months is an acceptable time frame to allow firms to acquire additional capital. The timing of the proposed increases is summarized below:
      1. Introducing Firms That Do Not Receive Funds or Securities
      a. Current rule: $5,000
      b. By 6/30/93: $12,000
      c. By 12/31/93: $19,000
      d. By 6/30/94: $25,000
      2. All Other Firms
      a. Current rule: $5,000
      b. By 6/30/93: $6,500
      c. By 12/31/93: $8,500
      d. By 6/30/94: $10,000
      V. Summary of Initial Regulatory Flexibility Analysis

      The Commission has prepared an Initial Regulatory Flexibility Analysis ("Analysis") in accordance with 5 U.S.C. 630 regarding the proposed amendments. The Analysis notes that the objective of the proposed amendments is to further the purposes of the various financial responsibility and customer protection rules that provide safeguards with respect to the financial responsibility and related practices of brokers and dealers. In sum. the Analysis states that the proposed amendments would subject broker-dealers to higher capital requirements. A copy of the Analysis may be obtained by contacting Roger G. Coffin. Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW.. Washington, DC 20549, (202) 272-7375.
      VI. Statutory Analysis

      Pursuant to the Securities Exchange Act of 1934 and particularly Sections 15(c)(3). 17 and 23 thereof, 15 U.S.C. 78o(c)(3), 78q and 78w, the Commission proposes to amend 240.15c3-1, of title 17 of the Code of Federal Regulations in the manner set forth below.

      List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.

      Text of the Proposed Amendments

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

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

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

      Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 781, 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. Paragraphs (a)(2)(iv), (vi) and (a)(4) to § 240.15c3-1 are revised to read as follows:

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

      * * * * *
      (a)(2) * * *
      Brokers or Dealers That Introduce Customer Accounts
      (iv)(A) Brokers or Dealers That Receive Securities. A broker or dealer shall maintain net capital of not less than $50,000 if it introduces on a fully disclosed basis transactions and accounts of customers to another registered broker or dealer but does not receive, directly or indirectly, funds from or for, or owe funds to, customers, and does not carry the accounts of or for customers. A broker or dealer operating pursuant to this paragraph (a)(2)(iv)(A) may receive, but shall not hold, customer or other broker or dealer securities. A broker or dealer operating under this paragraph (a)(2)(iv) may participate in a firm commitment underwriting without being deemed to be a dealer for the purposes of paragraph (a)(2)(iii) of this section but may not enter into a commitment for the purchase of shares related to that underwriting.
      (B) Brokers or Dealers That Do Not Receive Securities. A broker or dealer shall maintain net capital of not less than $25,000 if it introduces, on a fully , disclosed basis, transactions and accounts of customers to another registered broker or dealer but does not receive, directly or indirectly, funds or securities from or for, or owe funds or securities to, customers, and does not carry the accounts of or for customers. A broker dealer operating under this paragraph may engage in the activities set forth in paragraph (a)(2)(v) of this section.
      (C) A broker or dealer operating under this paragraph may engage in the following dealer activities without being subject to the requirements of paragraph (a)(2)(iii) of this section:
      (1) In the case of a buy order, prior to executing such customer's order, it purchases as principal the same number of shares or purchases shares to accumulate the number of shares necessary to complete the order, which shall be cleared through another registered broker or dealer; or
      (2) In the case of a sell order, prior to executing such customer's order, it sells as principal the same number of shares or a portion thereof, which shall be cleared through another registered broker or dealer.
      * * * * *

      Other Brokers or Dealers
      (vi) A broker or dealer that does not receive, directly or indirectly, or hold, securities for, or owe funds or securities to, customers and does not carry accounts of, or for, customers and does not engage in any of the activities described in paragraphs (a)(2) (i) through (v) of this section shall maintain net capital of not less than $10,000.
      * * * * *

      Capital Requirements for Market Makers
      (4) A broker or dealer engaged in activities as a market maker as defined in paragraph (c)(8) of this section shall maintain net capital in an amount not less that $2,500 for each security in which it makes a market based on the average number of such markets made by such broker or dealer during the 30 days immediately preceding the computation date. Under no circumstances shall it have net capital less than that otherwise required by the other provisions of paragraph (a) of this section, or be required to maintain net capital of more than $1,000,000 unless otherwise required by the other provisions of paragraph (a).
      * * * * *
      3. § 240.15c3-1e is amended by revising paragraph (f) and adding paragraph (g) to read as follows:

      § 240.15c3-1e Temporary Minimum Requirements (Appendix E to 17 CFR 240.15c3-1e).

      Brokers or Dealers That Introduce Customer Accounts And Do Not Receive Securities
      (f) A broker or dealer that falls within- the provisions of Rule 15c3-1(a)(1)(iv)(B) and computes its required net capital under § 240.15c3-1(a)(1)(i) shall maintain net capital of not less than the greater of the amount computed under that paragraph or:
      (1) $5,000 until June 30, 1993;
      (2) $12,000 on July 1, 1993, until December 31, 1993;
      (3) $19,000 on January 1, 1994, until June 30, 1994; and
      (4) $25,000 on July 1, 1994.
      Other Brokers or Dealers
      (g) A broker or dealer that falls within the provisions of Rule 15c3-1(a)(2)(vi) and computes its required net capital under § 240.15c3-1(a)(1)(i) shall maintain net capital of not less than the greater of the amount computed under that paragraph or:
      (1) $5,000 until June 30, 1993;
      (2) $6,500 on July 1, 1993, until December 31, 1993;
      (3) $8,500 on January 1, 1994, until June 30, 1994; and
      (4) $10,000 on July 1. 1994.

      By the Commission.

      Dated: November 24, 1992.

      Margaret H. McFarland,

      Deputy Secretary.

      [FR Doc. 92-29035 Filed 12-1-92; 8:45 am)

      BILLING CODE 8010-01-M


      1 Securities Exchange Act Release No. 27249 (September 15, 1989). 54 FR 40395 (October 2, 1989). All comments are available in File No. S7-28-89 at the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549.

      2 Securities Exchange Act Release No. 31511, (November 24, 1992).

      3 Generally, net capital, as defined by Rule 15c3-1. is a broker-dealer's net worth plus liabilities subordinated in accordance with Appendix D of the rule, minus assets not readily convertible into cash and certain percentages, or haircuts, of a firm's securities and commodities positions.

      4 See Securities Exchange Act Rule 15c3-1(a)(4); 17 CFR 240.15c3-1(a)(4). The Commission's adopting release amended paragraph (a)(4) to require $1,000 for each security priced $5 or less.

      5 The Commission's adopting release amended paragraph (a)(4) to raise this ceiling from $100,000 to $1,000,000.

      6 An introducing broker-dealer is one that has a contractual arrangement with another firm, known as the carrying or clearing firm, under which the carrying firm agrees to perform certain services for the introducing firm. Usually, the introducing firm submits its customer accounts and customer orders . to the carrying firm that executes the orders and carries the account. The carrying firm's duties include the proper disposition of customer money and securities after trade date, the holding of customer securities and funds, and the recordkeeping associated with carrying customer accounts.

      A fully disclosed introducing arrangement should be distinguished from an omnibus clearing arrangement where the clearing firm maintains one account for all the customer transactions of the introducing firm. In ah omnibus relationship, the clearing firm does not know the identity of the customers of the introducing firm. In a fully-disclosed clearing arrangement, the clearing firm knows the names, addresses, positions and other ~ relevant data as to each customer. For the purposes of the net capital rule, broker-dealers that introduce accounts on an omnibus basis are considered clearing firms.

      7 To be considered a fully disclosed introducing firm, the broker-dealer must have in place a clearing agreement that states that, for the purposes of SIP A and the Commission's financial responsibility rules, customers are customers of the clearing, and not the introducing, firm. Furthermore, the clearing firm must issue account statements directly to customers. Such statements must disclose the nature of the relationship between the entities and contain the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding the customer's account Finally, the account statement must disclose that customer funds or securities are located at the clearing, and not the introducing, firm. Absent such an arrangement, the introducing firm would be required to comply with greater minimum net capital requirements.

      8 As an alternative, a number of firms suggested that the Commission could accomplish its regulatory goals more fairly by drafting a net capital rule that would call for incremental increases for different types of business activity. For example, if a firm transacted s margin business, its minimum net capital requirement would increase by a pre-established factor. However, this approach would require the net capital rule to make dozens of distinctions that would further complicate the regulatory process. It is important for the net capital rule to be based on readily identifiable minimum classification requirements. Therefore this suggestion does not provide a workable alternative to the base requirement approach currently in place.

      9 For a more complete discussion of the cost of capital see Section II(c)(iii) of the Commission's adopting release.

      10'The overall ceiling for market maker net capital was also raised from $100,000 to $1,000,000.

    • 92-71 Nasdaq National Market® Additions, Changes, and Deletions as of November 20, 1992

      SUGGESTED ROUTING:*

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

      As of November 20, 1992, the following 30 issues joined the Nasdaq National Market,® bringing the total number of issues to 2,956:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      EZEMB

      E-Z-EM, Inc. (Cl B)

      10/27/92

      1000

      HALO

      HA-LO Industries, Inc.

      10/28/92

      1000

      HCCH

      HCC Insurance Holdings, Inc.

      10/28/92

      1000

      PDCO

      Patterson Dental Company

      10/28/92

      1000

      RHOM

      The Rottlund Company, Inc.

      10/29/92

      1000

      MAIN

      Main St. & Main, Inc.

      10/30/92

      1000

      MAINW

      Main St. & Main, Inc. (9/4/96 Wts)

      10/30/92

      1000

      MTST

      Microtest, Inc.

      10/30/92

      500

      CNCN

      Citizens National Corporation

      11/02/92

      200

      ARONB

      Aaron Rents, Inc. (Cl B)

      11/03/92

      1000

      BAMM

      Books-A-Million, Inc.

      11/03/92

      1000

      DPGE

      Dial Page, Inc.

      11/05/92

      500

      ORPCV

      Orion Pictures Corporation (WI)

      11/09/92

      1000

      NEOP

      Neoprobe Corporation

      11/10/92

      1000

      NEOPW

      Neoprobe Corp. (11/10/96 Cl E Wts)

      11/10/92

      1000

      ANBC

      ANB Corporation

      11/11/92

      200

      MVIS

      Media Vision Incorporated

      11/11/92

      1000

      NPMH

      NPM Healthcare Products, Inc.

      11/17/92

      1000

      RAVN

      Raven Industries, Inc.

      11/17/92

      500

      BASER

      Base Ten Systems, Inc. (11/10/94 Ser B Rts)

      11/18/92

      1000

      CSAVP

      Continental Savings of America (Ser A Non-Cumulative Conv Pfd)

      11/18/92

      1000

      LGNDA

      Ligand Pharmaceuticals (Cl A)

      11/18/92

      1000

      CBOR

      Commercial Bancorp

      11/19/92

      200

      CSTLR

      Constellation Bancorp - Subscription (12/10/92 Rts)

      11/19/92

      1000

      LNOPF

      LanOptics Ltd. Ordinary Shares

      11/19/92

      1000

      PSFT

      PeopleSoft, Inc.

      11/19/92

      1000

      SPCH

      Sport Chalet, Inc.

      11/19/92

      1000

      AMFF

      AMFED Financial, Inc.

      11/20/92

      1000

      MDCOR

      Marine Drilling Co. (12/11/92 Rts)

      11/20/92

      1000

      USCL

      USA Classic, Inc.

      11/20/92

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since October 26, 1992:

      New/Old Symbol

      New/Old Security

      Date of Change

      EZEMA/EZEM

      E-Z-EM, Inc. (Cl A) (Reclassification)/E-Z-EM, Inc.

      10/27/92

      UHCOW/UHCOW

      Universal Holding Corp. (12/31/99 Wts)/Universal Holding Corp. (6/29/93 Wts)

      10/28/92

      ARONA/ARON

      Aaron Rents, Inc. (Cl A)/Aaron Rents, Inc.

      11/02/92

      PURE/MBIO

      Purepac, Inc./Moleculon, Inc.

      11/02/92

      STSA/STSA

      Sterling Financial Corporation/Sterling Savings Association

      11/02/92

      ORBKF/OPTKF

      Orbotech, Ltd./Optrotech, Ltd.

      11/09/92

      WSDI/SHEF

      Wall Street Deli, Inc./Sandwich Chef, Inc.

      11/10/92

      GEMS/NWGI

      Glenayre Technologies, Inc./N-W Group, Inc.

      11/12/92

      COOP/COOP

      Cooperative Bank for Savings, Inc., SSB/Cooperative Bank for Savings, Inc.

      11/13/92

      PAGZ/CASH

      PAGES, Inc./C.A. Short International, Inc.

      11/16/92

      HFMO/HFMO

      Home Federal Bancorp of Missouri Inc./Home Federal Savings Bank of Missouri

      11/19/92

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      SUHC

      Summit Holding Corporation

      10/28/92

      WETT

      Wetterau, Incorporated

      10/30/92

      AFBK

      Affiliated Bankshares of Colorado, Inc.

      11/02/92

      ILIOW

      Ilio, Inc. (8/31/93 Wts)

      11/04/92

      COILP

      Crystal Oil Company (Ser A Conv Pfd)

      11/09/92

      AXXX

      Artel Communications

      11/10/92

      BASER

      Base Ten Systems, Inc. (11/10/94 Ser B Rts)

      11/10/92

      NEWE

      Newport Electronics, Inc.

      11/11/92

      VIRA

      Viratek, Inc.

      11/17/92

      FNYB

      First New York Bank For Business

      11/17/92

      RHMO

      Ramsay - HMO, Inc.

      11/17/92

      VHII

      Value Health, Inc.

      11/18/92

      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.

    • 92-70 Trade Date-Settlement Date Schedule for 1993

      SUGGESTED ROUTING:*

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

      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 18, 1993. On January 18, securities exchanges and The Nasdaq Stock MarketSM 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. 7

      14

      18

      8

      15

      19

      11

      19

      20

      12

      20

      21

      13

      21

      22

      14

      22

      25

      15

      25

      26

      18

      25

      27

      19

      26

      28

      Note: January 18, 1993, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on January 18 will be combined with transactions made on the previous business day, January 15, for settlement on January 25. 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 18.

      Presidents' Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, February 15, 1993, in observance of Presidents' Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date

      Feb. 5

      12

      17

      8

      16

      18

      9

      17

      19

      10

      18

      22

      11

      19

      23

      12

      22

      24

      15

      Markets Closed

      -

      16

      23

      25

      *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."

      Good Friday: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Good Friday, April 9, 1993. "Regular way" transactions made on the business days immediately preceding that day will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date

      April 1

      8

      13

      2

      12

      14

      5

      13

      15

      6

      14

      16

      7

      15

      19

      8

      16

      20

      9

      Markets Closed

      12

      19

      21

      Memorial Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, May 31, 1993, 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 21

      May 28

      June 2

      24

      June 1

      3

      25

      2

      4

      26

      3

      7

      27

      4

      8

      28

      7

      9

      31

      Markets Closed

      June 1

      8

      10

      Independence Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, July 5, 1993, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date

      June 25

      July 2

      July 7

      28

      6

      8

      29

      7

      9

      30

      8

      12

      July 1

      9

      13

      2

      12

      14

      5

      Markets Closed

      6

      13

      15

      Labor Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, September 6, 1993, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date

      August 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

      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 11, 1993. On this day, securities exchanges and The Nasdaq Stock Market will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed.

      Trade Date

      Settlement Date

      Reg. T Date

      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 customers' 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.

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

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

      1

      22

      30

      2

      23

      Dec. 1

      3

      24

      2

      6

      25

      Markets Closed

      26

      3

      7

      Note: November 11, 1993 is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

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

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

      Securities exchanges and The Nasdaq Stock Market will be closed on Friday, December 24, 1993, in observance of Christmas Day, and Friday, December 31, 1993, in observance of New Year's Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date

      Dec. 16

      Dec. 23

      Dec. 28

      17

      27

      29

      20

      28

      30

      21

      29

      Jan. 3, 1994

      22

      30

      4

      23

      Jan.3, 1994

      5

      24

      Markets Closed

      27

      4

      6

      28

      5

      7

      29

      6

      10

      30

      7

      11

      31

      Markets Closed

      Jan. 3, 1994

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

    • 92-69 NASD 1993 Holiday Schedule

      SUGGESTED ROUTING:*

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

      The NASD will observe the following holiday schedule for 1993:

      January 1

      New Year's Day

      July 5

      Independence Day (Observed)

      February 15

      Presidents' Day

      September 6

      Labor Day

      April 9

      Good Friday

      November 25

      Thanksgiving Day

      May 31

      Memorial Day

      December 24

      Christmas Day (Observed)

      Questions regarding this holiday schedule may be directed to (301) 590-6821.

    • 92-68 Federal and State Legislative Update

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The second session of the 102nd Congress, which adjourned on October 9, 1992, passed only one major bill of direct interest to the securities industry, the Futures Trading Practices Act. Other proposed securities legislation involved government securities, limited partnership rollups, investment advisers, and mark-to-market securities inventory accounting. This Notice describes these bills, the NASD interest in them, and their status, including the likelihood of action in the next Congress. In addition, this Notice describes NASD activities with the states and the North American Securities Administration Association (NASAA).

      The NASD's Office of Congressional and State Liaison monitors legislation that affects the NASD in particular and the financial services industry in general. At the federal level, it tracks legislation, coordinates testimony, gives technical legislative drafting assistance, and serves as a focal point for contact with the NASD by congressional members and staffs. It provides similar, though limited, legislative functions at the state level and is involved in the state regulatory process through state securities commissioners and NASAA.

      If you need further information about the following bills, or have information about federal or state legislation or rules regarding securities regulation that you believe is of interest to the NASD, please call the Office of Congressional and State Liaison at (202)728-8248.

      FEDERAL LEGISLATION

      • Government Securities Act Amendments — When Congress passed the Government Securities Act (GSA) in 1986, it gave the NASD limited authority to regulate the financial condition of government securities broker/dealers. However, the GSA still prohibited the NASD from applying its sales-practice rules to transactions in government securities, which include treasury bills and bonds as well as securities issued by government sponsored agencies such as GNMA and FNMA. Given the increasing complexity and risk involved in government securities and their derivatives (such as STRIPS and CMOs), which have been more popular in recent years, the NASD has sought to have the statutory prohibition against sales-practice regulation removed.

      The GSA was due to expire at the end of 1991, and in January 1991 a Senate bill was introduced to reauthorize the GSA and give the NASD sales-practice authority with SEC and Treasury oversight. Granting the NASD this sales-practice authority over the sales of government securities by its members was supported by the SEC, Treasury, and the Government Accounting Office (GAO) as a necessary protection for investors. The bill passed the Senate in July 1991.

      After the Salomon Brothers disclosures in the government bond market surfaced in August 1991, the Senate and House held numerous hearings — at which the NASD testified — in September, and the Senate passed a second bill that month, clarifying the SEC's anti-fraud authority over the government securities auction. In November, the House Energy and Commerce Committee introduced a bill that included NASD sales-practice authority, quotation and transaction reporting for regulatory purposes, and SEC backstop authority for public dissemination of government securities information. The controversy surrounding these additional provisions prevented passage of the bill, and the Treasury's authority to write new rules for the government market expired.

      In June, both the House Energy and Commerce Committee and House Ways and Means Committee approved the Energy and Commerce bill. The House Banking Committee reviewed the Energy and Commerce bill in August and made a number of changes to give bank regulators responsibility for bank government dealers instead of the SEC. The full House rejected the Energy and Commerce Committee's bill when it was sent to the floor in September without the Banking Committee's amendments, based on the bill's procedural status rather than a substantive determination of the issues. Because Congress must amend the GSA to restore the Treasury's authority to write government securities rules, this bill will most likely be reintroduced early in the 103rd Congress.

      • Limited Partnership Rollups — Early in 1991, the House and Senate introduced bills to reform limited partnership rollup practices by changing proxy solicitation rules and granting rights to dissenters. The SEC and NASD opposed both bills as unnecessary, citing sufficient SEC and NASD authority to address the abuses that the legislation covers. The House bill passed last November, but the Senate bill — in spite of widespread sponsorship by the Senate — was blocked by Senator Gramm (R-TX), who opposed the bill as unnecessary and too burdensome. Both bills died when Congress adjourned.

      The NASD has responded to the legislative activity by proposing rules to address congressional concerns about partnership rollups. After adjournment 18 senators wrote to the NASD in support of the NASD's proposed rollup rules. Those rules would limit NASD member participation in partnership rollups that meet predetermined criteria and would restrict listings on the Nasdaq National Market® of securities resulting from rollups that fail to meet these criteria. Because those rules generally track the Senate bill and were approved by the NASD Board at its November 1992 meeting, Congress may not see as compelling a need to reconsider rollup legislation next year.

      • Investment Advisers — In February of this year the Senate introduced, at the request of the SEC, a bill to increase the number of SEC investment adviser examiners by charging an annual fee of $300 to $7,000 for registration. The bill also included a suitability requirement, fidelity bonding, and authorization for the SEC to require investment adviser filings to be made with a Central Registration Depository-type system for a fee. The SEC requested the bill because its resources allowed it to inspect advisers only once every 30 years on average. The Senate passed the bill in August without the suitability requirement.

      The NASD sought to include in any adviser bills, authority for the SEC to designate a self-regulatory organization (SRO) to perform inspections of investment advisers affiliated with SRO members. The NASD believes that the incremental cost of expanding current inspections of members is lower than creating a new program, and members would benefit by having only one NASD inspection instead of both an NASD and SEC inspection. In addition, with the increased use of wrap-fee arrangements, the investment advisory and securities businesses are converging, with securities transactions being the focal point for both sets of regulations. Given that, it would be inefficient and disruptive to members for the SEC to examine transactions for compliance with adviser rules while the NASD examines the same transactions for compliance with securities rules.

      The House proposed legislation that would have, in addition to the Senate bill's requirements, required surveys for unregistered investment advisers, a rulemaking on the definition of adviser, disclosure of disciplinary history to clients, updated disclosure of compensation arrangements, a private right of action under the Investment Advisers Act, confidentiality for clients, and increased federal-state cooperation. As the bill went through the House process, Congress added the NASD proposal for SEC designation of an SRO for adviser inspections, dropped the private right of action and definition rulemaking, and relaxed a number of other requirements. The bill that passed the House in late September was combined with two unrelated securities bills.

      The House and Senate were not able to resolve their different bills, which died when Congress adjourned. Given the effort spent on the bills by both Houses and the SEC's continuing need for more frequent investment adviser inspections, the 103rd Congress is likely to reconsider investment adviser legislation.

      Futures Trading Practices Act — The Senate reintroduced its bill to reauthorize the Commodity Futures Trading Commission (CFTC) at the beginning of the 102nd Congress in 1991. Since it agreed with the Treasury and SEC that revisions were necessary to the Commodity Exchange Act to respond to the increasing impact stock index futures have had on the underlying securities markets, the NASD joined with other SROs to support a Bush Administration proposal on the CFTC's reauthorization in 1990, and NASD President Joseph Hardiman testified several times in support of it. That proposal would have moved jurisdiction of stock index futures from the CFTC to the SEC, provided federal margin-setting authority over commodities markets, and revised the exclusivity clause in the Commodities Exchange Act. The jurisdictional shift was not accepted, but a Senate bill was passed that granted federal oversight of stock index future margins and provided a regulatory framework for hybrid products — which include both securities and futures aspects.

      Because the House bill had no similar provisions, the bills went to conference to reconcile differences. In October of this year, the Future Trading Practices Act became law. The Act's reauthorization, which lasts through fiscal year 1994, authorizes the Federal Reserve to set stock index future margins, which may be delegated to the CFTC. It also gives the CFTC general exemptive authority, which may be exercised, among other things, over exchange-traded and over-the-counter swaps, and over the regulation of hybrid instruments. While the futures exchanges raised competitive concerns about the absence of governmental oversight of the over-the-counter derivative market, no jurisdictional changes were made on swaps pending a GAO study now in progress. When that study is completed early 1993, swaps could again become an issue in Congress.

      • Mark-to-market securities inventory accounting — The President's budget submitted in January of this year included a proposal to require securities inventories valuation at market for tax purposes, a change from the current method of lower of cost or market valuation. The proposal, included in both major tax bills this year, is a significant revenue item, with estimates ranging from $2.5 to $3.7 billion over a four- or five-year period. The NASD was concerned that the legislation could adversely affect market liquidity by increasing the tax on market makers' inventories and discouraging position-taking at year end.

      As a result of NASD efforts, the second Senate tax bill, which also provides for urban enterprise zones, contained an exemption for market makers' and specialists' inventory. This provision was eliminated in conference and was not in the final bill sent to the President. The President vetoed both this and the earlier tax bill as violating his "no new taxes" pledge. Given the size of the revenue projected for this proposal, it will likely be re-examined in the 103rd Congress.

      STATE DEVELOPMENTS

      The NASD has also been involved in significant state developments in the past year. These issues have involved the redevelopment and redesign of the CRD, an investment adviser registration system, the state "blue sky" exemption for Nasdaq National Market securities and amendments to broker/dealer reporting requirements.

      With the addition of five states in 1991, the Nasdaq National Market has the same exemption status as the New York and American Stock Exchanges in all states except Virginia. Nasdaq National Market securities — both initial and secondary public offerings — are exempt from blue-sky review in all states except New Hampshire, Connecticut, and Virginia.

      During 1992, the NASD filed a report with the State of California on the listing and waiver process for Nasdaq National Market securities. As a result, the California securities commissioner has reported to the California legislature that he has no objection to making the Nasdaq National Market exemption, now subject to a sunset provision, permanent. In addition, the NASD has actively worked this year with the NASA A Registration Exemption Committee, which examines, among other things, state registration marketplace exemptions.

      As part of its technology redesign of all of its systems, the NASD is completely rebuilding the CRD. The CRD is the database of records of all broker/dealer members and registered representatives. Members and agents use the CRD to register with the NASD and all states and update their CRD information.

      The NASD has reached an agreement with NASAA on the redesign effort. The agreement provides for a completely new system that will involve more efficient access and communications between the membership, NASD, and the states. This new system will employ state-of-the-art technology as well as electronic filing. The redesign will also include a more logical presentation of the information, as well as a new system for relicensing registered representatives with new employers that will replace the current Temporary Transfer Program (TAT).

      The redesigned CRD will be used to register investment advisers and agents. This issue has become more critical as the members and associated persons registering with the states as investment advisers increase. Like CRD, the new system will permit registrants to file once with the new system and become registered in the various states.

      After several years of discussion, the SEC, NASD, and NASAA have resolved their differing views regarding disclosure requirements in matters reportable by broker/dealers on Form BD. The differences involved what needed to be reported as a "proceeding" on the form.

      The resolution requires reporting SRO and government formal administrative and civil actions, formal felony criminal indictments and informations or equivalents, and certain formal misdemeanor criminal informations. Not to be reported are criminal arrests without a formal written charge, investigations, and civil litigation.

    • 92-67 NASD® Responds to SEC's Market 2000 Concept Release

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On November 20, 1992, the NASD® submitted to the Securities and Exchange Commission (SEC) a letter responding to the SEC's request for comments on today's market structure and regulatory environment, its "Market 2000" study. In its letter, the NASD asked the SEC to rescind off-board trading restrictions (especially those in place after U.S. markets have closed), rescind exchange-market delisting restrictions, require enhanced disclosure of payment-for-order-flow practices, and adopt regulations for proprietary trading systems.

      SUMMARY OF COMMENTS

      The Securities Exchange Act of 1934 (Act), as amended in 1975, reflects a heavy presumption in favor of competition. The rationale for this presumption is even more valid today than it was in 1975: all investors share a common interest in fairness and liquidity, but increasingly pursue diverse investment and trading strategies. Competition is the best means to facilitate these investor demands by promoting innovation and diversity in fair and efficient secondary market trading mechanisms.

      COMPETITION FOR ORDER FLOW

      The NASD believes that there is nothing unique about competition for order flow in exchange-listed stocks that would justify deviations by the SEC or Congress from the longstanding and still prevailing pro-competition approach to U.S. market structure. Competition for order flow in exchange-listed stocks has not caused a reduction in market quality. Indeed, the evidence is to the contrary — market quality has improved as competition has increased. So long as markets remain transparent, the NASD sees no reason why these trends should not only continue, but receive increasing attention and support.

      The NASD also believes that competition for order flow in exchange-listed stocks has resulted in numerous innovations that would not have occurred if one market had a monopoly over order flow. The value of these competitive benefits to investors is significant and would be impossible to replicate in a monopolistic environment. Dispersal of order flow in exchange-listed stocks is a natural result of differing execution needs of diverse customers with different types and sizes of orders. Such dispersal occurs within markets as well as across competing markets. Some of these competing markets are foreign, so that it is in the interest of U.S. investors of all sizes and types for the SEC to continue to permit U.S. markets to provide the benefits that competition for order flow in exchange-listed stocks brings, rather than to force U.S. investors to seek innovation and diversity abroad.

      OFF-BOARD TRADING RESTRICTIONS

      While the markets have been changed and driven by competitive forces in the past 20 years, that evolution has not always been evenhanded or equitable. The exchange markets are able to trade the most active, premier Nasdaq stocks according to the Nasdaq unlisted trading privileges plan, but the majority of NASD market makers are still precluded from trading the most active, premier exchange stocks because of off-board trading restrictions. Indeed, third-market market makers are presently precluded from trading all exchange-listed securities in the only intermarket trading linkage, the Intermarket Trading System (ITS).

      The SEC should respond to the success of prohibiting further expansion of off-board trading restrictions (through implementation of SEC Rule 19c-3) by now removing all off-board trading restrictions, especially during after-hours trading sessions. There is no evidence that the competition that has been allowed to occur in the marketplace has in any way harmed investors. Indeed, given the evidence of the benefits of the competition that has been allowed to occur in the form of innovation, diversity, and pricing, more competition, not less, will benefit investors.

      The SEC Rule 19c-3 experiment has proven two things. First, that the auction and dealer markets can operate in synergy with each other, and second, that the existence of different types of systems and degrees of automation in market centers need not impede effective communication, competition, or regulatory oversight of markets. In that connection, recent experience demonstrates that competitive pressures are encouraging secondary markets to provide for price improvement measures including the exposure before execution of orders through ITS. Accordingly, the concerns raised by the internalization of customer order flow may be far less warranted today than in the past. For these reasons, the NASD believes that it is entirely proper for the SEC to remove all off-board trading restrictions, and to include all securities in the ITS linkage.

      PROPRIETARY TRADING SYSTEMS

      Competition for order flow also occurs with proprietary trading systems.1 These systems have been developed for specialized customers and in response to specialized needs. While proprietary trading systems may offer unique services to segments of the marketplace, they currently operate under an ad hoc "no action" letter approach, considerably less burdensome and time-consuming than the regulatory framework that the self-regulatory organizations (SROs) must abide by when seeking approval of or enhancements to similar systems. The SEC must fashion an equitable regulatory approach for proprietary trading systems that neither stifles the innovative developers of such systems nor unduly burdens the SROs charged with surveiling those systems or those interested in developing comparable competitive systems.

      PAYMENT FOR ORDER FLOW

      Given an environment where payment for order flow appears to contribute to competition and innovation and to reduce customer costs, and where best execution is occurring routinely, the only remaining regulatory issue is whether such practices are effectively disclosed. The NASD has on file with the SEC a rule proposal to require specific disclosure on customer confirmations regarding the receipt of additional remuneration for directing order flow. In addition, the 1991 study of payment-for-order-flow practices, the "Ruder" report, Inducements for Order Flow, contained recommendations that the NASD augment its rule proposal to require that firms disclose to customers a description of the firm's order-routing and execution practices as well as the inducements received by the firm. Inducements for order flow such as reciprocal trading arrangements and routing orders to affiliated or wholly owned entities for execution are commonplace in all markets, and investors should be made aware of the numerous transactional relationships that their brokers are involved in as well as the market centers in which their orders are executed so that they will be able to make informed decisions when placing their orders.

      TRANSPARENCY

      The NASD believes that competition in the markets does not damage liquidity or prevent best execution, provided there is market information available to the public. Transparency of market information significantly improves the fairness and efficiency of the markets through enhancing the ability of market makers to determine accurately the present value of a security and by permitting investors to evaluate the quality of the executions they receive. Accordingly, we believe that the Act's preference for real-time quotation and transaction reporting is entirely appropriate.

      DELISTING RESTRICTIONS

      Equally critical to competition among markets for order flow is the competition for listings. There are approximately 900 Nasdaq issuers that meet the listing standards of the New York Stock Exchange (NYSE) and the competition to attract those companies to list on the exchange is intense.

      The present competition for listings, however, is profoundly unbalanced. NYSE Rule 500 prevents a listed company (that is otherwise considered by the exchange to be eligible for continued listing) from withdrawing and transferring its securities from the NYSE to another exchange or the Nasdaq market without being required to comply with extremely arbitrary and burdensome rule requirements. The proposed withdrawal from listing must be approved by the company's security holders at a meeting at which a substantial percentage of the outstanding amount of the particular security is represented.

      Since 1984, the NASD has been on record opposing NYSE Rule 500 as an unfair barrier to competition between the NYSE and The Nasdaq Stock Market.SM The SEC has also acknowledged that Rule 500 conceivably could have an anti-competitive effect since it would make it possible for the NYSE to prospect freely for listings from other SROs while making it difficult for them to seek listings from among NYSE-listed companies. Accordingly, the NASD believes that anti-competitive delisting restrictions should be rescinded immediately.

      CONCLUSION

      Today's marketplace is a highly competitive, technologically sophisticated environment that has been witness to dynamic and rapid development of new products and innovative trading mechanisms. The NASD believes that where competition has been allowed to flourish in the securities markets, overall efficiency and services for customers have improved. In order to facilitate continued growth and innovation in the markets, the NASD recommends the SEC take the following actions:

      • Eliminate off-board trading restrictions.


      • Permit third market makers access to all exchange-listed securities through the ITS/CAES linkage.


      • Adopt disclosure requirements regarding inducements for order flow.


      • Adopt procedures for review of operations and allocation of regulatory costs for proprietary trading systems.


      • Eliminate exchange delisting restrictions.

      1 The NASD notes that third market makers re not deemed to be operators of proprietary trading systems solely because they operate internal execution systems. Members of the NASD registered as market makers in exchange-listed stocks are required to maintain firm, continuous, two-sided quotations and are regulated as market makers.

    • 92-66 Quotation and Trade-Reporting Requirements for Members Dealing in High-Yield Bonds

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On November 9, 1992, the NASD® submitted rule proposals to the Securities and Exchange Commission (SEC) regarding quotation and transaction reporting requirements for members trading high-yield, fixed-income securities. The SEC is expected to act on these rules in the next few months, and 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 rule filing, contact Market Data Services at (301) 948-6162.

      BACKGROUND AND DESCRIPTION OF REQUIREMENTS

      The NASD is proposing regulatory requirements for members that participate in the high-yield, fixed-income securities market. The proposed 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.

      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 minimum 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.

    • 92-65 SEC Approval of Amendments Concerning the Exclusion of Class-Action Matters From Arbitration Proceedings and Requiring That Predispute Arbitration Agreements Include a Notice That Class-Action Matters May Not Be Arbitrated

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On October 28, 1992, the Securities and Exchange Commission (SEC) approved amendments to Section 12 of the NASD Code of Arbitration Procedure and Article III, Section 21 of the NASD Rules of Fair Practice. The amendments to Section 12 took effect on October 28, 1992, but the change to Article III, Section 21 will not take effect until October 28, 1993, one year after Commission approval. The text of the amendments follows the discussion below.

      BACKGROUND AND DESCRIPTION OF AMENDMENTS

      On October 28, 1992, the SEC approved amendments to Section 12 of the NASD Code of Arbitration Procedure (Code) and Article III, Section 21 of the NASD Rules of Fair Practice to exclude class-action matters from arbitration proceedings conducted by the NASD and to require that predispute arbitration agreements contain a notice that class-action matters may not be arbitrated.

      The Securities Industry Conference on Arbitration (SICA) developed the rule change in response to the SEC's directive, articulated by former SEC Chairman David Ruder, that investors have access to the courts in appropriate cases. SICA determined to clarify the treatment of class actions in its rules and, since 1990, has been developing such rules for the Uniform Code of Arbitration. On January 7, 1992, SICA unanimously adopted a final version of its rule language, which has been modified to conform to the NASD's Code provisions.

      The amendment to Section 12 of the Code adds a new subsection (d). Under subsection (d)(1) claims filed in arbitration as class actions are not eligible for submission under the Code. Subsection (d)(2) provides that claims filed by members of a putative or certified class action (class action) filed in another forum are ineligible for submission if the claim is part of the class action. A panel of one or three arbitrators or the court with jurisdiction over the class action will settle disputes over whether the claim is part of a class action.

      Under subsection (d)(3) no member or associated person can compel arbitration against a customer who is a member of a class action unless class certification is denied, the class is decertified, the customer is excluded from the class, the customer either elects not to participate in the class action, or the customer has complied with court-imposed conditions for withdrawing from the class.

      Accordingly, neither members nor their associated persons may use an existing arbitration agreement to compel a customer to arbitrate a claim included in a class action. Subsection (d)(4) provides that members and associated persons do not waive their rights under the Code or any agreement to arbitrate, except to the extent stated in Subsection (d).

      The rule change also amends Article III, Section 21(f) of the NASD Rules of Fair Practice, which governs the content of predispute arbitration agreements with customers, to make it consistent with Subsection 12(d) of the Code. All new agreements signed by customers must contain a statement prohibiting persons from bringing class actions to arbitration and from attempting to enforce an agreement to arbitrate against a member of a class action. To provide NASD members sufficient time to redraft and reprint their arbitration agreements, the amendment to Section 21(f) will take effect October 28, 1993.

      Questions regarding this Notice may be directed to Deborah Masucci, Vice President, Arbitration, at (212) 480-4881.

      PART III OF THE CODE OF ARBITRATION PROCEDURE

      Required Submission

      Sec. 12.

      (a), (b) and (c) Unchanged,
      (d) Class Action Claims.
      (1) A claim submitted as a class action shall not be eligible for arbitration under this Code at the Association.
      (2) Any claim filed by a member or members of a putative or certified class action is also ineligible for arbitration at the Association if the claim is encompassed by a putative or certified class action filed in federal or state court, or is ordered by a court to an arbitral forum not sponsored by a self-regulatory organization for classwide arbitration. However, such claims shall be eligible for arbitration in accordance with Section 12(a) or pursuant to the parties' contractual agreement, if any, if a claimant demonstrates that it has elected not to participate in the putative or certified class action or, if applicable, has complied with any conditions for withdrawing from the class prescribed by the court- Disputes concerning whether a particular claim is encompassed by a putative or certified class action shall be referred by the Director of Arbitration to a panel of arbitrators in accordance with Section 13 or Section 19 of the Code, as applicable. Either party may elect instead to petition the court with jurisdiction over the putative or certified class action to resolve such disputes. Any such petition to the court must be filed within ten business days of receipt of notice that the Director of Arbitration is referring the dispute to a panel of arbitrators.
      (3) No member or associated person shall seek to enforce any agreement to arbitrate against a customer who has initiated in court a putative class action or is a member of a putative or certified class with respect to any claims encompassed by the class action unless and until: (A) the class certification is denied; (B) the class is decertified; (C) the customer is excluded from the class by the court; or (D) the customer elects not to participate in the putative or certified class action or, if applicable, has complied with any conditions for withdrawing from the class prescribed by the court.
      (4) No member or associated person shall be deemed to have waived any of its rights under this Code or under any agreement to arbitrate to which it is party except to the extent stated in this paragraph.

      * * * * *

      TEXT OF AMENDMENTS TO ARTICLE III OF THE RULES OF FAIR PRACTICE

      Books and Records

      Sec. 21.

      Requirements When Using Predispute Arbitration Agreements with Customers

      (f)(5) The requirements of [this subsection] subparagraphs (f)(1) through (4) shall apply only to new agreements signed by an existing or new customer of a member after September 7, 1989.
      (6) All agreements shall include a statement that "No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein."
      (7) The requirements of subparagraph (6) shall apply only to new agreements signed by an existing or new customer of a member after October 28, 1993.

      * * * * *

    • 92-64 Nasdaq National Market Additions, Changes, and Deletions as of October 26, 1992

      SUGGESTED ROUTING:*

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

      As of October 26, 1992, the following 47 issues joined the Nasdaq National Market, bringing the total number of issues to 2,947:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      FMDD

      F & M Distributors, Inc.

      9/25/92

      500

      USML

      Universal Standard Medical Labs., Inc.

      9/25/92

      1000

      UTCIV

      Uniroyal Technology Corporation

      9/28/92

      1000

      UBNKZ

      Union Bank-Depository Shares

      9/30/92

      1000

      PDRR

      Alpine Meadows of Tahoe, Inc.

      10/01/92

      1000

      CSAR

      Caraustar Industries, Inc.

      10/01/92

      1000

      JUST

      Just Toys, Inc.

      10/01/92

      1000

      NKOT

      Nu-kote Holding, Inc. (Cl A)

      10/01/92

      1000

      ADLAC

      Adelphia Communications Corporation (Cl A)

      10/02/92

      500

      EFII

      Electronics for Imaging, Inc.

      10/02/92

      200

      XLTC

      Excel Technology, Inc.

      10/02/92

      500

      PHMC

      Plaza Home Mortgage Corporation

      10/02/92

      1000

      FROK

      FirstRock Bancorp, Inc.

      10/05/92

      1000

      DDDDF

      4th Dimension Software Ltd. Ordinary Shares

      10/06/92

      1000

      ARCH

      Arch Petroleum, Inc.

      10/06/92

      1000

      BWSIL

      BioMedical Waste Systems, Inc. (Cl B)(Wts)

      10/06/92

      1000

      BWSI

      BioMedical Waste Systems, Inc.

      10/06/92

      1000

      DSPT

      DSP Technology Inc.

      10/06/92

      500

      MCAF

      McAfee Associates, Inc.

      10/06/92

      1000

      MTMI

      Microtek Medical, Inc.

      10/06/92

      1000

      NCTI

      Noise Cancellation Technologies, Inc.

      10/06/92

      1000

      NSCF

      Northstar Computer Forms, Inc.

      10/06/92

      200

      SPMT

      Sportmart, Inc.

      10/06/92

      1000

      RACE

      DATA RACE, Inc.

      10/07/92

      1000

      CJGPF

      Chai-Na-Ta Ginseng Products Limited

      10/09/92

      500

      BPIE

      BPI Environmental, Inc.

      10/12/92

      1000

      TODH

      Todhunter International, Inc.

      10/13/92

      1000

      CPLY

      Copley Pharmaceutical, Inc.

      10/14/92

      1000

      IQSW

      IQ Software Corporation

      10/15/92

      1000

      ABTI

      Alpha-Beta Technology, Inc.

      10/16/92

      1000

      CMMD

      Command Security Corporation

      10/16/92

      1000

      FRTZ

      Fritz Companies, Inc.

      10/16/92

      1000

      TACO

      Taco Cabana, Inc. (Cl A)

      10/16/92

      1000

      BRKT

      Brooktrout Technology, Inc.

      10/20/92

      1000

      COSFF

      Corel Corporation

      10/21/92

      1000

      KMET

      KEMET Corporation

      10/21/92

      1000

      HOFL

      Home Savings Bank, F.S.B.

      10/22/92

      500

      IMGA

      Image Am erica, Inc.

      10/22/92

      1000

      OLCMF

      Olicom A/S

      10/22/92

      1000

      PCLI

      Physicians Clinical Laboratory, Inc.

      10/22/92

      1000

      PSQL

      Platinum Software Corporation

      10/22/92

      500

      SBIB

      Sterling Bancshares, Inc.

      10/22/92

      500

      BMTN

      Boomtown, Inc.

      10/23/92

      1000

      CITA

      CITATION Computer Systems, Inc.

      10/23/92

      1000

      CMAG

      Casino Magic Corp.

      10/23/92

      1000

      CMBI

      Central Mortgage Bancshares, Inc.

      10/23/92

      500

      SFNCA

      Simmons First National Corporation (Cl A)

      10/26/92

      200

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since September 28, 1992:

      New/Old Symbol

      New/Old Security

      Date of Change

      QUIN/XCEL

      Quincy Savings Bank/Excel Bancorp, Inc.

      9/29/92

      TRNZ/AICP

      Trinzic Corp./AICorp

      10/01/92

      SOSA/SOSA

      Somerset Savings Bank/Somerset Bankshares, Inc.

      10/01/92

      MORR/MORR

      Morrison Restaurants Inc./Morrison Inc.

      10/05/92

      TXMX/TXMX

      El Chico Restaurants, Inc./Southwest Cafes, Inc.

      10/12/92

      ELCH/TXMX

      El Chico Restaurants, Inc./El Chico Restaurants, Inc.

      10/13/92

      VIRO/MSMR

      ViroGroup, Inc./Missimer & Associates, Inc.

      10/16/92

      BOMS/BOMS

      BancorpSouth, Inc./Bancorp of Mississippi Inc.

      10/22/92

      DOSEW/DOSEW

      Choice Drug Systems, Inc. - 3/31/93 (Wts)/Choice Drug Systems Inc. 10/31/92 (Wts)

      10/22/92

      NCELW/NCELW

      Nationwide Cellular Service Inc.- 2/15/93 (Wts)/Nationwide Cellular Svcs. Inc. - 10/28/92 (Wts)

      10/22/92

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      ECRC

      Employer's Casualty Company

      9/25/92

      FABKN

      First of America Bank Corp. - Ser. E (Pfd)

      9/28/92

      FAB KM

      First of America Bank Corp. - Ser. G (Pfd)

      9/28/92

      BULKF

      B & H Bulk Carriers, Ltd.

      9/29/92

      CDRGQ

      Cedar Group, Inc.

      9/29/92

      NUMS

      Nu-Med, Inc.

      9/29/92

      FFNS

      First Savings Bancorp

      10/01/92

      SFGI

      Security Financial Group, Inc.

      10/01/92

      SFSI

      Sunwest Financial Services, Inc.

      10/01/92

      WSVS

      Wiland Services, Inc.

      10/01/92

      QUAN

      Quantronix Corporation

      10/02/92

      SCAF

      Surgical Care Affiliates, Inc.

      10/02/92

      DUFM

      Durr-Fillauer Medical, Inc.

      10/06/92

      CYTOP

      Cytogen Corporation - $2.50 Cv. (Pfd)

      10/08/92

      HWRD

      Howard Savings Bank (The)

      10/08/92

      MAGAF

      Magna International Inc. (Cl A)

      10/09/92

      JAIL

      Adtec, Inc.

      10/13/92

      QZMGF

      Quartz Mountain Gold

      10/14/92

      SVAN

      Savannah Foods & Industries, Inc.

      10/14/92

      CSTP

      Congress Street Properties, Inc.

      10/15/92

      INBF

      INB Financial Corporation

      10/15/92

      PFSB

      Piedmont Federal Corporation

      10/15/92

      CEMC

      Century MediCorp, Inc.

      10/16/92

      IFII

      Indiana Financial Investors, Inc.

      10/19/92

      FLER

      Fleer Corporation

      10/20/92

      AXXN

      Action Auto Rentals, Inc.

      10/21/92

      MOOR

      Moorco International Inc.

      10/21/92

      PHNI

      Phoenix Resource Companies, Inc. (The)

      10/22/92

      KMSI

      KMS Industries, Inc.

      10/23/92

      SRAMC

      Simtek Corporation

      10/23/92

      SRAWC

      Simtek Corporation (Wts) 3/6/96

      10/23/92

      AEGSY

      Aegis Group PLC

      10/26/92

      CCNC

      CCNB Corporation

      10/26/92

      HRZN

      Horizon Industries, Inc.

      10/26/92

      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.

    • 92-63 Christmas Day and New Year's Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

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

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

      Trade Date

      Settlement Date

      Reg. T Date*

      Dec. 17

      Dec. 24

      Dec. 29

      18

      28

      30

      21

      29

      31

      22

      30

      Jan. 4, 1993

      23

      31

      5

      24

      Jan. 4, 1993

      6

      25

      Markets Closed

      -

      28

      5

      7

      29

      6

      8

      30

      7

      11

      31

      8

      12

      Jan. 1, 1993

      Markets Closed

      -

      4

      11

      13

      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.

      * 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."

    • 92-62 SOES Tier Levels to Change for 538 Issues on December 1, 1992

      SUGGESTED ROUTING:*

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

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

      • A 1,000-share maximum order size 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 of their establishment, the NASD Trading Committee and Board of Governors decided that the tier levels applicable to each security would be reviewed periodically to determine if the trading characteristics of the issue had changed so as to warrant a SOES tier-level move. Such a review was conducted as of August 31, 1992, using the aforementioned formula and fourth-quarter trading data. The results of this review were analyzed by the SOES Subcommittee and the NASD Trading Committee, which recommended that changes in SOES tier levels should be implemented per the formula calculation with the exception that an issue would not be permitted to move more than one level.

      To further explain, if an issue previously was categorized in the 200-share tier, it would not be permitted to move to the 1,000-share tier even if the formula calculated that such a move was warranted. The issue could move only one level to the 500-share tier as a result of any single review. Likewise, a security previously assigned to the 1,000-share tier could move only to 500 shares, regardless of the formula calculation. 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 December 1, 1992.

      NASDAQ NATIONAL MARKET SOES CHANGES

      All Issues in Alphabetical Order by Name

      Symbol

      Company Name

      Old Tier Level

      New Tier Level

      A

           

      ELUXY

      A B ELECTRLX ADR SPD

      1000

      500

      ABSI

      A B S INDS

      500

      1000

      SKFRY

      A B SKF ADR

      200

      500

      AEPI

      A E P INDS INC

      500

      1000

      ALTI

      ALTAI INC

      200

      500

      APGI

      A P GREEN INDS

      1000

      500

      ADGE

      ADAGE INC

      500

      1000

      AVCR

      ADVACARE INC

      200

      500

      LAIS

      ADVAN INTERVENTIONAL

      200

      500

      AESM

      AERO SYS INC

      1000

      500

      ATNG

      ALATENN RESOURCES

      500

      1000

      AEOK

      ALEXANDER ENGY CORP

      500

      1000

      ALKS

      ALKERMES INC

      500

      1000

      AORGB

      ALLEN ORGAN CO CL B

      200

      500

      ABGA

      ALLIED BANKSHARES

      200

      500

      ALGR

      ALLIED GROUP INC

      500

      1000

      ALET

      ALOETTE COSMETICS

      500

      1000

      ARELW

      ALPHAREL INC WTS 94

      1000

      500

      AMBC

      AMER BNCP OHIO

      200

      500

      AFIL

      AMER FILTRONA CORP

      500

      200

      RICE

      AMER RICE INC

      500

      200

      AMSC

      AMER SUPERCONDUCTOR

      200

      500

      AMGD

      AMER VANGUARD CORP

      200

      500

      AMWD

      AMER WOODMARK CORP

      1000

      500

      ASGR

      AMERICA SERVICE GROUP

      200

      500

      AWII

      AMERIWOOD INDS INT'L

      500

      1000

      AMOS

      AMOSKEAG CO

      1000

      500

      AMPI

      AMPLICON INC

      500

      200

      ANRG

      ANERGEN INC

      200

      500

      ARIB

      ASPEN IMAGING INT'L

      1000

      500

      ATKM

      ATEK METALS CENTER

      500

      200

      ATWD

      ATWOOD OCEANICS INC

      1000

      500

      ACAM

      AUTOCAM CORP

      1000

      500

      TOTAC

      AUTOTOTE INC CL A

      1000

      500

      AVTR

      AVATAR HLDGS INC

      1000

      500

             

      B

           

      BFEN

      B F ENTERPRISES INC

      200

      500

      BFSI

      B F S BANKORP INC

      200

      500

      BHAGB

      B H A GROUP INC CL B

      500

      200

      BNHB

      B N H BNSH INC

      1000

      500

      BTRIC

      B T R REALTY INC

      500

      1000

      BPMI

      BADGER PAPER MILLS

      200

      500

      BWINB

      BALDWIN LYONS CL B

      500

      200

      BGII

      BALLY GAMING INT'L

      500

      1000

      BTEK

      BALTEK CORP

      500

      200

      BOMS

      BANCORP OF MISS INC

      200

      500

      BNHC

      BANK OF NEW HAMP CORP

      1000

      500

      BPILF

      BASIC PET INT'L LTD

      500

      200

      BSNX

      BASIN EXPLORATION

      500

      1000

      BFRS

      BEN FRANKLIN RETAIL

      500

      1000

      BTGCW

      BIO-TECH GEN WTS 95

      1000

      500

      BTGCZ

      BIO-TECH GEN WTS 96

      1000

      500

      BGENW

      BIOGEN INC WTS

      1000

      500

      BIOMF

      BIOMIRA INC

      500

      1000

      BLIS

      BLISS LAUGHLIN INDS

      500

      200

      BOON

      BOONTON ELECTRONICS

      500

      200

      BORAY

      BORALLTDADS

      500

      200

      BOSA

      BOSTON ACOUSTICS INC

      1000

      500

      BOST

      BOSTON DIGITAL CORP

      1000

      500

      BOXXA

      BOX ENERGY CP CL A

      1000

      500

      BRCOA

      BRADY W H CO CL A

      1000

      500

      BTSB

      BRAINTREE SAV BK THE

      500

      1000

      BRDN

      BRANDON SYSTEMS CORP

      200

      500

      BRDL

      BRENDLE'S INC

      1000

      500

      BMTC

      BRYN MAWR BK CORP

      1000

      500

      BTLR

      BUTLER MFG CO

      1000

      500

             

      C

           

      CASH

      C A SHORT INT'L INC

      500

      1000

      CBLMW

      C B L MEDICAL WTS

      1000

      500

      CCBF

      C C B FIN CORP

      500

      1000

      CENF

      C E N F E D FIN CORP

      500

      1000

      CERB

      C E R B C O INC

      500

      200

      CIMC

      C I M C O INC

      1000

      500

      LAWR

      CMS/DATA CORP

      1000

      500

      CNBE

      C N B BANCSHARES INC

      500

      1000

      CORR

      COR THERAPEUTICS

      500

      1000

      CPBI

      C P B INC

      1000

      500

      CSFCB

      C S F HLDGS INC CL B

      500

      1000

      CSPI

      C S P INC

      1000

      500

      CAMDW

      CAL MICRO DEVICE WTS

      500

      1000

      CWTR

      CAL WATER SVC CO

      500

      1000

      CFHC

      CALIFORNIA FIN HLDG

      500

      1000

      CCLPZ

      CALLON CON LP UTS

      1000

      500

      WINEA

      CANANDAIGUA WINE A

      500

      1000

      CANX

      CANNON EXPRESS

      1000

      500

      HKYIF

      CANSTAR SPORTS INC

      500

      200

      CYNRW

      CANYON RES CP WTS

      500

      1000

      CCBT

      CAPE COD BK TR CO

      500

      1000

      CAII

      CAPITAL ASSOCIATES

      1000

      500

      CABK

      CAPITAL BANCORP

      1000

      500

      CBCL

      CAPITOL BANCORP LTD

      200

      500

      CAFS

      CARDINAL FIN GP

      500

      200

      CAVR

      CARVER CP

      1000

      500

      CATY

      CATHAY BANCORP INC

      500

      1000

      CELIW

      CEL SCI CP WTS 95

      500

      1000

      CEBC

      CENTENNIAL BNCP

      500

      1000

      CEBK

      CENTRAL CO-OP BANK

      1000

      500

      KOKO

      CENTRAL INDIANA BNCP

      1000

      500

      CJFC

      CENTRAL JERSEY FIN

      200

      500

      CSBC

      CENTRAL SOUTHERN HLDG

      200

      500

      CSBI

      CENTURY SOUTH BKS

      200

      500

      CHLN

      CHALONE WINE GRP LTD

      500

      1000

      CFED

      CHARTER FSB BANCORP

      500

      1000

      CHEM

      CHEMPOWER INC

      1000

      500

      DOCKS

      CHICAGO DOCK SBI

      1000

      500

      CDCRA

      CHILDRENS DIS CTRS CL A

      500

      200

      CSFT

      CHIPSOFT INC CL A

      200

      500

      CHMD

      CHRONIMED INC

      500

      1000

      CINF

      CINCINNATI FINANCIAL

      500

      1000

      CFNE

      CIRCLE FINE ART CORP

      500

      1000

      CINS

      CIRCLE INCOME SHARES

      500

      1000

      CSYI

      CIRCUIT SYSTEMS INC

      500

      1000

      CHCO

      CITY HOLDING CO

      200

      500

      CIVC

      CIVIC BANCORP

      1000

      500

      CGAS

      CLINTON GAS SYS

      1000

      500

      COLL

      COLLINS INDS INC

      500

      1000

      CCOA

      COMCOA INC

      500

      200

      CBWV

      COMMERCE BANC CORP

      500

      1000

      COBAP

      COMMERCE BNCP PFD B

      200

      500

      CBNB

      COMMERCEBANCORP

      500

      1000

      CBOCA

      COMMERCIAL BNCP COLO CL

      A 500

      1000

      CBKS

      COMMNWLTH BCSHS

      1000

      500

      CECOA

      COMMUN ENTMT CL A

      1000

      500

      CBKI

      COMMUNITY BANKS INC

      200

      500

      CMTL

      COMTECH TELECOMM CORP

      1000

      500

      CFIB

      CONS FIBRES INC

      500

      200

      COPIC

      CONS PRODUCTS INC

      1000

      500

      CSOL

      CONVERGENT SOLUTION

      1000

      500

      COOL

      COOPER DEVELOPMENT

      500

      200

      ZAPS

      COOPER LIFE SCI INC

      500

      200

      COOP

      COOPERATIVE BK SAV

      200

      500

      CSTN

      CORNERSTONE FIN CORP

      500

      200

      CSTR

      COSTAR CORP

      500

      1000

      CRCC

      CRAFTMATIC CONTOUR

      500

      200

      CSCI

      CRYENCO SCIENCES INC

      500

      1000

      CULP

      CULP INC

      1000

      500

      CTII

      CYTOTHERAPEUTICS INC

      200

      500

             

      D

           

      DARTA

      DART GROUP CP CL A

      500

      200

      DATX

      DATA TRANSLATION INC

      500

      200

      DKEY

      DATAKEY INC

      1000

      500

      DMAR

      DATAMARINE INT'L INC

      200

      500

      DSCC

      DATASOUTH COMPUTER

      1000

      500

      DWCH

      DATAWATCH CORP

      500

      1000

      DWCHW

      DATAWATCH CORP WTS

      500

      1000

      DATM

      DATUM INC

      1000

      500

      DAVX

      DAVOX CORP

      1000

      500

      DEER

      DEERBANK CORP

      200

      500

      DSSI

      DEFENSE SOFTWARE SYS

      200

      500

      DGAS

      DELTA NATURAL GAS

      1000

      500

      DIDIF

      DESTRON/I D I INC

      500

      1000

      DTRX

      DETREX CORP

      1000

      500

      DICN

      DICEON ELCTRONICS

      1000

      500

      DIPCW

      DIGITAL PRODS WTS A

      1000

      500

      DIPCZ

      DIGITAL PRODS WTS B

      1000

      500

      DVRS

      DIVERSCO INC

      1000

      500

      DVCR

      DIVERSICARE INC

      1000

      500

      DOUG

      DOUGLAS AND LOMASON

      500

      1000

      DRCO

      DYNAMICS RESEARCH CORF

      1000

      500

             

      E

           

      ERLYE

      E R L Y INDUSTRIES

      1000

      500

      EROI

      E R O INC

      500

      1000

      EZEM

      E Z EM INC

      1000

      500

      EBSI

      EAGLE BANCSHARES

      500

      1000

      ELCN

      ELCO INDS INC

      1000

      500

      ETCIA

      ELECTRONIC TELECOMM CL A

      1000

      500

      EMBX

      EMBREX INC

      500

      1000

      EMBXW

      EMBREX INC WTS 96

      500

      1000

      ENNI

      ENERGYNORTHINC

      1000

      500

      EASI

      ENGINEERED SUPPORT

      1000

      500

      ENZNW

      ENZON INC WTS 94

      1000

      500

      ESCA

      ESCALADE INC

      1000

      500

      ECGC

      ESSEX COUNTY GAS CO

      200

      500

      EVGN

      EVERGREEN BANCORP

      500

      1000

             

      F

           

      FMBN

      F & M BANCORP (MD)

      200

      500

      FMNT

      F AND M NATIONAL CORP

      500

      1000

      FFSB

      F F BANCORP INC

      500

      1000

      FFFG

      F F O FIN GRP INC

      500

      1000

      FLSHP

      F L S HLDGS A PFD

      200

      500

      FRPP

      F R P PROPERTIES INC

      200

      500

      F1CI

      FAIR ISAAC AND CO

      1000

      500

      FLCP

      FALCON PRODUCTS INC

      500

      1000

      FMLY

      FAMILY BANCORP

      500

      1000

      FSCR

      FEDERAL SCREW WORKS

      200

      500

      FITC

      FINANCIAL TRUST CORP

      200

      500

      FACT

      FIRST ALBANY COS INC

      500

      1000

      FAMA

      FIRST AMARILLO BNCP

      200

      500

      FAMF

      FIRST AMFED CORP

      500

      1000

      FBNC

      FIRST BNCP TROY, NC

      200

      500

      FCHT

      FIRST CHATTANOOGA

      200

      500

      FCIT

      FIRST CITIZENS FIN

      500

      1000

      FFMY

      FIRST FED S&L FT MYERS

      500

      1000

      FLAG

      FIRST FED SAV BK LAG

      200

      500

      FFPR

      FIRST FED SAV BK PR

      500

      1000

      FRCC

      FIRST FIN CARIB CORP

      1000

      500

      THFF

      FIRST FIN CP (IN)

      500

      200

      FFCH

      FIRST FIN HLDG

      500

      1000

      FFWM

      FIRST FIN MARYLAND

      500

      1000

      FGHC

      FIRST GEORG HLDGS

      200

      500

      FIBI

      FIRST INTER BANCORP

      500

      1000

      FMSB

      FIRST MUTUAL SAV BK

      500

      200

      FNGB

      FIRST NORTHERN SAV BK

      500

      1000

      FOBBA

      FIRST OAK BROOK CL A

      200

      500

      FWBI

      FIRST WESTERN BNCP

      500

      1000

      FLGLA

      FLAGLER BANK CP CL A

      200

      500

      FLGF

      FLAGSHIP FIN CP

      1000

      500

      FLXS

      FLEXSTEEL INDS

      1000

      500

      FFPC

      FLORIDA FIRST FED

      500

      1000

      FLBK

      FLORIDABANK FSB

      500

      1000

      FOILO

      FOREST OIL CORP PFD

      200

      500

      FOILW

      FOREST OIL CORP WTS 96

      200

      500

      FRTHZ

      FOURTH FIN CORP DEP SH

      500

      1000

      FRAM

      FRAME TECH CORP

      500

      1000

      FSBX

      FRAMINGHAM SAV BK

      iooo

      500

      FKFD

      FRANKFORD CORP THE

      500

      200

      FELE

      FRANKLIN ELECTRIC CO

      1000

      500

             

      G

           

      GWCC

      G W C CORP

      1000

      500

      GANL

      GALEY & LORD INC

      500

      1000

      GBAN

      GATEWAY BANCORP INC

      500

      200

      GCOR

      GENCOR INDUSTRIES

      500

      1000

      GENBB

      GENESEE CORP CL B

      500

      200

      GENIP

      GENETICS INSTIT PFD

      500

      200

      GENIW

      GENETICS INSTIT WTS

      500

      1000

      GBFH

      GEORGIA BONDED FIBER

      200

      500

      GIGA

      GIGA TRONICS INC

      500

      200

      GILD

      GILEAD SCIENCES INC

      200

      500

      GNBC

      GLENDALE BNCP

      200

      500

      GOOD

      GOODY PRODUCTS INC

      500

      1000

      GBBS

      GREAT BAY BANKSHARES

      500

      1000

      GFGC

      GREAT FALLS GAS CO

      500

      200

      GSBC

      GREAT SOUTHERN BNCP

      1000

      500

      GFCT

      GREENWICH FIN CORP

      500

      1000

      GSOF

      GROUP I SOFTWARE INC

      1000

      500

      GMRK

      GULFMARK INT'L INC

      1000

      500

      GBSI

      GWINNETT BANCSHARES

      200

      500

             

      H

           

      HFFC

      H F FINANCIAL CORP

      500

      1000

      HDVSW

      H. D. VEST WTS A 93

      1000

      500

      HDVSZ

      H. D. VEST WTS B 94

      1000

      500

      HWEC

      HALLWOOD ENGY COS

      500

      200

      HBHC

      HANCOCK HLDG CO

      500

      1000

      HATH

      HATHAWAY CORP

      500

      1000

      HVFD

      HAVERFIELD CORP

      200

      500

      HEALW

      HEALTHWATCH WTS A

      500

      200

      HEALZ

      HEALTHWATCH WTS B

      500

      200

      HECHB

      HECHINGER CO CL B

      1000

      500

      HELX

      HELIX TECHNOLOGY CORP

      1000

      500

      HERS

      HERITAGE FIN SVC IL

      500

      1000

      HOENW

      HOENIG GP WTS A

      1000

      500

      HOLO

      HOLOPAK TECHS INC

      1000

      500

      HBENB

      HOME BENEFICIAL CORP CL

      B 500

      1000

      HFMD

      HOME FED CORP

      500

      200

      HFSF

      HOME FED FIN CORP

      200

      500

      HPBC

      HOME PORT BNCP INC

      1000

      500

      HMCI

      HOMECORP INC

      200

      500

      HOME

      HOMEDCO GP INC

      500

      1000

      HMTB

      HOMETRUST BANK

      500

      1000

      HFIN

      HORIZON FIN SVC INC

      500

      1000

      HYBDW

      HYCOR BIOMEDICAL WTS

      1000

      500

      HYDE

      HYDE ATHLETIC INDS

      200

      500

             

      I

           

      ICOC

      I C 0 INC

      1000

      500

      IIVI

      IIVI INC

      1000

      500

      INTK

      INOTEK TECH CORP

      1000

      500

      ILIOW

      ILIO INC WTS 93

      1000

      500

      MPAC

      IMPACT SYSTEMS INC

      1000

      500

      INDB

      INDEP BK CORP MA

      200

      500

      IUBC

      INDIANA UNITED BNCP

      500

      200

      IACI

      INDUSTRIAL ACOUSTICS

      200

      500

      IFDCA

      INDUSTRIAL FUNDING CL A

      1000

      500

      IHIIW

      INDUSTRIAL HLDG WTS A

      200

      500

      IHIIZ

      INDUSTRIAL HLDG WTS B

      200

      500

      IHII

      INDUSTRIAL HLDGS INC

      200

      500

      ITCC

      INDUSTRIAL TRAINING

      200

      500

      IITCF

      INTERA INFO TECH A

      1000

      500

      ICAR

      INTERCARGO CORP

      500

      1000

      IPICZ

      INTERNEURON WTS B 95

      1000

      500

             

      J

           

      JACO

      JACO ELECTRONICS INC

      500

      1000

      JASN

      JASON INC

      500

      1000

      JBNK

      JEFFERSON BKSHS VA

      500

      1000

      JNBK

      JEFFERSON NAT'L BANK

      500

      1000

      PNUT

      JIMBO'S JUMBOS INC

      500

      1000

      WILLA

      JOHN WILEY SONS CL A

      1000

      500

      JSBK

      JOHNSTOWN SAV BK FSB

      500

      200

      SPLKA

      JONES SPACELINK CL A

      500

      1000

             

      K

           

      KCSE

      K C S ENERGY INC

      500

      1000

      KLLM

      KLLM TRANSPORT SV

      200

      500

      KTII

      K TRON INT'L INC

      500

      1000

      KINN

      KINNARD INV INC

      1000

      500

      KOPN

      KOPIN CORP

      1000

      500

      KRUG

      KRUG INT'L CORP

      1000

      500

             

      L

           

      LCSI

      L C S INDS INC

      200

      500

      LXBK

      LSB BANCSHARES NC

      200

      500

      LSNB

      LAKE SHORE BANCORP

      500

      1000

      LAKE

      LAKELAND INDS INC

      1000

      500

      LPAC

      LASER-PACIFIC MEDIA

      500

      1000

      LBTYA

      LIBERTY MEDIA CORP CL A

      500

      1000

      LBTYB

      LIBERTY MEDIA CORP CL B

      500

      200

      LUSA

      LIFE USA HLDG INC

      500

      1000

      LINN

      LINCOLN FOODSVC PROD

      1000

      500

      LNSB

      LINCOLN SAVINGS BANK

      200

      500

      LIQB

      LIQUI BOX CORP

      200

      500

      LAFCB

      LOAN AMER FIN CL B

      200

      500

      LONDY

      LONDON INT'L PLC ADR

      500

      200

      LEIX

      LOWRANCE ELECTRONICS

      500

      1000

             

      M

           

      MMIM

      M M I MEDICAL INC

      500

      200

      MACD

      MACDERMID INC

      500

      200

      MKTAY

      MAKITA CP SPONS ADR

      200

      500

      MLIC

      MANHATTAN LIFE GUAR

      500

      200

      MRCS

      MARCUS CORP

      500

      1000

      MRCC

      MARK CONTROLS CORP NEW

      500

      1000

      MFAC

      MARKET FACTS INC

      200

      500

      MRTN

      MARTEN TRANSPORT LTD

      200

      500

      MASB

      MASSBANK CORP

      500

      1000

      MFLR

      MAYFLOWER CO-OP BK

      500

      200

      MTIX

      MECHANICAL TECH INC

      500

      200

      MDIN

      MEDALIST INDS

      1000

      500

      MDEV

      MEDICAL DEVICES

      1000

      500

      MDIX

      MEDICAL DIAGNOSTICS

      200

      500

      MSYS

      MEDICAL TECH SYS INC

      500

      1000

      MSYSZ

      MEDICAL TECH WTS 96

      200

      500

      MECS

      MEDICUS SYS CORP

      1000

      500

      MEGX

      MEGACARDS INC

      200

      500

      MEMXY

      MEMOREX TELEX NV ADR

      500

      1000

      MPTBS

      MERIDIAN PT RLTY TR

      500

      200

      MERS

      MERIS LABS INC

      500

      1000

      METS

      MET COIL SYSTEMS CORP

      1000

      500

      MEOHF

      METHANEX CORP

      500

      1000

      MIDS

      MID SOUTH INS CO

      1000

      500

      MSSB

      MID STATE FED SAV BK

      500

      1000

      MIDC

      MIDCONN BANK

      1000

      500

      MFRI

      MIDWESCO FILTER

      1000

      500

      SHOZC

      MILLFELD TRD WT CL A

      500

      200

      MILT

      MILTOPE GROUP INC

      500

      1000

      MILW

      MILWAUKEE INS GROUP

      200

      500

      MYTK

      MITEK SURGICAL PRODS

      200

      500

      MTNR

      MOUNTAINEER BKSHS WV

      200

      500

      LABL

      MULTI COLOR CORP

      1000

      500

             

      N

           

      NBTB

      N B T BANCORP INC

      200

      500

      BLDG

      N C I BLDG SYSTEM

      500

      1000

      NIPNY

      NEC CORP ADR

      500

      1000

      NFSF

      N F S FIN CORP

      500

      1000

      NHDI

      N H D STORES INC

      500

      200

      NWGI

      N W GROUP INC

      1000

      500

      POPS

      NAT'L BEVERAGE CORP

      500

      1000

      NCMC

      NAT'L CAP MGT CORP

      500

      1000

      NIRTS

      NAT'L INCOME RLT TRUST

      1000

      500

      NAIG

      NAT'L INSURANCE GRP

      200

      500

      MBLA

      NAT'L MERCANTILE BNCP

      1000

      500

      NPBC

      NATL PENN BSCHS INC

      200

      500

      NSBA

      NAT'L SAV BK ALBANY

      500

      1000

      NBTY

      NATURE'S BOUNTY INC

      500

      1000

      NAVG

      NAVIGATORS GRP INC

      1000

      500

      NHSL

      NEW HORIZONS S&L

      200

      500

      NDCOP

      NOBLE DRILLING PFD

      500

      1000

      NAMC

      NORTH AMER NAT'L CP

      1000

      500

      NTRSZ

      NORTHERN TR DEP SHRS

      1000

      500

      FERTP

      NU WEST INDS PFD A

      500

      200

      NUCM

      NUCLEAR METALS INC

      1000

      500

             

      O

           

      OESI

      O E S I POWER CORP

      1000

      500

      OHSC

      OAK HILL SPORTSWEAR

      1000

      500

      OGLE

      OGLEBAY NORTON CO

      200

      500

      OHBC

      OHIO BNCP YOUNGSTOWN

      500

      1000

      OLDB

      OLD NAT'L BNCP

      500

      1000

      OSTNO

      OLD STONE PFB B 2.40

      1000

      500

      OMEF

      OMEGA FIN CORP

      500

      200

      OSBN

      OSBORN COMM CP

      1000

      500

      OCOAC

      OUTLET COMM CL A

      1000

      500

             

      P

           

      PBSF

      PACIFIC BANK N A

      500

      1000

      PDLPY

      PACIFIC DUNLOP ADR

      1000

      500

      PISC

      PACIFIC INT'L SVC CORP

      1000

      500

      PTMLY

      PALMER TUBE MILL ADR

      200

      500

      PBCI

      PAMRAPO BNCP INC

      1000

      500

      PARK

      PARK NAT'L CORP

      200

      500

      PKWY

      PARKWAY CO

      500

      200

      PATK

      PATRICK INDS INC

      500

      200

      PMFG

      PEERLESS MFG CO

      1000

      500

      PTAC

      PENN TREATY AMER CORP

      500

      1000

      PVIR

      PENN VIRGINIA CORP

      500

      1000

      PNTAP

      PENTAIR INC PFD 87

      1000

      500

      PBNB

      PEOPLES SAV FIN CORP

      500

      1000

      PRFM

      PERFUMANIA INC

      500

      1000

      PHNI

      PHOENIX RESOURCE COS

      1000

      500

      PBGI

      PIEDMONT BKGP INC

      200

      500

      PSBN

      PIONEER BANCORP INC

      500

      1000

      PFBC

      PIONEER FED BNCP

      1000

      500

      PSFC

      PLAINS SPIRIT FIN

      500

      1000

      SIGN

      PLASTI LINE INC

      500

      1000

      PRAN

      PREMIER ANESTHESIA

      500

      1000

      PBKC

      PREMIER BKSHS

      200

      500

      PSSP

      PRICE STERN SLOAN

      1000

      500

      PENG

      PRIMA ENERGY CORP

      500

      1000

      PRGS

      PROGRESS SOFTWARE CORP

      500

      1000

      PSBK

      PROGRESSIVE BANK INC

      500

      1000

      PROS

      PROSPECT GP INC

      1000

      500

      PCOL

      PROTOCOL SYS INC

      200

      500

      PWRR

      PROVIDENCE WORCES RR

      200

      500

      PRBK

      PROVIDENT BNCP INC

      200

      500

      PECN

      PUBLISHERS EQUIP CORP

      1000

      500

      PLFC

      PULASKI FURNITURE CORP

      1000

      500

      PTNM

      PUTNAM TRUST CO

      500

      200

             

      Q

           

      QDELW

      QU1DEL CORP WTS 2000

      1000

      500

      QUIP

      QUIPP INC

      200

      500

             

      R

           

      RDCR

      RADIATION CARE INC

      500

      1000

      RARB

      RARITAN BANCORP INC

      200

      500

      RDRT

      READ-RITE CORP

      500

      1000

      RECP

      RECEPTECH CP CALL

      500

      200

      REED

      REEDS JEWELERS INC

      500

      200

      RFTN

      REFLECTONE INC

      1000

      500

      RGEQ

      REGENCY EQUITIES CORP

      500

      200

      REGB

      REGIONAL BNCP INC

      500

      1000

      REAL

      RELIABILITY INC

      500

      1000

      ARBC

      REPUBLIC BANK CAL

      500

      200

      RSFC

      REPUBLIC SAV FIN CORP

      200

      500

      REXL

      REXHALL INDS INC

      1000

      500

      RHEM

      RHEOMETRICS INC

      1000

      500

      RING

      RINGER CORP

      500

      1000

      RFBC

      RIVER FOREST BNCP

      500

      1000

      RNRC

      RIVERSIDE NAT'L BANK

      200

      500

      ROBC

      ROBEC INC

      1000

      500

      RNIC

      ROBINSON NUGENT INC

      1000

      500

      RMHI

      ROCKY MOUNT HELICOPT

      1000

      500

      RMUC

      ROCKY MT UNDERGARMNT

      1000

      500

      RULE

      RULE INDS INC

      1000

      500

      RBCO

      RYAN BECK CO INC

      200

      500

             

      S

           

      STBA

      S & T BANCORP INC

      200

      500

      SBRNW

      S A N B O R N WTS

      1000

      500

      SKFB

      S K FAMOUS BRANDS

      1000

      500

      SAFE

      SAFETYTEK CORP

      500

      1000

      SHRE

      SAHARA RESORTS

      500

      200

      SHEF

      SANDWICH CHEF INC

      500

      1000

      SWCB

      SANDWICH CO-OP BANK

      1000

      500

      STMI

      SATELLITE TECH MGMT

      200

      500

      SAYTW

      SAYETT GRP INC WTS

      500

      1000

      SAYT

      SAYETT GROUP INC

      500

      1000

      SCLN

      SCICLONE PHARMA INC

      500

      1000

      SCLNW

      SCICLONE PHARMA WTS

      500

      1000

      SCGN

      SCIGENICS INC CLLBLE

      500

      1000

      SCOT

      SCOTT AND STRINGFELLOW

      200

      500

      SHER

      SCOTTISH HERITABLE

      500

      200

      SECM

      SECOM GENERAL CORP

      500

      1000

      SECD

      SECOND BANCORP INC

      200

      500

      SCBC

      SECURITY CAP BNCP

      500

      1000

      SFSL

      SECURITY FED SAV CLEV

      200

      500

      SECF

      SECURITY FIN HLDG CO

      200

      500

      SNFCA

      SECURITY NAT'L FIN CL A

      500

      200

      SSVB

      SECURITY SAV FSB

      500

      200

      SSBC

      SHELTON BNCP INC

      500

      200

      SHOP

      SHOPSMITH INC

      1000

      500

      SETC

      SIERRA RL EST TR 84

      500

      200

      SMTSZ

      SOMANETICS CORP WTS B

      500

      1000

      SOMR

      SOMERSET GRP INC THE

      500

      200

      SNSTA

      SONESTAINT'LCLA

      200

      500

      SSBB

      SOUTHINGTON SAV BK

      500

      200

      SPEK

      SPEC'S MUSIC INC

      1000

      500

      SPIR

      SPIRE CORP

      1000

      500

      SPLE

      SPORTS/LEISURE INC

      500

      1000

      STRS

      SPROUSE REITZ STR NV

      1000

      500

      SBLIW

      STAFF BLUILDERS WTS

      500

      1000

      SDYNW

      STAODYN INC WTS

      1000

      500

      S OTA

      STATE OF THE ART INC

      500

      1000

      SWVA

      STEEL WEST VIRGINIA

      500

      1000

      STRB

      STROBER ORGANIZATION

      500

      200

      SUBK

      SUFFOLK BNCP

      200

      500

      SUMI

      SUMITOMO BANK OF CA

      1000

      500

      SMMT

      SUMMIT BANCORP

      1000

      500

      SNRU

      SUNAIR ELECTRONICS

      200

      500

      SNLT

      SUNLITE INC

      500

      200

      SRBC

      SUNRISE BNCP CALIF

      200

      500

      SGTI

      SURGICAL TECH INC

      1000

      500

      SUSQ

      SUSQUEHANNA BCSHS

      500

      1000

      SYMK

      SYM TEK SYSTEMS INC

      200

      500

      SYNC

      SYNALLOY CORP

      200

      500

      SYQT

      SYQUEST TECH INC

      200

      500

             

      T

           

      TCII

      T C I INT'L INC

      1000

      500

      TECN

      TECHNALYSIS CORP

      1000

      500

      TECUB

      TECUMSEH PRODS CL B

      500

      1000

      TANT

      TENNANT CO

      1000

      500

      WATR

      TETRA TECH INC

      200

      500

      FNOW

      THE FUTURE NOW INC

      500

      1000

      TMSTA

      THOMASTON MILLS CL A

      200

      500

      TMBS

      TIMBERLINE SOFTWARE

      1000

      500

      TOCRZ

      TOCOR II INC UTS 96

      500

      1000

      TODDA

      TODD A O CP CL A

      200

      500

      TKIOY

      TOKIO MARINE ADR

      1000

      500

      TELU

      TOTAL-TEL USA COMM

      1000

      500

      TRFI

      TRANS FIN BNCP INC

      500

      1000

      TRNI

      TRANS INDS INC

      1000

      500

      TWBC

      TRANSWORLD BNCP

      500

      200

      TRCO

      TRICO PRODUCTS CORP

      200

      500

      TCBC

      TRUST CO BNCP THE

      1000

      500

      TRMK

      TRUSTMARK CORP

      500

      1000

      TUSC

      TUSCARORA INC

      500

      1000

             

      U

           

      UFBI

      U F BANCORP INC

      500

      1000

      UNRIW

      U N R INDS INC WTS

      500

      1000

      USHO

      U S HOMECARE CORP

      500

      1000

      USRX

      U S ROBOTICS INC

      500

      1000

      UNFR

      UNIFORCE TEMP PERSNL

      1000

      500

      UPCPO

      UNION PLANTERS PFD E

      200

      500

      UNCF

      UNITED COS FINANCIAL

      1000

      500

      UNSA

      UNITED FIN CORP S C

      500

      1000

      UICI

      UNITED INS COS INC

      500

      1000

      UNEWY

      UNITED NEWSPAPER ADR

      500

      200

      UBMT

      UNITED SAV BK F A MT

      500

      200

      UHCO

      UNIV HOLDING CORP

      500

      1000

      USAC

      UNIVERSAL SEISMIC

      200

      500

      UPEN

      UPPER PENINSULA ERGY

      200

      500

      UBAN

      USBANCORP INC PA

      500

      1000

             

      V

           

      VSBC

      V S B BNCP INC

      1000

      500

      VALN

      VALLEN CORP

      1000

      500

      VALY

      VALLICORP HLDGS INC

      1000

      500

      VCRE

      VARI CARE INC

      500

      200

      VRSY

      VARITRONIC SYS INC

      1000

      500

      VNTX

      VENTRITEX INC

      200

      500

      VICT

      VICTORIA BKSHS

      500

      1000

      VLGEA

      VILLAGE SUPER MKT A

      200

      500

      VTSS

      VITESSE SEMICONDUCTOR

      200

      500

      VOLVY

      VOLVO AB CL B ADR

      1000

      500

             

      W

           

      WAIN

      WAINWRIGHT BK TR CO

      1000

      500

      WCLBW

      WAREHOUSE CLUB WTS

      1000

      500

      WFSB

      WASHINGTON FED SAV VA

      500

      1000

      WAMUP

      WASHINGTON MUT PFD A

      1000

      500

      WATFZ

      WATERFORD PLC ADR UT

      500

      200

      WTRS

      WATERS INSTRUMENTS

      500

      200

      WAVR

      WAVERLYINC

      1000

      500

      WEDC

      WEDCO TECHNOLOGY INC

      1000

      500

      WGNR

      WEGENER CORP

      1000

      500

      WLPI

      WELLINGTON LEISURE

      500

      200

      WSBC

      WESBANCO INC

      200

      500

      WCBC

      WEST COAST BNCP CA

      1000

      500

      WSBK

      WESTERN BANK OREGON

      500

      1000

      WFPR

      WESTERN FED SAV P R

      500

      200

      WTPR

      WETTERAU PROPERTIES

      200

      500

      WFRAF

      WHARF RESOURCES LTD

      500

      200

      WTNY

      WHITNEY HLDG CORP

      500

      1000

      WFMI

      WHOLE FOODS MARKET

      200

      500

      WMSI

      WILLIAMS INDS INC

      1000

      500

      WCHI

      WORKINGMENS CAP HLDG

      200

      500

      WFDS

      WORTHINGTON FOODS

      500

      1000

             

      X

           

      XPLR

      XPLOR CORP

      500

      200

             

      Y

           

      YSCO

      YES CLOTHING CO

      1000

      500

             

      Z

           

      ZSEV

      Z SEVEN FUND INC THE

      500

      200

      ZEUS

      ZEUS COMPONENTS INC

      1000

      500

      ZIGO

      ZYGO CORP

      1000

      500

    • 92-61 Revised Form BD Goes Into Effect November 16, 1992

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has approved changes to Form BD, the Uniform Application for Broker/Dealer Registration. The amendments, developed in consultation with the NASD, North American Securities Administrators Association (NASAA), and industry representatives, seek to clarify certain reporting requirements, including the definition of what "proceedings" are disclosable under Item 7(G). The scope of ownership disclosure required by the schedules to the Form BD has been changed to require that only 25 percent indirect owners and contributors be disclosed rather than the current 5 percent threshold. Additionally, the amendments update the disciplinary history reporting requirements to reflect changes implemented under the 1990 amendments to the Securities Exchange Act of 1934. The new form will be effective November 16, 1992. NASD members should begin to use the revised form when making their next Form BD amendment. The NASD will accept amendments on the old Form BD through January 10, 1993. After that date, amendments not filed on the revised Form BD cannot be accepted.

      CHANGES TO FORM BD

      The principal changes to the Form BD relate to Item 7 disclosures of disciplinary history of broker/dealers and their control affiliates. The requirements for disclosure of "proceedings" under Item 7 (G) represent the joint NASD, SEC, and NASAA interpretation first announced in Notices to Members 91-81 (December 1991). That interpretation requires firms to report formal administrative and civil actions initiated by self-regulatory and governmental agencies and formal criminal charges, including felony indictments, felony criminal informations, and formal felony criminal charges equivalent to a criminal indictment or information, and any formal misdemeanor criminal information (or equivalent) involving matters listed in Item 7(A)(1)of Form BD.

      The joint interpretation does not require reporting of criminal arrests effected in the absence of a formal written charge. Finally, the new definition does not require disclosure of informal investigations by regulators or pending private civil litigation.

      Item 7(E)(2) has been amended to the extent that broker/dealers will no longer be required to disclose on Form BD any violation of a self-regulatory organization (SRO) rule deemed "minor" pursuant to a plan, approved by the SEC. To date, the American Stock Exchange, the Boston Stock Exchange, the Cincinnati Stock Exchange, the New York Stock Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, and the Chicago Board Options Exchange have approved plans on file. All other 7(E)(2) violations must be reported until the SRO bringing the action has its plan approved. The NASD has filed with the SEC its proposed minor violations reporting plan. To date, the plan has not been approved.

      Other Item 7 amendments expand requirements to comply with the changes contained in the International Securities Enforcement Cooperation Act and the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Item 7(A) has been amended to require disclosure of similar convictions of the firm or its control affiliates by a foreign court. A new question, Item 7(c)(5), has been added to report fines or orders to cease and desist issued by the SEC or the Commodity Futures Trading Commission (CFTC). SEC Release Number 34-30958 requests that firms file an amendment on or promptly after November 16, 1992, if they determine additional Item 7 disclosures are appropriate.

      The instructions for Item 10 have been revised to require that firms check all types of business activities, but exclude those which account for less than one percent of the applicant's securities related revenue. This de minimis exception will not apply to those activities that trigger specific SRO or SEC requirements, such as those involving municipal and government securities or options, which must be reported in Item 10 even if volume of activity is insignificant. Item 10 also was amended to include new categories of activity, including broker dealers selling corporate debt securities and interests in mortgages or other receivables, or selling tax shelters or limited partnerships in the secondary market.

      Other less dramatic changes to the Form BD include an instruction in Item 1 (C) requesting that firms doing business under other names disclose them on Schedule D and a clarifying instruction to Item 5 reminding firms that they should only supply successor details when reporting a succession on the current filing.

      AMENDMENTS TO SCHEDULES AND ATTACHMENTS

      Schedules for disclosure of the applicant's ownership have been totally redesigned, and requirements have been redefined. Existing schedules required firms to file an appropriate schedule based on their filing entity type. The revised schedules are not based on this categorical distinction. Schedule A will now be used to report executive officers, directors, or all general partners and 5 percent direct owners or limited partners contributing 5 percent or more of the partnership's capital. The SEC has revised the instructions to define beneficial stock ownership of an applicant to include securities owned by the immediate family living in the same residence.

      Regardless of the filing entity type, Schedule B will be used for applicants to report their indirect ownership. For each direct owner not a person or public reporting company under Section 12 or 15 (d) of the Exchange Act reported on Schedule A, the applicant must disclose on Schedule B all 25 percent owners or contributors of (to) the direct owners. Instructions indicate that each successive 25 percent owner be disclosed until a person or public reporting company is reached. In determining beneficial ownership, the same attribution requirement applies to indirect owners that applied to direct owners. Schedule C has been completely revised to be used to report additions, deletions, and other changes to Schedules A and B. Approved NASD member firms should review their existing schedules to determine if an amendment is deemed appropriate. The approved firm should file the new Schedule A and B once, then submit all subsequent amendments on revised Schedule C. Applications for initial broker/dealer registration must now be made on the revised Form BD.

      Other schedules, namely D and E, have also been revised, and a Form BD Disclosure Reporting Page (DRP) has been added. Schedule DRP for Form BD, modeled after the U-4 DRP, must now be used to provide details for Item 7 responses. For each new event or to update an event previously reported, a DRP must be filed. The DRP should be the only filing necessary; no attachments are necessary. Details to other Form BD items will continue to be reported on Schedule D.

      Schedule E used to report branch office additions, deletions, or changes has been redesigned in a more structured format for required information.

      The format change was undertaken to help facilitate the implementation of electronic Schedule E. Beginning November 16, 1992, Firm Access Query System (FAQS) subscribers will be able to file branch office additions, deletions, and changes via the ELECFILE command. The changes to the form will help insure that hard-copy filers include all relevant data about the branch location. Questions concerning this feature or other FAQS subscriber services should call the FAQS line at (301)590-6862.

      FILING INSTRUCTIONS

      NASD members will not be required to file the amended form at any particular time. Member firms should, nevertheless, review their existing filing and determine whether an amendment is required due to this revision. If so, they should make their amended filing on the new form. If, as a result of the ownership disclosure changes, an amendment is necessary, a complete Schedule A and B (if applicable) should be filed. Thereafter, ownership and control changes will be made by filing the revised Schedule C.

      If you determine an amendment is not necessary at this time, you would begin to use the revised form when an amendment was necessary. After January 10, 1993, only the revised Form BD will be accepted.

      For additional details, refer to the revised Form BD (enclosed) or SEC Release Number 34-30959. To obtain copies or ask questions regarding the form or the instructions, call Member Services (301) 590-6500. Questions regarding this Notice should be directed to John F. Vaughn, Assistant Director, Membership, at (301) 590-6865 or Belinda Blaine, Attorney, at (202) 504-2418, Office of Chief Counsel, Division of Market Regulation (SEC).

    • 92-60 SEC Approval of Amendments Relating to Periodic Account Statements

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On October 14, 1992, the Securities and Exchange Commission (SEC) approved an amendment adding new Section 45 to Article III of the Rules of Fair Practice requiring members to send account statements to customers at least quarterly. The amendments take effect on January 31, 1993. The text of the new rule language follows the discussion below.

      BACKGROUND AND DESCRIPTION OF THE AMENDMENTS

      On October 14, 1992, the SEC approved a rule change adding a new Section 45 to Article III of the NASD Rules of Fair Practice relating to periodic account statements. Under SEC Rule 15c3-2, broker/dealers have to notify customers every three months that the free credit balances in their accounts may either be used by the broker/dealers or paid on demand to the customers. The notification requirement, however, only applies if a customer has a free credit balance.

      Because NASD members do not have to send periodic account statements to customers, some broker/dealers send only the free-credit-balance notice required by Rule 15c3-2. They do not send account statements of all securities positions, money balances, and account activity since the last statement. As a result, these customers are not advised of the current status of their accounts, regardless of any change in the status of those accounts.

      The NASD believes that, in the interest of customer protection, customers should be more fully informed of the status of their accounts. The new rule requires members to send account statements at least once every quarter to customers having securities positions, funds, or any change in their account during the period since the previous statement was sent. The rule requires that the statement include a description of all securities positions, money balances, and account activity in the account during the period.

      Subsection (a) of the rule requires each general securities member to send a statement of account describing all account activity to each customer at least once every quarter. Any account statements showing all account activity and sent more frequently than quarterly will satisfy the requirement.

      Subsection (b) of the rule defines the term "account activity" to include all types of activity that may occur in a securities account with respect to "securities or funds in the possession or control of the member." Thus, this limitation exempts account activity relating to funds or securities not in control of the member. For example, direct participation program (DPP) securities are not covered since, after the initial purchase through the distributing broker/dealer, the general partner communicates directly with investors.

      Subsection (c) defines the phrase "general securities member" as a member that calculates its net capital under SEC Rule 15c3-1(a), except for paragraphs (a)(2) or (a)(3) — that is, a broker/dealer required to maintain at least $25,000 in net capital. Subsection (c) further defines "general securities member" to exclude members who do not carry customer accounts or hold customer funds or securities. Thus, members whose business is limited to variable contract insurance products, mutual funds, and unit trusts, among other products, or who neither carry accounts nor hold customer funds or securities, are exempt from the rule. In these cases, responsibility for complying with the rule falls on the member carrying the account or holding the funds or securities for those members.

      Both subsections (b) and (c) exempt, from the periodic account statement requirement, members that neither carry customer accounts nor hold customer funds or securities. The NASD does not believe members, whether limited or general broker/dealers, should have to report information they may not be able to obtain or independently confirm on securities or funds not in their possession. In the case of DPPs and similar products, when a customer purchases DPP units through a member, the customers' funds go to the general partner (through an escrow account), the general partner confirms admission to the partnership directly to the purchaser, and all subsequent communications are usually between the general partner and the investor.

      Subsection (d) of the rule permits the NASD's Operations Committee to exempt any member from the provisions of the rule upon a showing of good cause. This would permit the NASD under unusual circumstances to exempt a member if application of the rule would be unnecessarily burdensome given the type of business it conducts and the nature of the accounts, securities, or funds involved, and if the goal of customer protection and information could be met under alternative arrangements.

      Following publication of the rule change for member vote, the NASD received several inquiries from members who conduct business with institutional or governmental clients on a "receipt-versus-payment/delivery-versus-payment" (RVP/DVP) basis. These members maintain accounts for their customers, but they represent that they hold funds or securities only for the few days necessary to complete the transactions. These members believe that firms that conduct such business (i.e., an RVP/DVP type of business for institutional or corporate clients) should be eligible for an exemption from the new rule under Subsection (d).

      While the NASD does not intend to grant blanket exemptions, members may apply to the NASD's Operations Committee for exemptions tailored to their specific circumstances. An exemption, if granted by the Committee, would generally be account-specific and would not apply to all the accounts of each member. To apply for an exemption, a member should send its written request detailing the reason for its request and the type of business it conducts to the NASD Operations Committee, c/o Financial Responsibility Department, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006-1506.

      The amendments take effect on January 31, 1992. Questions concerning this Notice should be directed to Thomas R. Cassella, Vice President, Financial Responsibility at (202) 728-8237, or Elliott R. Curzon, Senior Attorney, Office of General Counsel at (202) 728-8451.

      TEXT OF AMENDMENTS TO SECTION 45, ARTICLE III OF THE RULES OF FAIR PRACTICE

      (Note: All language is new.)

      Customer Account Statements

      Sec. 45

      (a) Each general securities member shall, with a frequency of not less than once every calendar quarter, send a statement of account containing a description of any securities positions, money balances, or account activity to each customer whose account had a security position, money balance, or account activity during the period since the last such statement was sent to the customer.
      (b) For purposes of this section, the term "account activity" shall include, but not be limited to, purchases, sales, interest credits or debits, charges or credits, dividend payments, transfer activity, securities receipts or deliveries, and/or journal entries relating to securities or funds in the possession or control of the member.
      (c) For purposes of this section, the term "general securities member" shall refer to any member which conducts a general securities business and is required to calculate its net capital pursuant to the provisions of SEC Rule 15c3-1(a), except for paragraphs (a)(2) and (a)(3). Notwithstanding the foregoing definition, a member which does not carry customer accounts and does not hold customer funds or securities is exempt from the provisions of this section.
      (d) The Association, acting through its Operations Committee, may, pursuant to a written request for good cause shown, exempt any member from the provisions of this section.419

    • 92-59 SEC Approval of Amendments Requiring Prefiling of Advertisements for Collateralized Mortgage Obligations

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On October 28, 1992, the Securities and Exchange Commission (SEC) approved an amendment to Article III, Section 35 of the Rules of Fair Practice and Section 8 of the NASD's Government Securities Rules requiring members to prefile advertisements relating to collateralized mortgage obligations (CMOs). The amendments take effect on November 16, 1992. The text of the new rule language follows this Notice.

      BACKGROUND AND DESCRIPTION OF THE AMENDMENTS

      On October 28, 1992, the SEC approved a rule change amending Article III, Section 35 of the Rules of Fair Practice and Section 8 of the NASD's Government Securities Rules requiring members to file advertisements concerning CMOs issued by a corporation or an agency of the United States government with the NASD prior to use. The requirement will be temporary, lasting for a period of one year until November 15, 1992. Before the end of the first year, the Association will evaluate the efficacy of the rule and determine whether to extend the rule, propose changes, or eliminate it.

      The amendments reflect the NASD's increasing concern over misleading advertisements for CMOs and an increase in the number of complaints associated with such advertisements. The NASD believes that CMOs are extremely complex and require full and fair disclosure to assist the investor in understanding them. CMO advertisements generally are brief and emphasize high yields, safety, government guarantees (where applicable), and liquidity. The NASD has found, however, that it is difficult to distinguish between CMOs based on the content of such advertisements. Even though two CMOs have the same underlying collateral, they may differ substantially in their prepayment predictability or volatility. In particular, the terms "interest only" or "principal only" are generally inadequately explained.

      As a result of these concerns, the NASD issued Notice to Members 92-27 (May 1992) detailing the problems relating to CMO advertising and recommending that members' CMO advertisements comply with certain standards set forth in the Notice. For example, the NASD believes that an advertisement which includes the "yield" of a CMO is misleading without disclosure of the prepayment assumption used to calculate the yield and that the anticipated yield and average life of the security will fluctuate depending on the actual prepayment experience and current interest rates.

      The NASD also recommended in Notice to Members 92-27 (May 1992) that CMO advertisements not contain comparisons between CMOs and any other investment vehicles. The NASD is particularly concerned that advertising CMOs as alternatives to certificates of deposit (CDs) falsely implies that CMOs offer the same level of safety and guarantee of interest and principal as CDs.

      In light of these concerns, the NASD has amended its rules to subject CMO advertisements to pre-use filing to provide NASD staff an opportunity to comment on the fairness and reasonableness of such advertisements prior to use and permit potentially misleading advertisements to be identified and withheld from publication.1

      The new rule with respect to CMO advertising is set forth in new Subsection (c)(2) of Section 35 requires that all advertisements concerning corporate CMOs be filed with the NASD's Advertising Department at least 10 days prior to first use unless the Department permits a shorter period in particular circumstances. The advertisement must be approved before use. If changed or expressly disapproved by the NASD, it cannot be published or circulated until the member makes the changes specified by the Association. A disapproved advertisement must be refiled and receive Association approval prior to publication or circulation. The NASD also added a new Subsection 8(c)(1)(B) to its Government Securities Rules to require prefiling of advertisements relating to CMOs issued by an agency of the United States government. A technical amendment also deletes current Subsection 8(c)(2)(B) which applied to filing advertisements concerning government securities during the first year of the operation of the Government Securities Rules which were adopted by the NASD in 1989.

      While the NASD believes that a pre-use filing requirement for CMO advertisements is appropriate, the NASD recognizes that it diminishes the flexibility of member firm advertising programs. Accordingly, the rule will be in effect for one year only. During that year, the NASD's Fixed Income Committee will review the rule's impact to determine the need for changes to ensure that CMO advertising is not misleading.

      The NASD has also amended Article III, Section 35 of the Rules of Fair Practice to consolidate the current filing requirements for registered investment companies and public direct participation programs set forth in Subsections (c)(1) and (2), respectively, into new Subsection (c)(1). The requirements themselves are unchanged.

      The amendments take effect on November 16, 1992. Questions concerning this Notice should be directed to R. Clark Hooper, Vice President, Advertising at (202) 728-8330, or Elliott R. Curzon, Senior Attorney, Office of General Counsel at (202) 728-8451.


      1 At present, advertisements concerning government securities must be filed with the NASD within 10 days of first use or publication. Additionally, advertisements and sales literature concerning registered investment companies and direct participation programs currently must be filed within 10 days of first use. Advertising and sales literature pertaining to options currently must be approved in advance of its use or publication.


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

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

      Communications With the Public 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) 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.
      (2) Advertising and sales literature concerning 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 for review within 10 days of first use or publication. Filing in advance of use is recommended. Members need not file for review advertising and sales literature which has been filed by the sponsor, general partner or underwriter of the program or by another member.]
      (1) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) 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.
      (2) Advertisements concerning collateralized mortgage obligations registered under the Securities Act of 1933 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 or sales literature has been refiled for, and has received, Association approval. 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.

      GOVERNMENT SECURITIES RULES

      Communications With the Public

      Sec. 8

      (c) Filing Requirements And Review Procedures
      (1) Members shall file advertisements for review with the Association's Advertising Department as follows:
      (A) Advertisements concerning government securities (as defined in Section 3(a)(42) of the Securities Exchange Act of 1934) other than collateralized mortgage obligations shall be filed by members with the Association's Advertising Department for review within 10 days of first use or publication[.]; and
      (B) Advertisements concerning collateralized mortgage obligations 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 or sales literature 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.
      (2) [(A)] No change.
      [(B) Each member that, on the effective date of this section, had been filing advertisements with the Association for a period of less than one year shall continue to file its advertisements concerning government securities at least 10 days prior to use, until the completion of one year from the date the first advertisement was filed with the Association.]

    • 92-58 SEC Approval of Amendment to Section 13, Schedule E to the NASD By-Laws Effective October 1, 1992

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has approved an amendment to Section 13 of Schedule E to the NASD By-Laws (Schedule E). The amendment permits NASD members to sell securities issued by an entity that wholly owns the member to their employees and other associated persons. The text of the amendment follows this Notice.

      BACKGROUND

      Section 13 provides an exemption from the NASD Free-Riding and Withholding Interpretation (Interpretation) and permits NASD members to sell securities of the member or those of its parent to its employees. Section 13 was part of the original amendments to the NASD By-Laws governing the distribution of securities of an NASD member. The NASD Board of Governors (Board) recognized the fact that employees of members would naturally desire to have an ownership interest in their employer. The Board also believed such an investment was beneficial for both the employee and employer.

      The Interpretation is based on the premise that members have an obligation to make a bona fide public distribution at the public offering price of securities of a public offering which trade at a premium in a secondary market. This obligation applies regardless of whether such securities are acquired by the member and an underwriter, as a selling group member, or from a member participating in the distribution as an underwriter or selling group member, or otherwise. The NASD believes that failure to make a bona fide public distribution when there is a demand for an issue can be a factor in artificially raising the price at which the security trades in the secondary market. Thus, failure to make a bona-fide distribution, especially when the member may have information relating to the demand for the securities or other factors not generally known to the public, is inconsistent with high standards of commercial honor and just and equitable principles of trade, and leads to an impairment of public confidence in the fairness of the investment banking and securities business.

      Prior to 1988, Section 13 permitted sales to employees of an affiliated member. Notice to Members 86-28 requested comments to modify major sections of Schedule E, including a proposal specifically to exclude sales to affiliates. Notice to Members 88-33 adopted those modifications and, as a result, Section 13 was narrowed to restrict the exemption from the Interpretation to sales to employees of the member or its parent. To permit sales to employees of affiliates of NASD members was believed to be too broad and permissive in scope. Sales to employees of the member or its parent was the original intent of the exemption from the Interpretation. The NASD and the SEC now believe that certain sales to special purpose affiliates may be appropriate. The view is now that the modifications may have been too restrictive and may have disenfranchised persons that should have been permitted to invest in the securities of their employer's holding company.

      AMENDMENT

      Section 2(h) of Schedule E defines the term "parent" for purposes of Section 13 as any entity affiliated with the member from which the member derives 50 percent or more of its gross revenues or in which it employs 50 percent or more of its assets. Large diversified holding companies cannot meet this definition of a parent of a member because the activities of the broker/dealer are only a small part of their business. Employees and other associated persons of NASD member firms owned by such large holding companies, therefore, could not rely on the Section 13 exemption to the Interpretation to purchase shares of their respective holding company in a public offering.

      Section 13 now allows employees and other associated persons of NASD members wholly owned by large holding companies to purchase the securities offered by such entities even though the holding company does not come within the Schedule E definition of a parent. It is the NASD's belief that enabling such persons to purchase shares of their respective holding company in a public offering is consistent with the policy of permitting employees of members to have an ownership interest in their member-employers.

      EFFECTIVE DATE

      The amendment became effective on October 1, 1992. Therefore, NASD members may sell securities to their employees and associated persons when the securities are issued by an entity that wholly owns the NASD member.

      Questions concerning this Notice can be directed to Carl R. Sperapani, Assistant Director, or the staff of the Corporate Financing Department, at (202) 728-8258.

      AMENDMENT TO SCHEDULE E TO THE BY-LAWS

      (Note: New language is underlined.)

      Section 13 — Sales to Employees — No Limitations

      Notwithstanding the provisions of the Board of Governors' Interpretation With Respect To "Free-Riding and Withholding," a member may sell securities issued by a member, a parent of a member, an entity which wholly owns a member, or by an issuer treated as a member or parent of a member under Section 9 hereof to the member's employees; potential employees resulting from an intended merger, acquisitions, or other business combination of members resulting in one public successor corporation; persons associated with the member; and the immediate family of such employees or associated persons without limitation as to amount and regardless of whether such persons have an investment history with the member as required by that interpretation; provided, however, that in the case of an offering of equity securities for which a bona fide independent market does not exist, such securities shall not be sold, transferred, assigned, pledged, or hypothecated for a period of five months following the effective date of the offering.

    • 92-57 Proposed Amendments to Schedule E to the NASD By-Laws Regarding Potential Conflicts of Interest; Last Voting Date: December 21, 1992

      SUGGESTED ROUTING:*

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

      MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on proposed changes to Schedule E that would require compliance with its provisions if a member participating in a distribution of a public offering of debt or equity securities has a conflict of interest with the issuer. A conflict of interest would be deemed to exist if the member or its affiliates own an aggregate of 10 percent or more of the outstanding subordinated debt, 10 percent or more of the common equity or the preferred equity of a corporation; or 10 percent or more of the distributable profits or losses through a general, limited, or special partnership interest. The NASD is also proposing to adopt an exception to the requirement that a qualified independent underwriter provide a pricing opinion where the member affiliated with the issuer or a member that has a conflict of interest with the issuer is participating as a financial advisor in a restructuring or recapitalization. The text of the amendments follows the discussion below.

      BACKGROUND

      In 1972, the NASD adopted Schedule E to the By-Laws (Schedule E) to regulate the potential conflicts of interest that exist when a member participates in the public distribution of its own securities or the securities of an affiliate. The presumptions contained within Schedule E used to determine affiliation are generally either voting control through ownership of equity securities or common control of management through interlocking officerships or directorships. Schedule E addresses the conflicts by requiring a qualified independent underwriter to render an opinion on the price of the securities offered, conduct due diligence, and participate in the preparation of the registration statement, in the absence of an investment-grade rating for debt securities or a bona fide independent market for equity securities. The qualified independent underwriter also assumes underwriter's liability for the offering. The NASD has relied on the objectivity and independence of the qualified independent underwriter to resolve the conflicts of interest present when a member distributes its own securities or those of an affiliate.

      PUBLICATION FOR COMMENT

      In June 1990, the NASD published Notice to Members 90-39 (June 1990) requesting membership comment on proposed amendments to Schedule E to address the conflicts of interest that exist when a member participates in a public offering of an issuer while the member owns debt, preferred equity, or non-voting common equity of the issuer. The NASD is concerned regarding such offerings because members and their affiliates often become holders of risky, less-than-investment-grade debt securities as a result of their participation in leveraged buy-out transactions. This could influence the independence of members' pricing and due diligence functions in any subsequent related public offering.

      COMMENTS RECEIVED

      The NASD received 19 comment letters on the amendments to Schedule E published for comment in Notice to Members 90-39. None of the comments fully supported the proposed amendments as published for comment. The commenters were particularly concerned with the concept of expanding Schedule E to include certain types of offerings that have heretofore been excluded from the provisions of Schedule E and argued that the 10 percent threshold that would trigger the application of Schedule E is too low. Commenters also argued that ownership of debt and non-voting preferred and common stock does not permit members or their affiliates to control an issuer and does not affect the member's ability to independently perform pricing and due diligence in a public offering. Commenters also pointed out the practical difficulty of determining when debt and preferred securities are owned since such securities may have been acquired in the normal course of business and are being held in trading or investment accounts.

      Questions were also raised regarding the impact of the proposed amendments on NASD members affiliated with banks or bank holding companies, since banks are most likely to act as a corporate lender, and the difficulties that members affiliated with banks would experience in complying with the provisions of Schedule E which require (1) that a majority of the members of the Board of Directors of the member have five years experience in the securities business; and (2) if the member intends to manage the underwriting, that the member have been involved in the securities business at least five years.

      NASD REVIEW

      The NASD has reviewed the comments received in response to Notice to Members 90-39. The NASD continues to believe that a member is subject to conflicts of interest in pricing an offering of securities and performing due diligence that require compliance with the provisions of Schedule E when the member owns at least 10 percent of the debt and non-voting preferred and common stock of an issuer. The NASD recognizes that the incidences of such ownership have decreased since the issue was first considered. A number of changes have been made to the proposed amendments to Schedule E that the NASD believes will address the most significant objections of commenters. Because of the negative comments generated by publication for comment of the original version of the proposed amendments to Schedule E, the NASD has published a revised proposal for member vote.

      SUMMARY OF PROPOSED AMENDMENTS

      Set forth below is a summary of the amendments proposed to each section of Schedule E. In each case, a description is provided of any modifications to the rule language as published in Notice to Members 90-39.

      Section 1 — General

      The NASD is proposing a new introductory paragraph to Schedule E that sets forth the applicability of Schedule E to conflict-of-interest situations by prohibiting members and their associated persons from participating in the distribution of a public offering of debt or equity securities if the member and/or its associated persons, parent, or affiliates have a conflict of interest with the company. No modifications have been made to the rule language of this provision as published in Notice to Members 90-39.

      Section 2 — Definitions

      Four new definitions are proposed to be added to the definitions section and one definition is proposed to be amended.

      • Common Equity — A new definition of "common equity" is proposed to include the total number of shares of common stock outstanding without regard to class, voting rights, or other distinguishing characteristics as reflected on the consolidated financial statements of the company. No modifications have been made to the rule language of this provision as published in Notice to Members 90-39.


      • Conflict of Interest — The principal new definition is that of "conflict of interest." Significant modifications have been made to the rule language of this provision as published in Notice to Members 90-39 to address the comments received which are reflected in this provision and the related definitions for "preferred equity" and "subordinated debt." The provision has been modified to exclude ownership of the common equity, preferred stock, or debt of the parent of the issuer. A conflict of interest will be deemed to exist if the member and/or its associated persons, parent, or affiliates in the aggregate beneficially own 10 percent or more of the:
        (1) outstanding subordinated debt of a company;
        (2) common equity of a company which is a corporation; or
        (3) preferred equity of a company. In addition, a conflict of interest will be deemed to exist if the member and/or its associated persons, parent, or affiliates beneficially owns a general, limited, or special partnership interest in 10 percent or more of the distributable profits or losses of a company.
        The calculation of the 10 percent threshold would be based on all securities of the issuer beneficially owned by the member at the time of the filing of the offering documents, including proprietary trading accounts and other fluctuating positions, regardless of whether any of the securities are sold prior to effectiveness of the offering.

        A new paragraph has been added to this provision to set forth a number of exclusions from the definition of "conflict of interest" in response to the requests of commenters. Exclusions would be available for: (1) offerings by not-for-profit and charitable organizations; (2) investment companies registered under the Investment Company Act; (3) "separate accounts" as defined in the Investment Company Act of 1940; (4) real estate investment trusts; (5) direct participation programs; (6) financing-instrument-backed securities that are rated investment grade; (7) equity securities for which a bona fide independent market exists; and (8) debt securities rated investment grade.1


      • Preferred Equity — The term "preferred equity" is proposed to be the same as that published in Notice to Members 90-39 and would include the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, voting rights, or other distinguishing characteristics as reflected on the consolidated financial statements of the company.


      • Subordinated Debt — In response to comments, the NASD has modified the proposal published for comment, which included a definition of the term "debt" that would have provided that a conflict exists based on at least a 10 percent beneficial interest in the short- and long-term debt of a company. On review of the comments received, the NASD believes that the proposed amendments should not (and were not intended to) apply to banks or lending institutions that make loans to companies in the normal course of business. Since it is subordinated debt that is often is sued in a leveraged buy-out and restructuring transactions, the NASD has determined that these are the transactions of greatest concern. As a result, all senior debt, whether secured or unsecured, and all short-term with a maturity at issuance of less than one year would be excluded from the application of the proposed amendments.2

        In place of the prior proposed definition of the term "debt," the NASD is proposing to adopt a definition of "subordinated debt" to include debt of an issuer that is expressly subordinate in right of payment to, or with a claim on assets subordinate to, any existing or future debt of such issuer and all debt that is specified as subordinated at the time of issuance. The language of the definition specifically excludes short-term debt, as well as secured debt and bank debt not specified as subordinated debt at the time of issuance.


      • Qualified Independent Underwriter —A conforming amendment is proposed to subparagraph (6) of the definition of "qualified independent underwriter" currently included in Subsection 2(1) to Schedule E. Subsection 2(1) sets forth the requirement that a qualified independent underwriter not be an affiliate of the issuer and not beneficially own 5 percent or more of the outstanding voting securities of the issuer. The provision is proposed to be modified also to prohibit ownership of 5 percent or more of the common equity, preferred equity, or subordinated debt of the issuer.

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

      Subsection 3(a) — It is proposed that Section 3 be retitled "Participation in Distribution of Securities." Subsection 3 (a) has been modified by the addition of a prohibition on any member underwriting or participating as a member of the underwriting syndicate or selling group or otherwise assisting in the distribution of a public offering of securities of a company with which the member or its associated persons, parent, or affiliates have a conflict of interest unless the member complies with Subsection 3(b) and Subsection 3(c). No modifications have been made to the rule language of this provision as published in Notice to Members 90-39.

      Subsection 3(b) — The NASD is not proposing any changes to Subsection 3(b) which requires that the majority of the Board of Directors of the member that is deemed to have a conflict with the issuer must have been actively engaged in the investment banking or securities business for at least five years and, if the member intends to manage the underwriting, that the member have been involved in the securities business at least five years. With respect to the concerns of commenters that are bank-affiliated members, the NASD believes that if the members of the Board and the firm can demonstrate sufficient appropriate experience, the Corporate Financing Department has some flexibility in applying the provision and that exceptions, as appropriate, may be granted pursuant to Section 16 of Schedule E by a hearing subcommittee or by the Chairman of the Corporate Financing Committee in consultation with the Director of the Department on a case-by-case basis.

      Subsection 3(c) — The NASD is proposing to amend Subsection 3(c) to indicate that if a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of securities of a company with which it or its associate persons, parent, or affiliate have a conflict, the offering must be made in compliance with paragraph 3(c)(1), which requires a qualified independent underwriter to participate in the preparation of the offering document, exercising the usual standards of due diligence with respect thereto, and issue an opinion on the pricing of the offering. As stated above, the definition of "conflict of interest" would specifically exclude the application of Schedule E to conflict-of-interest situations where the offering comports with the alternative forms of Schedule E compliance set forth in paragraphs 3(c)(2) and (3), which require either a bona fide independent market (in the case of an equity offering) or an investment-grade rating (in the case of a debt offering).

      No modifications have been made to the rule language of Subsection 3(c) as published in Notice to Members 90-39. In response to comments, however, the NASD proposes to clarify the applicability of the requirements of paragraph 3(c)(1) to recapitalizations and restructurings where an NASD member offering securities of an affiliate or subject to the application of Schedule E because of a conflict of interest is acting as a financial advisor rather than an underwriter. In this event, the NASD believes that it is appropriate to recognize that the more limited functions of the member acting as a financial adviser would not require the qualified independent underwriter to provide a pricing opinion where the financial adviser has not been engaged to opine on the price or the exchange value. The NASD is, therefore, proposing to amend paragraph 3(c)(1) to set forth this exception in a parenthetical statement.

      Section 4 — Disclosure

      Subsection 4(b) — This Subsection of Schedule E is proposed to be amended to require the disclosure in the offering document if the offering is by an issuer with which a member has a conflict of interest. The provision currently requires that the offering document disclose that the offering is being made pursuant to the provisions of Schedule E, the name of the qualified independent underwriter and that such member is assuming the responsibilities of acting as a qualified independent underwriter. In the case of an offering subject to the conflict-of-interest provisions, the provision would require disclosure that the member or its associated persons, parent, or affiliates own the common stock, preferred stock, or subordinated debt of the company.

      Members currently subject to Schedule E are only required to disclose whether the offering is being made by a member of its own securities or those of an affiliate and are not required to disclose that the member has a conflict of interest with the issuer. In response to comments received on the proposed amendments, the NASD has determined to delete the language originally included in Notice to Members 90-39 that would have required disclosure that the member is subject to a conflict of interest. Moreover, the NASD has long held the position that the application of Schedule E is not a determination that a conflict of interest actually exists, but is necessary to prevent at least the appearance of a conflict of interest.

      Corporate Financing Filing Requirements

      The filing requirements of the Corporate Financing Rule are contained in Section (b) to Article III, Section 44 of the NASD Rules of Fair Practice (Corporate Financing Rule). Paragraph (b)(6)(C) requires that members filing an offering subject to the filing requirements of the Rule or Schedule E3 submit a statement that is intended to elicit information on whether any member or person associated with a member has acquired any debt or equity securities of the issuer. The provision currently requires a statement of the association or affiliation with any member of any debt or equity securityholder of an issuer in an initial public offering. Where the offering is not an initial public offering, the same information is requested to any securityholder of five percent or more of any class of the issuer's securities. The provision sets forth the details of the information regarding such securityholdings that must be submitted in the statement.

      The NASD believes that this provision is sufficiently broad to require the submission of information regarding the beneficial ownership by a member, its associated persons, parent, or affiliates of any equity, preferred stock, or subordinated debt of an issuer and the submission of supplemental information after the offering is filed if the ownership level changes during the registration period.

      REQUEST FOR VOTE

      The NASD Board of Governors believes that the proposed amendments to Schedule E are necessary to address the potential conflicts of interest that are present when a member (its associated persons, parent, or affiliates) participating in a debt or equity public offering owns 10 percent or more of the subordinated debt, preferred stock, or common equity of a company. The Board considers the proposed amendments necessary and appropriate and recommends that members vote their approval. The amendments will not be effective until filed with and approved by the Securities and Exchange Commission. 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 December 21, 1992.

      Questions concerning this Notice should be directed to Charles L. Bennett, Director, NASD Corporate Financing Department, at (202) 728-8253.


      1 For offerings subject to Schedule E on the basis that the securities are being issued by a member or an affiliate of a member, the offering is subject to the filing requirements of Schedule E regardless of whether the offering is of equity securities for which a bona fide independent market exists or of debt securities which are rated investment grade.

      2 The calculation of the 10 percent threshold would be applicable to an issuer's entire subordinated debt outstanding. Senior and short-term debt would, therefore, be excluded when calculating the percentage of debt that would trigger application of the proposed amendments.

      3 The filing requirements of Schedule E take precedence over the filing requirements of the Corporate Financing Rule pursuant to Section 15 of Schedule E. Therefore, offerings that are exempt from the filing requirements of the Rule are nonetheless subject to filing with the Corporate Financing Department for review if subject to the provisions of Schedule E. See subparagraph (7) to Section (b) to the Corporate Financing Rule.


      Schedule E to the NASD By-Laws

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

      Distribution of Securities of Members and Affiliates — Conflicts of Interest

      Section 1 — General

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

      Section 2 — Definitions

      * * * * *

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

      * * * * *

      (g) Conflict of Interest — shall be deemed to exist when:
      (1) a member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the outstanding subordinated debt of a company;
      (2) a member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the common equity of a company which is a corporation, or beneficially own a general limited or special partnership interest in 10 percent or more of the distributable profits or losses of a company; or
      (3) a member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the preferred equity of a company.
      (4) The provisions of paragraphs (1), (2) and (3) hereof notwithstanding, the conflict of interest provisions of this Schedule E shall not apply to:
      (a) an offering of securities exempt from registration with the Securities and Exchange Commission under Section 3(a)(4) of the Securities Act of 1993;
      (b) an investment company registered with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended;
      (c) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940, as amended;
      (d) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code;
      (e) a "direct participation program" as defined in Article III, Section 34 of the Rules of Fair Practice;
      (f) an offering of financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories;
      (g) an offering of a class of equity securities for which a bona fide independent market as defined in Section 2(c) exists as of the date of the filing of the registration statement and as of the effective date thereof; and
      (h) an offering of a class of securities rated in one of the four highest generic rating categories by a nationally recognized statistical rating organization.

      * * * * *

      (l) Preferred Equity— the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, ex-changeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.

      * * * * *

      [l]o Qualified independent underwriter* — a member which:

      * * * * *
      (6) is not an affiliate of the entity issuing securities pursuant to Section 3 of this Schedule and does not beneficially own five percent or more of the outstanding voting securities, common equity, preferred equity or subordinated debt of such entity which is a corporation or beneficially own a partnership interest in five percent or more of the distributable profits or losses of such entity which is a partnership; and

      * * * * *

      (r) Subordinated Debt includes (1) debt of an issuer which is expressly subordinate in right of payment to, or with a claim on assets subordinate to, any existing or future debt of such issuer; or (2) all debt that is specified as subordinated at the time of issuance. Subordinated debt shall not include short-term debt with maturity at issuance of less that one year and secured debt and bank debt not specified as subordinated debt at the time of issuance.

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

      (a) No member shall underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of an issue of debt or equity securities issued or to be issued by the member of an affiliate of the member, or of a company with which the member or its associated persons, parent or affiliates have a conflict of interest, unless the member is in compliance with subsection 3(b) and subsection 3(c) below.
      (b) In the case of a member which is a corporation, the majority of the board of directors, or in the case of a member which is a partnership, a majority of the general partners or, in the case of a member which is a sole proprietorship, the proprietor as of the date of the filing of the registration statement and as of the effective date of the offering shall have been actively engaged in the investment banking or securities business for the five year period immediately preceding the filing of the registration statement.
      (c) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of its own or an affiliate's securities or proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of securities of a company with which it or its associated persons, parent or affiliates have a conflict of interest, subject to this Section without limitation as to the amount of securities to be distributed by the member, one or more of the following three criteria shall be met:
      (1) the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established at a price no higher or yield no lower than that recommended by a qualified independent underwriter, (except that in the case of an exchange offer or other transaction relating to a recapitalization or restructuring of a company, a qualified independent underwriter is not required to provide a recommendation on the price or yield at which a security shall be distributed if the member that is affiliated with the issuer or with which the member or its associated persons, parent or affiliates have a conflict of interest is not obligated to and does not provide a recommendation or opinion with respect to the price, yield, or exchange value of the transaction), which shall also participate in the preparation of the registration statement and prospectus, offering circular, or similar document and which shall exercise the usual standards of "due diligence" in respect thereto; provided, however, that an offering of securities by a member which has not been actively engaged in the investment banking or securities business, in its present form or as a predecessor broker/dealer, for at least the five years immediately preceding the filing of the registration statement shall be managed by a qualified independent underwriter;

      * * * * *

      Section 4 — Disclosure

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

      Section 11 — Suitability

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

      Section 12 — Discretionary Accounts

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


      * In the opinion of the National Association of Securities Dealers, Inc., and the Securities and Exchange Commission, the full responsibilities and liabilities of an underwriter under the Securities Act of 1933 attach to a "qualified independent underwriter" performing the functions called for by the provisions of Section 3 hereof.

    • 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

      SUGGESTED ROUTING:*

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

      MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on a proposal to rescind the Guidelines and to amend Article III. Section 35 of the Rules of Fair Practice to include items that were contained in the Guidelines and would apply to advertisements for all types of investment products. The text of the proposed amendments and a copy of the Guidelines follow this Notice.

      BACKGROUND AND DESCRIPTION OF PROPOSAL

      The Guidelines were adopted by the NASD in 1982 following the Securities and Exchange Commission's (SEC) 1979 repeal of its Statement of Policy on Investment Company Sales Literature and are set forth at ¶ 5286 of the NASD Manual. When the SEC amended Rule 482 under the Securities Act of 1933 and adopted Rule 34b-1 under the Investment Company Act of 1940 relating to the communication of investment company performance to the public, many of the provisions of the Guidelines became obsolete. Accordingly, the NASD is proposing to rescind the Guidelines and amend Article III, Section 35 of the Rules of Fair Practice by adding those provisions of the Guidelines that imposed general standards for communications and certain of the Guidelines' specific standards for communications concerning claims of tax-free or tax-exempt returns, comparisons, and predictions and projections would become part of Article III, Section 35. The amended provisions would apply to advertisements for all types of investments, whereas the application of the Guidelines was restricted to investment company and variable contract products.

      Proposed new Subsection 35(d)(1)(D) would incorporate the entire provision set forth as "General Considerations," which is currently included in the first section of the Guidelines, under the provision contained in Section 35 that imposes general "Standards Applicable to Communications With the Public." The first standard under new paragraph 35(d)(1)(D)(i) relates to the overall context of a statement and would require members to consider that a statement may be misleading in one context while being perfectly appropriate in another context. The principal test of this standard is whether the statement adequately balances the potential risks with the potential benefits. The proposed rule language is identical to that currently contained in the Guidelines.

      The standard set forth in proposed new paragraph 35(d)(1)(D)(ii) relates to the importance of the target audience as a factor in evaluating the communication. The provision would require varying levels of explanation or detail in a communication depending on the audience and the member's ability to restrict the communication to the intended audience. Members are required to consider the likelihood that the communication could be received by persons for whom the explanations or information are inadequate or misleading. The proposed rule language is identical to that currently contained in the Guidelines.

      The standard set forth in new paragraph 35(d)(1)(D)(iii) would require that all statements in communications be made clearly and cautions against complex or overly technical explanations and the inclusion of material information in legends or footnotes. The proposed rule language is identical to that currently contained in the Guidelines.

      New Subsections 35(d)(2)(L), (M), and (N) would incorporate concepts contained in the Guidelines into the requirements set forth in Section 35 as "Specific Standards" for communications with the public. Subsection 35(d)(2)(L) would prohibit members from calling an investment "tax free" or "tax exempt" if tax liability is merely postponed or deferred, and requires that if there are references to tax-free/tax-exempt current income or if taxes are payable on redemption, those facts and any applicable taxes must be adequately disclosed. The rule language of this provision is drawn from the last paragraph of the section in the Guidelines titled "4. Specific Considerations in Presenting Yield Data or Illustrations."

      Subsection 35(d)(2)(M) would require members, when using comparisons, to ensure that the comparisons are clear, fair, balanced, and include any material differences between the subjects of the comparison such as liquidity, safety, investment objectives, and fees, among others. The rule language of this provision is drawn from the first three paragraphs of the section in the Guidelines titled "5. Considerations Regarding Comparisons."

      Subsection 35(d)(2)(N) would prohibit members from predicting or projecting future performance on any basis, including past performance. Hypothetical illustrations of mathematical principles such as dollar-cost averaging, however, are not considered projections of performance. The rule language of this provision is based on that included in the section in the Guidelines titled "Adequacy of Information Concerning the Relevance of Results Illustrated to Probable Future Results."

      Comments Received on Proposed Amendments

      The NASD published the proposed amendments to Subsections 35 (d)(2)(L), (M), and (N) for comment in Notice to Members 91-79 (December 1991). The NASD received five comment letters with four favoring the proposal and one opposed to one provision. In response, the Board of Governors (Board) has approved a number of changes to the original version of the amendments to Article III, Section 35 as published for comment.

      In one instance, the Board amended the original proposal to add new Subsection 35(d)(1)(D) relating to "General Standards" to incorporate matters from the Guidelines that the commenter believed are not expressly covered elsewhere in Section 35. The Board also modified proposed Subsection 35(d)(2)(L) relating to tax-free/tax-exempt claims to specify that adequate disclosure would require disclosure of which taxes apply or which do not (as opposed to disclosure of both).

      The Board also modified proposed Subsection 35(d)(2)(M) covering comparisons to include a specific reference to differences in the safety of investments and to clarify that the requirement to disclose material differences may include those listed in the subsection thus distinguishing between differences that, although listed, may not be material. The Board, however, did not as suggested modify Subsection 35(d)(2)(M) to only require disclosure of "relevant" material differences on the basis that the terms "material" and "relevant" are synonymous.

      Rejecting another recommendation, the Board retained proposed Subsection 35(d)(2)(N) to prohibit all predictions or projections of performance because such projections are likely to be speculative and, therefore, misleading under the antifraud provisions of the federal securities laws. The Board believes the proposed subsection addresses specific forms of communication, while the anti-fraud provisions are general in nature. Another suggestion called for modifying the subsection to permit statements relating to results from zero coupon bond portfolios and hypothetical illustrations (such as dollar-cost averaging or tax-free compounding charts). The Board rejected the suggestion regarding zero coupon bond portfolios because of the variety of zero coupon bond funds and because of the changes in expectations if the shares are liquidated; however, the Board agreed with the recommendation regarding hypothetical illustrations of mathematical principles. The Board also deleted the first reference to "future" in this subsection on grounds of redundancy.

      REQUEST FOR VOTE

      The Board believes that it is appropriate to rescind the Guidelines and amend Article III, Section 35 to incorporate and make applicable to all investment products standards that were previously applicable only to investment company/variable contract products. In addition to eliminating redundancies by rescinding the Guidelines, the incorporation of general and specific standards previously only applicable to investment company/ variable contract products would consolidate the regulations under one rule. The Board considers the proposed amendments necessary and appropriate and recommends that members vote their approval.

      The text of the proposed amendments to Article III, Section 35 that requires member vote is below. The text of the Guidelines which are proposed to be deleted in their entirety follow the amendments to Article III, Section 35. 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 December 21, 1992. The amendment will not be effective until it is filed with and approved by the SEC.

      Questions concerning this Notice should be directed to R. Clark Hooper, Vice President, Advertising, at (202) 728-8330, or Elliott R. Curzon, Senior Attorney, Office of General Counsel (202)728-8451.

      PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE RULES OF FAIR PRACTICE REQUIRING MEMBER VOTE

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

      ARTICLE III

      * * * * *

      Communications With The Public

      Sec. 35.

      * * * * *

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

      * * * * *
      (D) In judging whether a communication, or a particular element of a communication may be misleading several factors should be considered, including, but not limited to:
      (i) The Overall Context in Which the Statement or Statements Are Made: A statement made in one context may be misleading even though such a statement could be perfectly appropriate in another context. An essential test in this regard is the balance of treatment of risks and potential benefits.
      (ii) The Audience to Which the Communication Is Directed: Different levels of explanation or detail may be necessary depending on the audience to which a communication is directed, and the ability of the member given the nature of the media used, to restrict the audience appropriately. If the statements made in a communication would be applicable only to a limited audience, or if additional information might be necessary for other audiences, it should be kept in mind that it is not al-ways possible to restrict the readership of a particular communication.
      (iii) The Overall Clarity of the Communication: A statement or disclosure made in an unclear manner obviously can result in a lack of understanding of the statement, or in a serious misunderstanding. A complex or overly technical explanation may be worse than too little information. Likewise material disclosure relegated to legends or footnotes realistically may not enhance the reader's understanding of the communication.
      (2) Specific Standards

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

      * * * * *
      (L) Claims of Tax-Free/Tax-Exempt Returns: Income or investment returns may not be characterized as tax free or exempt from income tax where tax liability is merely postponed or deferred. If taxes are payable upon redemption, that fact must be disclosed. References to tax-free/tax-exempt current income must indicate which taxes apply or which do not unless income is free from all applicable taxes. For example, if income from an investment company investing in municipal bonds may be subject to state or local income taxes, this should be stated, or the illustration should other-wise make it clear that income is free from federal income tax.
      (M) Comparisons: In making a comparison, either directly or indirectly, the member must make certain that the purpose of the comparison is clear and must provide a fair and balanced presentation, including any material differences between the subjects of comparison. Such differences may include investment objectives, sales and management fees, liquidity, safety, guarantees or insurance, fluctuation of principal and/or return, tax features, and any other factors necessary to make such comparisons fair and not misleading.
      (N) Predictions and Projections: Investment results cannot be predicted or projected. Investment performance illustrations may not imply that gain or income realized in the past will be repeated in the future. However, for purposes of this rule, the following types of information are not considered projections of performance; hypothetical illustrations of mathematical principles, (e.g., illustrations designed to show the effects of dollar-cost averaging, tax-free compounding, or the mechanics of variable annuity contracts or variable life policies).

      (Note: Entire text is proposed to be deleted.)

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

      1. General Considerations

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

      The Overall Context in Which the Statement or Statements Are Made

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

      The Audience to Which the Communication is Directed

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

      The Overall Clarity of the Communication

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

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

      Investment Objectives and Policies as Related to Data Provided

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

      Appropriateness and Fairness of the Time Periods Illustrated

      In general, the appropriate time periods for illustrations of results are those which are of sufficient duration that the relevance of the data to the investment objectives can be determined. Thus yield or performance data may cover a variety of different periods for different types of investments.

      The selection of a specific time period solely for the purpose of illustrating performance "at its best" is likely to mislead. Illustrations should generally include the last full calendar or fiscal year, or the last twelve months.

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

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

      The Clarity of a Chart or Table Format

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

      The Adequacy of Summary Results and the Need for Supporting Data

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

      Inclusion of Relevant Charges and Expenses

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

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

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

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

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

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


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


      • information about the general characteristics of the portfolio and any material portfolio changes which are anticipated.
      Historic yields should be calculated by dividing the company's annual dividends from net investment income by the maximum offering price of the company's shares, using either the average price during the year or the price at the beginning or end of the year.

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

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

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

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

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

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

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

    • 92-55 Nasdaq National Market Additions, Changes, and Deletions as of September 25, 1992

      SUGGESTED ROUTING:*

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

      As of September 25, 1992, the following 35 issues joined the Nasdaq National Market, bringing the total number of issues to 2,934:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      SNSC

      Swing-N-Slide Corp.

      8/28/92

      1000

      ABMD

      ABIOMED, Inc.

      8/31/92

      1000

      FCTR

      First Charter Corporation

      8/31/92

      200

      CONS

      Conservative Savings Corporation

      9/1/92

      200

      FISL

      First Interstate Bank of Southern Louisiana

      9/1/92

      200

      PDKL

      PDK Labs, Inc.

      9/1/92

      1000

      PDKLP

      PDK Labs, Inc. (Pfd)

      9/1/92

      1000

      PDKLZ

      PDK Labs, Inc. (Cl B Wts)

      9/1/92

      1000

      PDKLM

      PDK Labs, Inc. (Cl C Wts)

      9/1/92

      1000

      FUNC

      First United Corporation

      9/2/92

      200

      MSBB

      MSB Bancorp, Inc.

      9/3/92

      1000

      SCIOW

      Scios Nova Inc. (Cl C Wts)

      9/4/92

      1000

      SCIOZ

      Scios Nova Inc. (Cl D Wts)

      9/4/92

      1000

      BASER

      Base Ten Systems, Inc. (Rts)

      9/9/92

      1000

      CCAXW

      Corrections Corporation of America (Wts)

      9/14/92

      1000

      AWIN

      Allied Waste Industries, Inc.

      9/15/92

      1000

      FBNKP

      First Banks, Inc. (Pfd)

      9/15/92

      500

      IRWN

      Irwin Financial Corporation

      9/15/92

      500

      MBMI

      Micro Bio-Medics, Inc.

      9/15/92

      1000

      SGII

      SGI International

      9/15/92

      1000

      SHRO

      Sports Heroes, Inc.

      9/15/92

      1000

      SHROW

      Sports Heroes, Inc. (Wts)

      9/15/92

      1000

      WSTE

      TransAmerican Waste Industries, Inc.

      9/15/92

      1000

      WSTEW

      TransAmerican Waste Industries, Inc. (ClAWts)

      9/15/92

      200

      WSTEZ

      TransAmerican Waste Industries, Inc. (Cl B Wts)

      9/15/92

      200

      SPRC

      Sports & Recreation, Inc.

      9/16/92

      1000

      AMST

      American Studios, Inc.

      9/18/92

      1000

      CAKE

      Cheesecake Factory Incorporated (The)

      9/18/92

      1000

      ASGN

      On Assignment, Inc.

      9/22/92

      1000

      LFUS

      LittelFuse, Inc.

      9/22/92

      500

      LFUSW

      LittelFuse, Inc. (Wts)

      9/22/92

      500

      NTRX

      Netrix Corporation

      9/22/92

      1000

      AMGP

      American Insurance Group, Inc.

      9/22/92

      1000

      MONE

      The Money Store Inc.

      9/23/92

      1000

      CCUUY

      Compania Cervecerias Unidas S.A.

      9/24/92

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since August 28, 1992:

      New/Old Symbol

      New/Old Security

      Date of Change

      ILIOW/ILIOW

      Ilio Inc. (8/31/92 Wts)/Ilio Inc. (10/31/92 Wts)

      9/3/92

      SCIO/SCIO

      Scios Nova Inc./Scios, Inc.

      9/4/92

      ARBC/ARBC

      Republic Bank/American Republic Bank

      9/11/92

      HRIZ/HRIZ

      Horizon Resources Corporation/Horizon Gold Corporation

      9/17/92

      FAMR/FAMRA

      First American Financial Corp./First American Financial Corp. (Cl A)

      9/25/92

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      NIEX

      Niagara Exchange Corporation

      8/28/92

      FFAL

      First Federal of Alabama, F.S.B.

      8/31/92

      CTLC

      Consolidated-Tomoka Land Co.

      9/1/92

      NATC

      NaTec Resources, Inc.

      9/1/92

      SOCI

      Society Corporation

      9/1/92

      COUS

      Cousins Properties Incorporated

      9/2/92

      FPNJ

      First Peoples Financial Corporation

      9/4/92

      JALC

      John Adams Life Corporation

      9/4/92

      NOVX

      Nova Pharmaceutical Corporation

      9/4/92

      NOVXM

      Nova Pharmaceutical Corporation (Cl C Wts)

      9/4/92

      NOVXL

      Nova Pharmaceutical Corporation (Cl D Wts)

      9/4/92

      CNCD

      Concorde Career Colleges, Inc.

      9/9/92

      EIPM

      EIP Microwave, Inc.

      9/9/92

      GLXIF

      Glenex Industries, Inc.

      9/9/92

      GVMI

      GV Medical, Inc.

      9/9/92

      INMA

      Intermagnetics General Corporation

      9/9/92

      MMIC

      Mass Microsystems, Inc.

      9/9/92

      MEYR

      Fred Meyer, Inc.

      9/9/92

      CDRWQ

      Cedar Group, Inc. (Wts)

      9/11/92

      FEDF

      Federated Bank, S.S.B.

      9/14/92

      LLEC

      Long Lake Energy Corporation

      9/14/92

      ARAI

      Allied Research Corporation

      9/15/92

      JEANW

      Jean Philippe Fragrances, Inc. (Wts)

      9/15/92

      FASB

      First American BanCorp

      9/16/92

      HMOA

      HMO America, Inc.

      9/18/92

      MTBS

      Metro Bancshares Inc.

      9/21/92

      VMLPZ

      Banyan Mortgage Investors, L.P.

      9/23/92

      FAMRB

      First American Financial Corp. (Cl B)

      9/25/92

      Questions regarding this Notice should be directed to Mark 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.

    • 92-54 Veteran's Day and Thanksgiving Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

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

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veteran's Day, Wednesday, November 11, 1992, and Thanksgiving Day, Thursday, November 26, 1992. On Wednesday, November 11, securities exchanges and The Nasdaq Stock Market15" will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed in observance of Veteran's Day. All securities markets will be closed on Thursday, November 26, in observance of Thanksgiving Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      November 2

      Nov. 9

      Nov. 11

      3

      10

      12

      4

      12

      13

      5

      13

      16

      6

      16

      17

      9

      17

      18

      10

      18

      19

      11

      18

      20

      12

      19

      23

      18

      25

      30

      19

      27

      Dec. 1

      20

      30

      2

      23

      Dec. 1

      Dec. 3

      24

      2

      4

      25

      3

      7

      26

      Markets Closed

      -

      27

      4

      8

      Note: November 11, 1992, 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, 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 (212) 858-4341.

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

    • 92-53 Underwriting Compensation Received by Members in Public Corporate Equity Offerings

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The NASD® is publishing the results of a recent study of underwriting compensation received in the distribution of public corporate equity offerings. The NASD analyzed the amount of actual compensation received in such offerings during calendar year 1991 and used it to predict levels of compensation that might be expected for various sizes and types of offerings. These predicted compensation values, expressed as a percentage of offering proceeds, should provide members and their counsel with guidance regarding the typical amount of underwriting compensation for various offerings and the generally accepted levels of underwriting compensation as determined by the NASD.

      The NASD published the results of an earlier study of underwriting compensation in Notice to Members 83-15on April 8, 1983. The findings of this study supersede the results reported in the 1983 Notice.

      NASD COMPENSATION GUIDELINES

      The Corporate Financing Rule, Article III, Section 44 of the Rules of Fair Practice states that no member or person associated with a member shall receive compensation or participate in a public offering of securities if the underwriting compensation in connection with the public offering is unfair or unreasonable. Determinations of the fairness or reasonableness are made by comparing the proposed compensation to the NASD underwriting compensation guidelines, which represent the maximum amount of compensation "underwriters and related persons" may receive in a public offering. Underwriters and related persons include underwriters, underwriter's counsel, financial consultants and advisers, finders, members of the selling and distribution group, any member participating in the public offering, and any and all other persons associated with or related to, as well as members of the immediate family, of any of the aforementioned persons.

      The NASD's Corporate Financing Department (Department) has direct responsibility for the review of underwriting compensation. To ensure compliance with the compensation guidelines, the Department reviews public offerings before their effective dates and aggregates all items of value proposed to be received by underwriters and related persons. The Department then compares the total compensation, expressed as a percentage of offering proceeds, to the appropriate guideline applicable to the offering. For the Department to issue an opinion expressing "no objections" to the underwriting compensation, such compensation must be equal to or less than the maximum applicable guideline.

      In determining the maximum amount of compensation that is considered fair and reasonable, the NASD considers the size of the offering and the amount of risk assumed by the underwriter, which is determined by whether the offering is being underwritten on a firm commitment or best efforts basis and whether the offering is an initial or secondary offering. The maximum guideline amount generally will vary directly with the amount of risk assumed by the underwriter and inversely with the dollar amount of offering proceeds. Firm commitment offerings are permitted higher levels of compensation than best efforts offerings due to the risk involved in an underwriter purchasing the securities for resale versus simply utilizing its best efforts to place the securities for the issuer. In addition, a firm commitment initial public offering (IPO) is generally permitted higher compensation than a firm commitment secondary offering because the underwriter is dealing with an unseasoned issuer and is likely to incur higher costs in introducing the issuer to prospective underwriters and investors. The higher percentage levels of compensation permitted in smaller offerings recognizes that certain fixed costs are involved in any distribution, regardless of size.

      METHODOLOGY

      To predict levels of underwriting compensation accurately, the Department analyzed the amount of compensation received, as disclosed in the final offering document or prospectus, for 874 corporate equity offerings filed with the Department during calendar year 1991. All items of underwriting compensation received by underwriters and related persons were considered, including: cash discounts or commissions; accountable and non-accountable expense reimbursements; warrants, options, cheap stock, and other securities and rights to acquire securities received by underwriters and related persons; finders fees paid for introducing the underwriter and the issuer; rights of first refusal; financial consulting and advisory fees; and all other items of value received in connection with the offering.

      The offerings were organized into three categories: 402 firm commitment IPOs, 380 firm commitment secondary offerings, and 92 best efforts offerings. For each of the three categories, the staff performed a regression analysis to predict expected amounts of compensation for certain size offerings in each category.

      RESULTS

      The attached table indicates the gross proceeds of the offering (in millions of dollars) and the predicted percentage of gross proceeds, exclusive of any over-allotment option, that might be allocated to underwriting compensation for firm commitment IPOs, firm commitment secondary offerings, and best efforts corporate equity offerings. The amounts shown do not represent the compensation actually received in any one offering or the mathematical average for all offerings of a particular size reviewed during 1991. Such amounts also do not reflect the compensation originally proposed to be received when the offerings were filed with the NASD.

      It should also be made clear that the amounts of compensation shown are predicted amounts for corporate equity offerings. Such offerings frequently produce higher levels of underwriting compensation and their proposed levels often exceed the NASD guidelines. The study did not include corporate debt offerings because they usually have lower amounts of underwriting compensation than equity offerings.

      In addition, the study did not cover direct participation programs and real estate investment trusts because Appendix F to Article III, Section 34 of the Rules of Fair Practice limits them to a maximum underwriting compensation of 10 percent. Therefore, all such offerings have underwriting compensation equal to or less than 10 percent, with an additional .5 percent allowed for the reimbursement of bona fide due diligence expenses.

      Questions regarding this Notice may be directed to the NASD Corporate Financing Department at(202)728-8258.

      TOTAL UNDERWRITING COMPENSATION1

      Gross Dollar Amount of Offering (millions)

      Firm Commitment Initial Offerings (%)

      Firm Commitment Secondary Offerings (%)

      Best Efforts Offerings (%)

      $ 1

      15.80%

      14.57%

      11.83%

      2

      14.31

      12.91

      10.72

      3

      13.44

      11.94

      10.07

      4

      12.82

      11.26

      9.61

      5

      12.34

      10.72

      9.26

      6

      11.95

      9.56

      8.96

      7

      11.62

      9.12

      8.72

      8

      11.33

      8.76

      8.50

      9

      11.08

      8.45

      8.32

      10

      10.65

      8.18

      8.15

      11

      9.90

      7.95

      8.04

      12

      9.18

      7.74

      7.86

      13

      8.49

      7.56

      7.73

      14

      7.82

      7.39

      7.61

      15

      7.59

      7.24

      7.50

      16

      7.55

      7.10

      7.40

      17

      7.52

      6.97

      7.30

      18

      7.48

      6.85

      7.21

      19

      7.45

      6.74

      7.12

      20

      7.42

      6.63

      7.04

      25

      7.29

      6.20

      6.68

      30

      7.19

      5.86

      6.39

      35

      7.10

      5.60

      6.14

      40

      7.02

      5.37

      5.93

      45

      6.95

      5.19

      5.74

      50 or more

      6.89

      5.00

      25.57

      1 This table contains the results of a regression analysis of an overall population and not mathematical averages for each category. This data should be considered only in connection with the explanation of methodology contained in the attached Notice.

    • 92-52 Broker/Dealer and Agent Renewals for 1992-93

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The 1992-93 NASD® broker/dealer and agent registration renewal cycle begins in early November. This program simplifies the renewal process through the payment of one invoice amount that will include fees for NASD personnel assessments, NASD branch-office fees, New York Stock Exchange (NYSE), American Stock Exchange (ASE), and Chicago Board Options Exchange (CBOE) maintenance fees. In addition, Pacific Stock Exchange (PSE) maintenance fees will be collected for the first time this year. 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, 1993.

      INITIAL RENEWAL INVOICES

      On or around November 11, 1992, 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, and PSE maintenance fees, state agent renewal fees, and state broker/dealer renewal fees. The NASD must receive full payment of the November invoice no later than December 18, 1992.

      NASD personnel assessments for 1993 will be based on the number of registered personnel with an approved NASD license as of December 31, 1992. That personnel assessment is $10 per person. NASD branch-office assessments will be based on the number of active branches as of December 31, 1992. This branch-office assessment is $50 per branch.

      Agent renewal fees for NYSE, ASE, CBOE, PSE, 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, and PSE maintenance fees — collected by the NASD for firms that are registered with NYSE/ASE/CBOE/PSE as well as the NASD — are based on the number of NYSE-, ASE-, CBOE-, and PSE-registered personnel employed by the member.

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

      Payment of the initial invoice should be in the form of a check made payable to the National Association of Securities Dealers, Inc. The check should be drawn on the member firm's account, with the firm's Central Registration Depository (CRD) number included on the check. Submit the check along with the top portion of the invoice and mail them in the return envelope provided with the invoice. To ensure prompt processing, the renewal invoice payment should not be included with other forms or fee submissions. Members should be aware that failure to return payment to the NASD by the December 18, 1992, deadline will mean a loss of eligibility to do business in the states effective January 1, 1993.

      FILING FORM U-5

      Members may wish to avoid unwanted renewals by filing Form U-5 for agent terminations in one or more jurisdiction affiliations. Because of the increased convenience and flexibility reported by members that used predated Form U-5 for renewals in previous years, the NASD will again process predated agent terminations this year. From November 1 to December 18, the NASD will accept and process Forms U-5 (both partial and full terminations) with predated dates of termination. Under this procedure, if the U-5 indicates a termination date of December 31, 1992, an agent may continue doing business in a jurisdiction until the end of the calendar year without being assessed renewal fees for that jurisdiction. Please ensure that Forms U-5 are filed by the renewal deadline date of December 18, 1992. Also, predated U-5s cannot be processed if the date of termination indicated is January 1, 1993 or thereafter.

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

      The NASD encourages members having access to the Firm Access Query System (FAQS) to utilize electronic filings for the submission of all Forms U-5 and page Is of Form U-4. FAQS offers several advantages to firms in this regard, including the ability to immediately process terminations, ensure in-house control over agent registrations, and reduce normal and express mailing costs as well as long-distance telephone calls. It also allows members to quickly and efficiently handle the large filing volumes that typically occur at this time every year. Because of that, the NASD will provide an additional service to FAQS users by expanding the on-line user hours for November and December 1992. 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 fourth 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:

      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 1992 is December 18, 1992. This same date applies to the filing of Forms BDW with the jurisdictions that are not participating in Phase II. Predated Forms BDW filed with the CRD will be accepted and processed in the same manner as predated Forms U-5.

      REMOVING OPEN REGISTRATIONS

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

      BILLING CODE BREAKDOWN

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

      FINAL ADJUSTED INVOICES

      On or about January 11, 1993, 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, 1992. 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, and each state. Persons whose registration is approved in any of these jurisdictions during November and December will automatically be included in this roster, while registrations that are pending approval or are deficient at year's end will not be included in the renewal process. Firms also will receive an NASD branch-office roster that lists all branches for which they have been assessed.

      Firms then will have a two-month period in which to reconcile any discrepancies on the rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final adjusted invoice package will appear in the January 1993 issue of the Notice to Members, as well as on the inside cover of the renewal roster.

      Questions concerning this Notice may be directed to the NASD's Member Services Phone Center at (301) 590-6500.

    • 92-51 SEC Approval of Amendments Relating to "When, as and if Issued" and "When, As and if Distributed" Contracts; Effective November 2, 1992

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Government Securities
      Institutional
      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Trading
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On September 4, 1992, the Securities and Exchange Commission (SEC) approved amendments to Section 4 of the NASD® Uniform Practice Code. The amendments codify as new provisions of Section 4 of the UPC the Memorandum of the Committee relating to "When, as and if Issued" and "When, as and if Distributed" Contracts, and delete the Memorandum from the Code. The amendments take effect on November 2, 1992. The text of the new rule language follows the discussion below.

      BACKGROUND AND DESCRIPTION OF THE AMENDMENTS

      On September 4, 1992, the SEC approved amendments to Section 4 of the Uniform Practice Code (Code) codifying as new provisions of Section 4 the Memorandum of the NASD Operations Committee (Memorandum) relating to "When, as and if Issued" and "When, as and if Distributed" Contracts ("when issued" contracts or "when issued" securities). Currently, the Memorandum is published in the NASD Manual (Manual) immediately following Section 4. The rule change deletes the Memorandum in its entirety from the Code.

      The amendments to Section 4 cover confirmations, accrued interest, marks to market, margin requirements, deposit requests, segregation of funds, contract settlement, and cancellation. Except for confirmations, all the changes incorporate the subjects covered in the Memorandum into Section 4. Further, except for the cancellation provision in Subsection 4(h), Section 4 and those portions incorporated from the Memorandum are substantively unchanged. However, in certain cases, procedures previously recommended are now mandatory, and the explanatory language of the Memorandum is deleted.

      New Subsection 4(a) requires that parties to "when issued" transactions send confirmations containing certain minimum information. This information required to be sent is drawn from current Subsections 4(a) and 4(b), and ¶ 3504.10 of the Memorandum at page 3516 of the Manual. This information includes a description of the security and the plan under which it will be distributed, the designated authority for ruling on contract performance, and a provision for marking the contract to the market. New subparagraph 4(a)(3) states that the NASD Operations Committee (formerly, the Uniform Practice Committee)(the Committee) will provide a description of the security and any plan of issuance or distribution for inclusion in "when issued" contracts. This language is based on ¶ 3504.11 of the Memorandum at page 3516 of the Manual. New Subsection 4(b) specifies the treatment of accrued interest in "when issued" contracts and is based on ¶ 3504.12 of the Memorandum at page 3517 of the Manual.

      New Subsection 4(c) provides that because of potentially significant delays in the issuance or distribution of "when issued" securities, such contracts should be marked to the market pursuant to the provisions of Section 58 of the Code to protect a party whose interest becomes partially unsecured as a result of market value changes to the securities under contract. This provision differs from ¶ 3504.13 of the Memorandum at page 3517 of the Manual. The NASD has determined that separate marks to market standards for "when issued" contracts are not necessary and, instead, members can rely on Section 58 requirements.

      New Subsection 4(d) requires "when issued" contracts to comply with Sections 220.4 and 220.5 of Regulation T of the Board of Governors of the Federal Reserve System. This provision differs from ¶ 3504.20 of the Memorandum at page 3518 of the Manual, which is only precatory in nature. New Subsection 4(e) allows members to require deposits or collateral for "when issued" contracts even if not required by Regulation T. This provision is based on the last paragraph of ¶ 3504.13 of the Memorandum at page 3518 of the Manual. New Subsection 4(f) recommends the segregation of "when issued" contracts, and deposits made in connection with them, on the books of a member firm and is drawn from P504.30 of the Memorandum at page 3518 of the Manual. New Subsection 4(g) specifies the rules for settlement of such contracts and incorporates current Subsections 4(c) and4(d).1

      Finally, new Subsection 4(h) provides for the cancellation of "when issued" contracts by the Committee. The Committee canceled "when issued" contracts under its authority to rule on issues related to such contracts specified in Section 2 of the Code. In addition, the Memorandum states that the date for settlement of "when issued" contracts must be determined after the date of issuance becomes known and that, if the securities eventually issued or distributed differ substantially from those contemplated in the contract, the contract cannot be settled and must be canceled. ¶ 3504.10 of the Memorandum at page 3516 of the Manual.

      Subsection 4(h) is intended to codify the general authority of the Committee to cancel "when issued" contracts and to provide some specificity regarding the Committee's cancellation authority. The structure of Subsection 4(h) is intended to differentiate between situations where the contract will (1) always be canceled; (2) generally be canceled; and (3) generally not be canceled.

      Subsection 4(h)(1) retains the original language from ¶ 3504.10 of the Memorandum at page 3516 of the Manual and Section 2 of the Code granting the committee broad discretionary power to cancel "when issued" contracts if circumstances change. This general authority to cancel contracts is retained in Subsection 4(h) to provide for situations which are not anticipated by the more specific provisions of Subsections 4(h)(3) and (4). Thus, notwithstanding the fact that the circumstances surrounding the performance of a contract may fit within Subsections 4(h)(3) and (4), the Committee retains the discretion to act inconsistently with those subparagraphs if, in its judgment, such action is necessary to effectuate the purposes of Section 2 of the Code.

      Subsection 4(h)(2) states that the Committee will cancel contracts if the securities will not be issued or distributed. This provides for the situation where an announced merger, reorganization, or distribution plan fails or is terminated after "when issued" securities have begun trading. Because such securities cannot be delivered since they will not be issued or distributed, the NASD has determined to cancel any such contracts.

      Subsection 4(h)(3) provides that contracts will generally be canceled if the "securities which are to be issued or distributed are not substantially the same as those contemplated in the contract." A nonexclusive list of the types of material changes that will generally result in cancellation includes changes to the redemption provision schedule, dividend payments, interest rate, maturity, yield, and exercise price. The NASD regards these as changes to the terms of the security and, therefore, material to the contract to purchase the security.

      Subsection 4(h)(4) provides for certain changes that "shall not require cancellation of contracts . . . ." Because they change the terms underlying the plan of distribution and not the terms of the security, these terms are not material to the contract to purchase the security and include: (1) a change in the amount of equity or debt to be issued; (2) restructuring of the financing arrangements; and (3) settlement of a legal action directly related to the distribution plan which also affects the financial statement of the issuer.

      The NASD believes that Subsections 4(h)(3) and (4) will clarify the NASD's standards for the cancellation of contracts under the enumerated situations. Such standards will assist risk/benefit analysis by participants in "when issued" transactions, thereby advancing the purposes of Section 2 of the Code.

      The NASD's preference, as expressed in the two Subsections, is to cancel "when issued" contracts only if the security issued or distributed, not the plan for issuance or distribution, is substantially different. The NASD also believes, however, that the effect of changes to particular securities and plans of distribution are not predictable and, therefore, may not be appropriately resolved by rigidly adhering to the formula in Subsections 4(h)(3) and (4). It is for this reason that the NASD has retained its general authority to cancel "when issued" contacts as necessary.

      The amendments take effect on November 2, 1992. Questions concerning this Notice should be directed to Elliott R. Curzon, Senior Attorney, Office of General Counsel at (202) 728-8451, or Dorothy Kennedy, Manager of Uniform Practice at (212)858-4340.


      1 Current Subsections 4(c) and 4(d), previously numbered 4(e) and 4(f), were renumbered in SR-NASD-91-13, approved by the SEC in Rel. No. 34-29687 on September 13, 1991; 56 F.R. 47819 (September 20, 1991).


      TEXT OF AMENDMENTS TO SECTION 4 OF THE UNIFORM PRACTICE CODE

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

      [Delivery Dates]

      When, As and If Issued/Distributed Contracts

      Confirmations or comparisons

      [(a) A confirmation covering a transaction in a security "when, as and if issued" shall adequately identify the security and the plan, if any, under which the security is proposed to be issued.
      (b) A confirmation covering a transaction in a security "when, as and if distributed" shall adequately identify the security and the plan, if any, under which the security is proposed to be distributed.]
      (a)(1) Each party to the transaction shall send a written "when, as, and if issued" or "when as and if distributed" confirmation or comparison in the same form as set forth as Exhibit A of this section and pursuant to the requirements of Sections 9(a), 10 and 64 of the Code.
      (2) Each confirmation or comparison covering a contract in a "when, as and if issued" or "when, as and if distributed" security shall, at a minimum, contain:
      (i) an adequate description of the security and the plan, if any, under which the security is proposed to be issued or distributed;
      (ii) designation of the National Association of Securities Dealers, Inc., as the authority which shall rule upon the performance of the contract; and
      (iii) provision for marking the contract to the market.
      (3) The Committee will furnish, upon written request therefor, an adequate description of any particular issue of securities and of the plan under which the securities are proposed to be issued for the purpose of inclusion in all contracts or confirmations covering transactions on a "when, as and if issued" or "when, as and if distributed" basis in the particular securities.

      Accrued interest

      (b) Unless the parties agree otherwise, "when, as and if issued" or "when, as and if distributed" transactions between members in fixed obligations of new or reorganized companies shall be "and accrued interest" to date of settlement. Interest shall be computed on the basis of the expired portion of the coupon current at the time of settlement, and all due and past due coupons shall be detached.

      "When, as and if issued" or "when, as and if distributed" transactions between members in in-come or contingent interest securities of such companies shall be traded "flat" and shall carry all payments that may be made or declared in connection with such new securities from the effective date of the plan; except that, if any payment is made or declared directly or indirectly in connection with such securities, prior to the settlement date, transactions made on and after the "ex" date for such payment shall carry only payments made or declared in connection with such securities from such "ex" date.

      Securities of such companies which bear a fixed rate of interest, plus contingent additional payment, are to be traded "and accrued interest" at the rate of the fixed interest, and traded "flat" in respect to the contingent payments.

      Marks to the market

      (c) In case of "when, as and if issued" or "when, as and if distributed" contracts, the time of issuance or distribution of the securities is indefinite and may be long delayed. Therefore, such contracts should be marked to the market pursuant to the provisions of Section 58 of the Code.

      Contracts on margin

      (d) All "when, as and if issued" or "when, as and if distributed" contracts shall be in compliance with Sections 220.4 and 220.5 of Regulation T of the Board of Governors of the Federal Reserve System.

      Request for deposits

      (e) A member may require a customer to deposit cash or collateral to secure a "when, as and if issued" or "when, as and if distributed" contract even though Section 220.8(b)(1) of Regulation T of the Board of Governors of the Federal Reserve System may not require such deposit.

      Segregation of funds

      (f) Deposits against "when, as and if issued" or "when, as and if distributed" transactions should be segregated on the books of the firm in order to present a true picture of the firms' position and its commitment in transactions of this kind. It may be appropriate to segregate such deposits from the firm's general cash balances by depositing them in a bank other than those containing the general deposits, loans or other obligations of the firm. Whether or not such physical segregation is made, no member should permit any part of deposits against "when, as and if issued" or "when, as and if distributed" contracts to be used for any purpose whatsoever other than to secure such contracts.

      At a minimum, every member doing business in "when, as and if issued " or "when, as and if distributed" securities shall ensure that the sum of the cash balances and any deposits with banks, clearing houses, or other brokers against "when, as and if issued" or "when, as and if distributed" contracts always exceeds the aggregates of all free credits and deposits against "when, as and if issued" or "when, as and if distributed" contracts by an amount fully ample to conduct his business with-out employing any part of such deposits.

      Settlement of contracts

      (g)
      (1) A date for the settlement of "when, as and if issued" and "when, as and if distributed" contracts shall be determined by the Committee when a sufficient percentage of the issue is out-standing.

      ["When, as and if issued"

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

      ["When, as and if distributed"

      (d)](3) In connection with a transaction in a security "when, as and if distributed," delivery shall be made at the office of the purchaser on the date declared by the Committee: except that if no delivery date shall be declared by the Committee, delivery may be made by the seller on the business day following the day upon which the seller has delivered at the office of the purchaser written notice of intention to deliver.

      Cancellation of contracts

      (h)(1) Pursuant to Section 2 of the Code the Committee may cancel or terminate "when, as and if issued" and "when, as and if distributed" contracts as necessary to resolve conflicts over the settlement of such contracts.
      (2) Contracts will be cancelled if the securities are not to be issued or distributed.
      (3) Contracts will generally be cancelled if the securities which are to be issued or distributed are not substantially the same as those contemplated in the contract. Material changes which will generally result in cancellation include, but are not limited to, changes to the redemption schedule, dividend payments, interest rates, maturity, yield, and exercise price.
      (4) Notwithstanding paragraph (h)(3), contracts will not generally be cancelled as a result of changes that do not constitute material changes to the terms of the security called for under the contract. Changes which will not generally result in cancellation include, but are not limited to:
      (i) changes in the dollar value of securities to be issued or distributed;
      (ii) restructuring of financing arrangements previously announced by the issuer of the securities; or
      (iii) settlement of any legal action or the occurrence of any other event which has or will have a material effect on the financial condition of the issuer of the securities.

      Exhibit A

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

      For use by dealers and brokers in confirming transactions with other dealers and brokers

      "When, as and if Issued" or "When, as and if Distributed" Contract

      __________________________________________________

      (Firm Name)

      Date__________________________________________________

      (Sold to) (Purchased From)

      Quantity

      Description of Security

      Price

             

      If this contract was made on a national securities exchange, it shall be subject to and governed by the requirements of such exchange, its constitution, rules, practices and interpretations thereof, relating to contracts between members of such exchange, as the same may be amended or modified from time to time.

      If this contract was made elsewhere than on a national securities exchange, it shall be subject to and governed by the requirements of the National Association of Securities Dealers, Inc., its By-Laws, Rules of Fair Practice, Uniform Practice Code, rulings and interpretations thereof as the same may be amended or modified from time to time.

      This contract shall be settled and payment therefor made at such time and place, in such manner, and by the delivery of such securities and/or other property as the exchange or association to whose requirements this contract is subject in its sole discretion may determine, or shall be canceled and thereafter shall be null and void if such exchange or association determines in its sole discretion that the [plan or proposal to which the securities were to be issued or distributed has been abandoned or materially changed] securities which are to be issued or distributed are not substantially the same as those contemplated in the contract. During the pendency of this contract either party shall have the right to call for a mark to the market, and upon failure of the other party to comply therewith the party not in default may close this contract in accordance with the requirements of the exchange or association to whose requirements this contract is subject.

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

      For use by a dealer (principal) and his customer covering transactions on a principal basis

      ________________________________________

      Date

      "When, as and if Issued" or "When, as and if Distributed" Contract

      TO___________________________

      I/we have sold to you/purchased from you___________________________shares/par value____________________________________at____________________________________.

      These securities shall be payable and deliverable "when, as and if issued" or "when, as and if distributed", or this contract shall be cancellable in accordance with the requirements of the National Association of Securities Dealers, Inc., its By-Laws, Rules of Fair Practice, Uniform Practice Code, applicable rules and interpretations thereunder and amendments thereof.

      I/we shall have the right to demand deposits according to such requirements. On your failure to comply therewith, we may close the contract in accordance with such requirements.

      ____________________________________

      (Firm Signature)

      Accepted:

      ____________________________________

      (Signature of Customer)

    • 92-50 Procedures Regarding Securities and Exchange Commission Rule 15c2-11 and Schedule H, Section 4 of the NASD® By-Laws

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Government Securities
      Institutional
      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Trading
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      In response to questions by members, issuers, and the legal community, the NASD is issuing this Notice to Members to address frequently raised questions regarding Schedule H, Section 4 of the NASD By-Laws relating principally to compliance with Securities and Exchange Commission (Commission or SEC) Rule 15c2-11. This section of Schedule H is described in Notice to Members 90-40. It requires broker/dealers to submit information to the NASD gathered pursuant to SEC Rule 15c2-11 before initiating or resuming a quotation of a non-Nasdaq over-the-counter equity security in any quotation medium. Section 4 also requires members to specify the basis and factors considered in establishing their initial priced entries for a non-Nasdaq over-the-counter equity security before such entry may be published in any quotation medium. In preparing this Notice, the NASD has received comments from the staff of the Division of Market Regulation of the SEC; however, the views expressed in this Notice represent those of the NASD.

      INTRODUCTION

      SEC Rule 15c2-11 governs the submission and publication of quotations by brokers and dealers for certain non-Nasdaq over-the-counter equity securities. Specifically, the rule applies to a broker/dealer's initiation or resumption of quotations for such securities in any interdealer quotation medium, including the NASD's OTC Bulletin Board" and National Quotation Bureau, Inc.'s "Pink Sheets" ("pink sheets"). Pursuant to the rule, brokers and dealers are required to review and maintain specified information about the issuer of the security before publishing a quotation for that security.

      Unless an exception to Rule 15c2-11 is available, the rule can be satisfied in one of only five ways: (1) the broker/dealer must have in its possession a prospectus specified by Section 10(a) of the Securities Act of 1933 (Securities Act) that has been filed with the Commission and which has been in effect less than 90 calendar days; or (2) the broker/dealer must have a copy of the offering circular provided for under Regulation A of the Securities Act and the effective date must be within the preceding 40 days; or (3) the issuer must be current in its filings with the Commission and the broker/dealer must have in its possession the issuer's latest Form 10-K and all subsequent Form 10-Qs and Form 8-Ks; or (4) the issuer must be exempt from Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) pursuant to Rule 12g3-2(b) and the broker/dealer must have in its possession all the information furnished to the Commission during the issuer's last fiscal year; or (5) the broker/dealer must have in its possession 16 items of information about the issuer, including financial information which shall be reasonably current in relation to the day the quotation is submitted.

      Paragraph (g)(1) of Rule 15c2-11 provides that the required financial information with respect to the issuer will be presumed to be reasonably current, unless the broker/dealer has information to the contrary, if the balance sheet is as of a date less than 16 months before the submission or publication of the quotation; the statements of profit and loss and retained earnings are for the 12 months preceding the date of such balance sheet; and, if such balance sheet is not as of a date less than six months before the submission or publication of the quotation, is accompanied by additional statements of profit and loss and retained earnings for the period from the date of such balance sheet to a date less than six months before the submission or publication of the quotation.

      Information that does not satisfy the time frame of paragraph (g)(1) of Rule 15c2-11, is presumptively not reasonably current. Broker/dealers seeking to rely on information outside of the time frame must affirmatively establish that the financial information is reasonably current.

      Documentation compiled by a member pursuant to Rule 15c2-11 must be filed with the NASD pursuant to Schedule H, Section 4 of the By-Laws together with a completed Form 211 at least three business days prior to entering a quotation in a quotation medium. Upon receipt, the NASD conducts a substantive review of the material and within three business days, notifies the broker/dealer whether the application has cleared such that quotation activity may begin or, alternately identifies deficiencies in the submission which must be resolved prior to a member being permitted to enter a quotation in a quotation medium.

      The following is a compilation of questions and answers relative to SEC Rule 15c2-11, the NASD's OTC Bulletin Board, and Schedule H of the NASD By-Laws.

      QUESTIONS

      Rule 15c2-11, Informational Requirements

      Question #1: What degree of scrutiny must a broker/dealer give the required Rule 15c2-11 documentation prior to submitting the information to the NASD seeking clearance to publish a quotation?
      Answer: Prior to submitting the information to the NASD, a broker/dealer must have a reasonable basis for believing that the information is accurate in all material respects and is obtained from a reliable source.
      Question #2: What steps should a broker/dealer take to have a reasonable basis to believe that the information is accurate in all material respects?
      Answer: A broker/dealer must review the material for obvious errors, internal inconsistencies, and questionable disclosures. This review must be in the context of all other information about the issuer in the broker/dealer's knowledge or possession, including the information required by paragraph (b).
      Question #3: What are the requirements of Rule 15c2-11 paragraph (b)?
      Answer: Paragraph (b) requires a broker/dealer to have in its possession: (1) A record of the circumstances surrounding the quotation request, including the identity of the person for whom the quotation is being submitted, (2) a copy of the trading suspension order or the Commission release announcing the suspension if the security has been suspended by the Commission during the last 12 months, and (3) a copy or written record of other material information, including adverse information, that the broker/dealer becomes aware of prior to publishing a quotation.
      Question #4: What steps should a broker/dealer take to have a reasonable basis to believe that the information is obtained from a reliable source?
      Answer: Generally, a broker/dealer can be satisfied that information is obtained from a reliable source if it is received from the issuer or its agents, or was obtained from an independent information service such as the Commission's public reference room. If a broker/dealer receives information about an issuer from another market maker or someone other than an agent of the issuer, the broker/dealer should verify the validity of the information with the issuer. Agents do not include promoters or others outside the issuer that may have a personal or an indirect interest in the security.
      Question #5: Under what circumstances would a broker/dealer be required to take further steps to have a reasonable basis to believe that the information is accurate in all material respects and the sources of the information are reliable?
      Answer: Ordinarily the broker/dealer need not do any further review unless a potential material deficiency has been detected. Examples of potential material deficiencies are material inconsistencies in the information or between the information and other information in the broker/dealer's possession, a qualified auditor's report, a recently acquired asset that materially enhances the financial condition of the issuer, or a material asset listed on the balance sheet that is unrelated to the issuer's business.
      Question #6: What should a broker/dealer do if a potential material deficiency is detected in the documents?
      Answer: A broker/dealer's specific efforts to satisfy itself with respect to the accuracy of the information if a potential material deficiency has been detected will vary with the circumstances, and may require the broker/dealer to obtain additional information or seek to verify existing information. For example, the broker/dealer may be satisfied that the information is correct after questioning the issuer, or the broker/dealer may need to consult an independent source, such as an attorney or accountant. Regardless of the methodology used to review a potential material deficiency, members are required to maintain in their records any other material information (including adverse information) regarding the issuer which comes to the member's knowledge or possession before the publication or submission of the quotation. Members are also strongly urged to document the manner in which the material deficiencies are resolved.
      Question #7: May a broker/dealer satisfy its obligation to review the required information and have a reasonable belief as to its accuracy and the reliability of its source solely because its documentation has been reviewed by the NASD?
      Answer: No. A broker/dealer must independently satisfy the requirements of Rule 15c2-11. Clearance by the NASD to initiate quotations in a quotation medium is not a substitute for this review.
      Question #8: Are a wholesale market maker's obligations under Rule 15c2-11 any different than a retail market maker's obligations?
      Answer: No. Commission Release No. 34-29094 states that the rule is directed at the fraudulent, deceptive, or manipulative potential of a broker/dealer's quotations, and does not focus on whether the broker/dealer also engages in retail activity.
      Question #9: Can a supplemental prospectus satisfy Rule 15c2-11(a)(1)?
      Answer: Yes. As long as the supplemental prospectus is filed pursuant to Section 10(a) of the Securities Act and includes sufficient information about the issuer to enable the broker/dealer to satisfy its obligation under Rule 15c2-11, i.e., it contains the types of information described in Rule 15c2-11(a)(5). However, if the issuer meets the requirements of Rule 15c2-11(a)(3), the broker/dealer must obtain the documents required by Rule 15c2-11(a)(3).
      Question #10: Is the issuer required to be current in its filings with the Commission in order for the broker/dealer to utilize Rule 15c2-11(a)(3)?
      Answer: Yes. Issuers that meet the requirements of Rule 15c2-11(a)(3) are those issuers that report to the Commission and are current in their reports. The broker/dealer must have the issuer's latest Form 10-K and all subsequent Form 10-Qs and those Form 8-Ks filed within five business days prior to publication or submission of the quotation. If the issuer has not filed a Form 10-K, the broker/dealer must have a copy of the prospectus, which has been in effect less than 16 months, and all subsequent Form 10-Qs and Form 8-Ks. If a filing is due at the Commission prior to the NASD's clearance of the Form 211 application, that filing must also be submitted with the application.
      Question #11: What happens if an issuer is not current in its filings with the Commission?
      Answer: If the issuer is not current in its filings with the Commission, the broker/dealer can seek to satisfy another subsection of the rule. Usually this would be Rule 15c2-11(a)(5). However, the fact that the issuer is not current in its filings may bear upon the determination of whether the available information is materially accurate.
      Question #12: Can banks that file Form 10-Ks and Form 10-Qs with the Office of Thrift Supervision or other bank regulators satisfy Rule 15c2-11(a)(3)?
      Answer: If the reports are filed pursuant to Section 13 or 15(d) of the Exchange Act with bank regulators, the reports will satisfy Rule 15c2-11(a)(3).
      Question #13: What information is required to be submitted under Rule 15c2-11(a)(4) relating to certain foreign issuers which are exempt from the periodic reporting requirements of Section 12(g) of the Exchange Act?
      Answer: The broker/dealer is required to submit all the information that the issuer has furnished during its past fiscal year to the Commission in order for the issuer to maintain its Rule 12g3-2(b) exemption.
      Question #14: Must the financial information required under Rule 15c2-11(a)(5) be independently audited?
      Answer: No. Rule 15c2-11(a)(5) does not require audited financials. However, a broker/dealer would ordinarily be required to review unaudited financial statements more closely than if the statements were independently audited. Nevertheless, simply because the statements have been audited, a broker/dealer cannot avoid its responsibility to review the financial statements in order to have a reasonable basis to believe that the information is accurate.
      Question #15: If an issuer has filed a Form 10-K or a prospectus with the Commission and the issuer is current in its reports to the Commission, can the broker rely on Rule 15c2-11(a)(5)?
      Answer: No. If an issuer has filed a 10-K or prospectus with the Commission and is current in its reports, the broker must file under, and have in its possession the information required by, Rule 15c2-11(a)(3).
      Question #16: What are the requirements for a broker/dealer if the issuer or its predecessor has been the subject of a Commission trading suspension during the preceding year?
      Answer: An SEC trading suspension should alert the broker/dealer to the possibility that information in its possession concerning the issuer may no longer be current or accurate. The broker/dealer must be particularly cautious when seeking to reinstate quotations following an SEC trading suspension. The member must obtain a copy of the Commission trading suspension order or the Commission release announcing the trading suspension. A broker/dealer should, at a minimum, receive assurances or additional information with respect to matters cited in the suspension order or with respect to other matters affecting the broker/dealer's reasonable belief as to the accuracy of the information. Reliance on new information or assurances from prior sources of information in these circumstances, however, requires caution. In exceptional cases, where the source is unable to provide reasonable assurances about the reliability of the information, consultation with an independent accountant or attorney may be warranted. All information gathered in the broker/dealer's investigation of the issues must accompany the Form 211 application.

      Rule 15c2-11 Exceptions

      Question #17: Are there any exceptions from the informational requirements of Rule 15c2-11?
      Answer: Yes. If a broker/dealer can meet one of the exceptions of Rule 15c2-11, it is not required to maintain or submit to the NASD any documents required by Rule 15c2-11. These exceptions primarily relate to instances where a broker/dealer wishes to quote a security that: is traded on a national securities exchange in the United States; represents unsolicited customer interest; has been the subject of regular and continuous quotations for the past 30 days; or is traded on Nasdaq.
      Question #18: When does the Rule 15c2-11(f)(1) "exchange" exception apply?
      Answer: The exchange exception applies to securities that are traded on a United States national securities exchange on the same day or the business day prior to the day the application is made to the quotation medium.
      Question #19: If the common stock of an issuer trades on the New York Stock Exchange, are the warrants of the same issuer exempt from Rule 15c2-11?
      Answer: No. The exception relates only to specific securities and not to the issuer. Each security must independently meet the requirements of the exception.
      Question #20: If trading in a security is halted or suspended on Nasdaq or an exchange, but the security has not been officially delisted from Nasdaq or the exchange, can it be listed on the OTC Bulletin Board?
      Answer: No. The OTC Bulletin Board is only for non-Nasdaq, non-U.S. exchange-listed securities. Dual listing is not permitted. Until a security is officially delisted from an exchange or Nasdaq, it cannot be entered on the OTC Bulletin Board.
      Question #21: If the broker/dealer is claiming the Rule 15c2-11(f)(2) "unsolicited customer interest" exception of Rule 15c2-11, can the broker/dealer publish quotations for the security in a quotation medium for its own account?
      Answer: No. If the broker/dealer claims the unsolicited customer interest exception, it can only publish or submit a quotation for that customer account. If the broker/dealer wishes to publish or submit a quotation for its own account or any other accounts, it must comply with Rule 15c2-11. Paragraph (f)(2) of Rule 15c2-11 does not apply to a quotation consisting of both a bid and an offer, each at a specified price, unless the quotation medium specifically identifies the quotation as representing a customer's unsolicited indication of interest.
      Question #22: Will the NASD be monitoring the broker/dealer's compliance with the unsolicited customer interest exception?
      Answer: Yes. The NASD monitors all aspects of broker/dealer compliance with Rule 15c2-11, including a quotation utilizing the unsolicited customer interest exception. The NASD may require the broker/dealer to produce its trading records and other documents to determine whether the broker/dealer traded for any account other than the indicated customer.
      Question #23: What are the requirements of Rule 15c2-11(f)(3), the "piggyback" exception?
      Answer: If a broker/dealer is relying on the Rule 15c2-11(f)(3) exception, the security must be quoted in the same interdealer quotation medium as the intended quotation during the past 30 calendar days, and that during those 30 days the security had to be quoted on at least 12 days without more than four consecutive business days without quotations.
      Question #24: Do "name only" quotations satisfy the piggyback exception requirement that the security be quoted in the quotation medium?
      Answer: Yes. The information requirements of Rule 15c2-11 apply to name only as well as priced quotations. Both types of quotations can be used to satisfy the piggyback exception. It should be noted, however, that each broker/dealer submitting a quotation must satisfy the informational requirements of Rule 15c2-11 until all of the requirements of the piggyback exception, including the 30-day quotation period, have been satisfied.
      Question #25: What happens when a security is no longer quoted by a broker/dealer in the quotation medium?
      Answer: If a security is not quoted by any broker/dealer for a period of more than 4 business days, the security no longer qualifies for the piggyback exception. A broker/dealer would be required to comply with Rule 15c2-11 before it could initiate or resume quotation of the security.
      Question #26: What constitutes a "business day" for purposes of Rule 15c2-11?
      Answer: For purposes of Rule 15c2-11, a "business day" is defined by reference to the quotation medium to which a broker/dealer submits the quotation. Any day that the quotation medium accepts and disseminates quotations would constitute a "business day" under Rule 15c2-11.
      Question #27: Must a broker/dealer quote a security for an entire "business day" to qualify for the "piggyback" exception contained in paragraph (f)(3)ofRulel5c2-11?
      Answer: Under the "piggyback" exception, a security will be deemed to have been quoted on a business day where a broker/dealer has continuously quoted a security for all or a substantial portion of that day. The existence of closing quotations on the OTC Bulletin Board may be used by the NASD to create a rebuttable presumption that the broker/dealer continuously quoted a security for a substantial portion of the business day.
      Question #28: If a security qualifies for the piggyback exception in one quotation medium, does it meet the piggyback exception for other quotation mediums? For example, if a security is quoted in the OTC Bulletin Board, can a market maker quote the security in the "pink sheets" without filing a Form 211 application?
      Answer: No. The staff of the SEC takes the position that the piggyback exception does not transfer from one quotation medium to another. Thus, quotations for a security in the OTC Bulletin Board may not be used to satisfy the piggyback requirements for the "pink sheets."
      Question #29: What are the requirements of Rule 15c2-11(f)(5), the "Nasdaq" exception?
      Answer: In order for a broker/dealer to rely on the Nasdaq exception, the security must be authorized for quotation on Nasdaq and the authorization must not be suspended, terminated, or prohibited.
      Question #30: Can a broker/dealer publish a quotation on the OTC Bulletin Board for a security that is currently traded on Nasdaq?
      Answer: No. The OTC Bulletin Board does not allow quotations for Nasdaq securities.
      Question #31: If the common stock and units of an issuer are already quoted on the OTC Bulletin Board, does a Form 211 application need to be submitted for the warrants of the same issuer?
      Answer: Yes. Rule 15c2-11 applies to securities, not issuers. Quotations for the common stock and units may be in compliance with Rule 15c2-1 1, but that does not qualify any other securities of the issuer. Accordingly, a completed Form 211 and the Rule 15c2-11 information would have to be submitted for the warrants. However, if the broker/dealer has previously submitted documents relating to the issuer that continue to meet the requirements of Rule 15c2-11, it need not refile identical documents. The broker/dealer need only submit a completed Form 211 alone or with any additional documents needed to comply with Rule 15c2-11.

      Schedule H and OTC Bulletin Board Questions

      Question #32: What must be included in the basis and factors for a broker/dealer's initial priced entry?
      Answer: A broker/dealer's basis and factors should relate to the price that the broker/dealer is proposing. The statement on the Form 211 must be concise and directly related to the proposed bid and/or offer. The basis and factors should not be broad generalized statements but should articulate how the priced quotation was determined, including the factors taken into consideration. The NASD is not conducting merit review but must be able to clearly understand the basis for the initial priced entry.
      Question #33: If a broker/dealer's Rule 15c2-11 documentation has been cleared by the NASD, but the broker/dealer did not request clearance for a priced quotation, is the broker/dealer required to file anything additional when it changes its unpriced quotation to a priced quotation?
      Answer: Yes. The broker/dealer must supplement its original application with the Form 211 indicating the intended priced entry and the basis and factors even if other broker/dealers are publishing priced quotations for the security or a piggyback exception has become available.
      Question #34: Can Form 211 applications be faxed to the NASD?
      Answer: No. The original Form 211 must be mailed and requires original signatures.
      Question #35: If a security on the OTC Bulletin Board appears in the "eligible" status, can a broker/dealer enter quotations without filing a Form 211 application?
      Answer: No. The "eligible" status on the OTC Bulletin Board indicates that another broker/dealer has been cleared to quote the security, but the piggyback exception of Rule 15c2-11 has not been met. When the status for a security on the OTC Bulletin Board is "active" a broker/dealer may enter quotes without filing the Form 211 application.
      Question #36: What are the filing requirements of Schedule H if another security of the issuer is trading on Nasdaq, i.e., if a broker/dealer wishes to quote the warrants of an issuer that has a common stock listed on Nasdaq?
      Answer: Since an issuer that has a security trading on Nasdaq will be a reporting company, the broker/dealer need only submit the Form 211 and indicate on the Form 211, under Rule 15c2-11(a)(3), the reports that the broker/dealer has in its possession. These reports would include the issuer's latest Form 10-K and all subsequent Form 10-Qs and Form 8-Ks. In this case the Form 211 can be faxed to the NASD.
      Question #37: Is there an expedited procedure for listing recently delisted Nasdaq securities on the OTC Bulletin Board?
      Answer: Yes. On February 28, 1992, the SEC granted an exemption from Rule 15c2-1 1 for securities that will be delisted from Nasdaq due to the revised listing and maintenance requirements for the Nasdaq Small-Cap Market.SM When these securities are delisted, they will automatically be eligible to quote on the OTC Bulletin Board or any other quotation medium the next business day without the filing of a Form 211, as long as the following requirements are met:
      (1) The security must have been traded on Nasdaq for the past 30 days;
      (2) The issuer must not be subject to bankruptcy proceedings;
      (3) The issuer must be current in its SEC reporting requirements; and
      (4) The broker/dealer relying on this exception must have been a market maker in the subject security during the 30 days prior to delisting.
      Question #38: Can more than one security of an issuer be included on a Form 211?
      Answer: Yes. More than one security for a single issuer may be requested on a single Form 211.
      Question #39: Can a broker/dealer accept payment to make a market in an issuer's securities?
      Answer: No. A market maker cannot accept any form of compensation, including cash, securities, products, or services, for the purposes of making a market, to cover out-of-pocket expenses for making a market, or for submitting an application to make a market in an issuer's securities. This activity was addressed in Notice to Members 75-16 in 1975.
      Question #40: Can a broker/dealer rely on the inside market (high bid, low ask prices) calculated on the OTC Bulletin Board in executing retail transactions?
      Answer: No. Broker/dealers cannot execute transactions in non-Nasdaq over-the-counter equity securities based on the prices of any non-validated quotations. Members should be aware that the best indication of the prevailing market price is the actual trades that are occurring in the marketplace and not the quotations appearing on the OTC Bulletin Board or other quotation mediums. As the Commission stated in the leading decision of Alstead, Dempsey & Company, Incorporated (SEC Release No. 34-20825, April 5, 1984): "By their very nature, quotations only propose a transaction: they do not reflect the actual result of a completed arms-length sale. Thus, as we have frequently pointed out, quotations for obscure securities with limited inter-dealer trading activity may have little value as evidence of the current market." (See Notice to Members 92-16).
      Question #41: If the OTC Bulletin Board displays three firm quotations, is a broker/dealer required by Article III, Sections 1 and 21 (b) of the NASD Rules of Fair Practice, to call the market makers to verify their quotations appearing on the OTC Bulletin Board?
      Answer: No. The broker/dealer does not have to call the three market makers to verify the firm quotations that are displayed on the screen. A broker/dealer need only note on the order ticket the identity of the broker/dealers and the firm quotations obtained from the OTC Bulletin Board.
      Question #42: If the OTC Bulletin Board has one firm quote and two name only quotations, is the broker/dealer required to call the name-only market makers to determine their quotations?
      Answer: Yes. If there are fewer than three firm quotations on the OTC Bulletin Board, the broker/dealer must call the name-only market makers to obtain the three required quotations.
      Question #43: What is the broker/dealer's obligation if the OTC Bulletin Board has fewer than three market makers listed?
      Answer: The broker/dealer must check the "pink sheets" or any other quotation medium for additional market makers. A market maker in these quotation mediums must be contacted to obtain its current quotations. If three market makers cannot be found, then the broker/dealer need only contact the one or two that were found.
      Question #44: If the OTC Bulletin Board has three non-firm priced quotations in a foreign security, must a broker/dealer contact each market maker?
      Answer: Yes. Non-firm quotations on the OTC Bulletin Board cannot be used to satisfy the requirement that quotations be obtained from other market makers.
      Question #45: Does Rule 15c2-1 1 and Schedule H apply to secondary market transactions in direct participation program securities?
      Answer: Yes. Both Rule 15c2-11 and all of the sections of Schedule H apply. Pursuant to Schedule H, Section 4, members are required to submit their Rule 15c2-11 information to the NASD prior to publishing quotations. Moreover, members must report their volume in secondary market transactions, and certain pricing information in direct participation program trading as required by Schedule H, Section 2 of the NASD By-Laws. For more information on trade reporting for these securities, please call Automated Reports at (301) 590-6887. In addition, a separate Notice will be issued addressing this subject.
      Question #46: Where can a broker/dealer get more information on the subjects discussed in this Notice?
      Answer: All interested broker/dealers should read Rule 15c2-11, Commission Release No. 34-29094, Schedule H, Section 4 of the NASD By-Laws, and Notice to Members 90-40. Additionally, the Compliance Division's OTC Compliance Unit (202) 728-8149 is available throughout the business day and by voice mail during non-business hours to respond to inquiries or to direct the caller to the appropriate party. We encourage members to call with their questions and inquiries.

      For more information contact Daniel M. Sibears, Director, Compliance Division, at (202) 728-8959 or Ken Worm, Manager, OTC Compliance Unit, at (202) 728-8149. Also, broker/dealers with questions regarding Rule 15c2-11 may contact the Office of Trading Practices, Division of Market Regulation, Securities and Exchange Commission at (202) 272-2848.

    • 92-49 Nasdaq National Market Additions, Changes, and Deletions as of August 25, 1992

      SUGGESTED ROUTING:*

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

      As of August 25, 1992, the following 36 issues joined the Nasdaq National Market, bringing the total number of issues to 2,927:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      HEAT

      Petroleum Heat and Power Co., Inc. (Cl A)

      7/29/92

      1000

      SFTIF

      SOFTIMAGE Inc.

      7/29/92

      500

      SPLKA

      Jones Spacelink, Ltd. (Cl A)

      7/30/92

      500

      CDATV

      Control Data Systems, Inc. (WI)

      8/3/92

      1000

      HITK

      Hi-Tech Pharmacal Co., Inc.

      8/3/92

      1000

      BIIEF

      BII Enterprises Inc.

      8/4/92

      1000

      COLB

      Columbia Banking System, Inc.

      8/4/92

      200

      CREAF

      Creative Technology Ltd.

      8/4/92

      1000

      GENZZ

      Genzyme Corporation (12/31/96 Wts)

      8/4/92

      1000

      PEAK

      Peak Technologies Group, Inc. (The)

      8/4/92

      1000

      USBCP

      U.S. Bancorp (Pfd)

      8/4/92

      1000

      MCSY

      Medic Computer Systems, Inc.

      8/5/92

      1000

      CNIT

      CENIT Bancorp, Inc.

      8/6/92

      500

      EZCOF

      Ezcony Interamerica Inc.

      8/6/92

      500

      ARBH

      Arbor National Holdings, Inc.

      8/7/92

      1000

      BNYN

      Banyan Systems Incorporated

      8/7/92

      200

      KWIC

      Kennedy-Wilson, Inc.

      8/7/92

      1000

      PAWN

      First Cash, Inc.

      8/10/92

      1000

      ENVG

      Envirogen, Inc.

      8/11/92

      500

      TOPS

      Tops Appliance City, Inc.

      8/11/92

      500

      VACI

      Value-Added Communications, Inc.

      8/12/92

      1000

      BTOP

      Bestop, Inc.

      8/13/92

      1000

      CSCI

      Cryenco Sciences, Inc. (Cl A)

      8/13/92

      500

      AMRS

      American Residential Holdings, Inc.

      8/14/92

      1000

      ALDN

      Alden Press Company (The)

      8/18/92

      1000

      ALHCP

      American Life Holding Company (Pfd)

      8/18/92

      1000

      HMCI

      HomeCorp, Inc.

      8/18/92

      200

      SMTS

      Somanetics Corporation

      8/18/92

      1000

      SMTSZ

      Somanetics Corporation (Wts)

      8/18/92

      500

      TECH

      Techne Corporation

      8/18/92

      1000

      THRX

      Theragenics Corporation

      8/18/92

      1000

      DANS

      Danskin, Inc.

      8/19/92

      1000

      LAYN

      Layne, Inc.

      8/20/92

      1000

      LQMD

      LifeQuest Medical, Inc.

      8/20/92

      500

      PACO

      Paco Pharmaceutical Services, Inc.

      8/20/92

      500

      ABRS

      Amber's Stores, Inc.

      8/21/92

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since July 28, 1992:

      New/Old Symbol

      New/Old Security

      Date of Change

      HOLD/CMIN

      American Holdings Inc./Computer Memories Incorporated

      7/31/92

      GIES/REUT

      Green Isle Environmental Services, Inc./Reuter, Inc.

      8/3/92

      AMSR/AMSR

      Amserv Healthcare Inc./Amserv Inc.

      8/13/92

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      GCRA

      CNL Realty Investors, Inc.

      7/31/92

      GOAL

      Goal Systems International Inc.

      8/3/92

      KMCI

      KMC Enterprises, Inc.

      8/3/92

      APWRA

      Applied Power, Inc. (Cl A)

      8/4/92

      WECO

      Washington Energy Company

      8/4/92

      MAJR

      Major Realty Corporation

      8/6/92

      LFSA

      First Federal Savings and Loan Association of Lenawee County

      8/10/92

      MSYSW

      Medical Technology Systems, Inc. (8/15/92 Wts)

      8/10/92

      NLON

      New London Inc.

      8/10/92

      HIVT

      Health Insurance of Vermont, Inc.

      8/11/92

      ROIL

      Reserve Industries Corporation

      8/11/92

      SONNF

      Sonora Gold Corporation

      8/11/92

      TRTI

      Transtech Industries, Inc.

      8/11/92

      BRJS

      Brajdas Corporation

      8/12/92

      CLEA

      Chemical Leaman Corporation

      8/14/92

      TSQM

      T2 Medical, Inc.

      8/14/92

      PHPH

      PHP Healthcare Corporation

      8/17/92

      PACCA

      Provident Life and Accident Insurance Company of America (Cl A)

      8/20/92

      PACCB

      Provident Life and Accident Insurance Company of America (Cl B)

      8/20/92

      WEXC

      Wolverine Exploration Company

      8/20/92

      WEXCP

      Wolverine Exploration Company (Pfd)

      8/20/92

      WEXCW

      Wolverine Exploration Company (Wts)

      8/20/92

      FSKY

      First Security Corporation of Kentucky

      8/24/92

      VMTGZ

      Banyan Mortgage Investors L.P. II

      8/25/92

      WCAT

      WICAT Systems, Inc.

      8/25/92

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

    • 92-48 Columbus Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

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

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

      Trade Date

      Settlement Date

      Reg. T Date*

      October 1

      8

      12

      2

      9

      13

      5

      13

      14

      6

      14

      15

      7

      15

      16

      8

      16

      19

      9

      19

      20

      12

      19

      21

      13

      20

      22

      Note: October 12, 1992, is considered a business day for receiving customer payments under Regulation T of the Federal Reserve Board.

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

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

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (212) 858-4341.*Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(1), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 92-47 The Role of the NASD's Standing Committees

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Government Securities
      Institutional
      Internal Audit
      Legal & Compliance
      Municipal
      Mutual Fund
      Operations
      Options
      Registration
      Research
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The work of the NASD's Board of Governors standing committees is essential to the success of the NASD's programs and the fulfillment of its purposes. Every year, more than 200 individuals with expertise in various aspects of the securities business contribute their time and serve on one or more of these committees. This Notice includes a brief overview of the role and workings of these committees as well as the process for selecting committee members.

      OVERVIEW

      The committees of the Board of Governors are essential to developing NASD policy, advising the Board, and representing the many constituencies of the NASD and its subsidiaries. The countless hours devoted by industry and other volunteer members of these committees contribute much to the success and effectiveness of the NASD.

      The Board currently has 16 standing committees. A list of these committees along with a brief description of their primary functions is included with this Notice. In addition to these committees, ad hoc (or "special") committees or task forces are often established by the Board to address transitory issues and issues that require special expertise or that cannot, as a practical matter, be addressed by standing committees.

      Committee size varies and the majority of the committees have at least two Governors who act as liaisons with the Board. This structure facilitates broad industry participation and provides a mechanism for ongoing communication with the NASD Board. It also brings important segments of the industry into the NASD process.

      SELECTION PROCESS

      Under NASD By-Laws, the Board has broad discretion to establish committees. When selecting persons to serve on committees, a Selection Committee consisting of the President and the incoming and retiring Chairman of the Board reviews current committee rosters. This review begins after election of the Chairman of the Board for the coming year each November.

      The Selection Committee recommends to the Board a slate of nominees for each committee. Those nominated have the expertise to address the issues before the committee and represent the public and the participants in the securities industry affected by the work of the committee. To carry out its role, the Selection Committee takes into consideration:

      • Each committee's particular needs including the number of members, committee functions, short- and long-term issues to be addressed, and other external factors that would have a bearing on the group's actions.


      • Recommendations by the various committee chairmen and staff liaisons based on their observations of the participation, attendance, and length of service of each committee member.


      • Suggestions received from district committee chairmen and district directors concerning current and former members of the district committees with expertise in the areas covered by particular committees.


      • Requests from Governors to serve on particular committees.


      • Correspondence and biographical data received throughout the year from or about individuals who wish to serve on the committees.

      The Selection Committee presents its recommended committee roster to the Board for approval at the January meeting.

      ENCOURAGING BROADER PARTICIPATION

      The NASD believes that adding individuals to the rosters who have not previously served on committees will enhance the NASD's vitality. Bringing new people into the work of the committees subjects established points of view to continuing scrutiny, accords representation to a broad spectrum of the securities industry and the public, and adds greater depth to the pool of qualified candidates for future Board service.

      Service on an NASD committee is a privilege afforded to those who have demonstrated expertise in the area of the securities industry that the committee represents. Although expertise is the most important criteria for committee service, it is not the only one. Often, committee members must expend significant amounts of time and effort to properly discharge their duties. This can frequently create challenges as committee members try to fulfill their obligations to the committee while simultaneously meeting the continuing demands of their careers.

      For these reasons, persons thinking about offering their services to one or more of the NASD committees listed below should consider not only their level of expertise in the subject matter but also the effect such service will have on their current and future schedules. If, after careful thought, an individual would like to learn more about service on a committee, simply contact the staff liaison listed after the committee.

      Corporate Financing Committee develops NASD policy relating to public equity and debt financing; and considers the fairness and reasonableness of underwriting compensation and arrangements proposed by members. Contact Charles Bennett at (202) 728-8253.

      Direct Participation Programs/Real Estate Committee reviews and develops regulations specifying standards of fairness and reasonableness that members must satisfy when distributing direct participation programs; and regulations that such programs sponsored or distributed by members must satisfy. Contact Charles Bennett at (202) 728-8253.

      Fixed Income Securities Committee monitors developments and advises the Board on matters relating to corporate, municipal, and government fixed-income securities. Contact Richard G. Ketchum at (202) 728-8020.

      Institutional Investors Committee advises the staff and Board on matters concerning investments, investment strategies, the workings of institutional investors, and how the Nasdaq market can better serve the needs of these investors. Contact S. William Broka at (202) 728-8050.

      Insurance Affiliated Members Committee provides the Board with expertise, advice, and recommendations on matters concerning insurance company members, insurance products, and the insurance business. Contact R. Clark Hooper at (202) 728-8330.

      International Committee concerns itself with the activities of members in international securities in U.S. markets and their activities in U.S. securities in international markets. Areas addressed include trading and settlement procedures; U.S. and other national government laws; regulations and reporting requirements; and reciprocal dealer access to the international markets. Contact John T. Wall at (202) 728-8200.

      Investment Companies Committee considers a broad range of issues relating to the distribution of investment company shares; makes recommendations to the Board for new rules, amendments to existing rules, comments on SEC proposals; and provides interpretive advice to members and their staff. Contact R. Clark Hooper at (202) 728-8330.

      Issuer Affairs Committee, comprised of senior officials of Nasdaq listed companies, addresses issues related to listing requirements, investor relations and policy issues affecting Nasdaq listed companies. Contact Glenn C. Faulkner at (202) 728-8275.

      Marketing Committee advises the staff on developing and maintaining a comprehensive marketing plan and program for the NASD and its subsidiaries. The committee also advises the staff on public relations programs directed to key publics that elevate the prestige and image of the NASD and The Nasdaq Stock Market,SM and promote maximum awareness and greater understanding of their business and regulatory activities. Contact L. Brian Holland at (202) 728-8116.

      Membership Committee recommends various categories of registration to the Board, develops qualification examinations for Board-approved categories of registration; provides ongoing industry oversight to the NASD's qualification examination program; recommends actions to the Board in areas related to registration and qualification such as membership and training standards; and reviews current registration and licensing procedures of self-regulatory organizations, state, and other government jurisdictions. Contact Frank J. McAuliffe at (301) 590-6694.

      Nasdaq Hearing Review Committee reviews Nasdaq qualification matters appealed to or called for review by the Board and considers policy issues relating to Nasdaq issuer qualifications. Contact T. Grant Callery at (202) 728-8285.

      Nasdaq Qualifications Committee monitors qualification standards, both for initial inclusion and maintenance, for The Nasdaq Stock Market. Contact Donald H. Bosic at (202) 728-8043.

      National Arbitration Committee, composed of individuals from both the general public and the securities industry, monitors the activities of the NASD's arbitration forum; develops policies and procedures under which that forum operates; recommends changes in the NASD Code of Arbitration Procedure; and supplements the national list of arbitrators with qualified persons. Contact Deborah Masucci at (212) 858-4488.

      Operations Committee recommends policy, rules, and interpretations to the Board on uniform practice matters; reviews and makes recommendations on clearing policies and other back-office-related areas; and monitors developments and makes recommendations on financial responsibility and credit rules and regulations. Contact Thomas R. Cassella at (202) 728-8237.

      State Liaison Committee serves as the focal point for all NASD dealings with state legislatures, state securities regulators and the North American Securities Administrators Association, Inc. Contact Frank J. Formica at (202) 728-8289.

      Trading Committee, which is primarily involved in issues relating to the trading of securities in the Nasdaq market and the over-the-counter market, develops recommendations for consideration by the Board of Governors on issues that impact the trading community. It also addresses and advises the Board on policy issues related to rule changes and system enhancements for the Small Order Execution System (SOES)SM; designs and develops rules and regulations on the trading of listed options over-the-counter; and is responsible for the development of a Nasdaq Options program to facilitate options trading on Nasdaq-quoted securities. Contact Glen R. Shipway at (212) 858-4448.

    • 92-46 Nasdaq National Market Additions, Changes, and Deletions as of July 28, 1992

      SUGGESTED ROUTING:*

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

      As of July 28, 1992, the following 48 issues joined the Nasdaq National Market, bringing the total number of issues to 2,916:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CTEC

      Cholestech Corporation

      6/26/92

      1000

      SBUX

      Starbucks Corporation

      6/26/92

      1000

      WCBI

      Westco Bancorp, Inc.

      6/26/92

      1000

      MTSI

      MicroTouch Systems, Inc.

      6/30/92

      1000

      NCBRP

      National Community Banks, Inc. (Pfd)

      6/30/92

      1000

      ALCC

      Allied Capital Commercial Corporation

      7/1/92

      1000

      BBIOY

      British Bio-technology Group pic

      7/1/92

      500

      CFBC

      CF Bancorp, Inc.

      7/1/92

      500

      CNTBY

      Cantab Pharmaceuticals pic

      7/1/92

      1000

      DRAI

      Data Research Associates, Inc.

      7/1/92

      1000

      FMPO

      FM Properties Inc.

      7/1/92

      1000

      FFDP

      FirstFed Bancshares, Inc.

      7/1/92

      1000

      OSBF

      OSB Financial Corp.

      7/1/92

      200

      SBRNP

      SANBORN INC. (Pfd)

      7/2/92

      1000

      SBRNZ

      SANBORN INC. (Cl A Wts)

      7/2/92

      1000

      SEMIW

      All American Semiconductor, Inc. (Cl A Wts)

      7/6/92

      500

      SEMIZ

      All American Semiconductor, Inc. (Cl B Wts)

      7/6/92

      500

      TSINW

      TSI Corporation (Wts)

      7/6/92

      500

      HNFC

      Hinsdale Financial Corporation

      7/7/92

      1000

      FISH

      Small's Oilfield Services Corp.

      7/7/92

      200

      FISHW

      Small's Oilfield Services Corp. (Wts)

      7/7/92

      200

      RCOM

      Regal Communications Corporation

      7/7/92

      1000

      ABCI

      Allied Bank Capital, Inc.

      7/9/92

      200

      ARGS

      Argus Pharmaceuticals, Inc.

      7/10/92

      1000

      EISI

      Electronic Information Systems, Inc.

      7/10/92

      1000

      FSLA

      First Savings Bank, SLA

      7/10/92

      200

      FFBA

      First Federal Savings Bank Of Colorado

      7/14/92

      200

      ABCW

      Anchor BanCorp Wisconsin, Inc.

      7/16/92

      1000

      EAGL

      Eagle Hardware & Garden, Inc.

      7/16/92

      1000

      WIRE

      Encore Wire Corporation

      7/16/92

      1000

      MEDR

      Medrad, Inc.

      7/16/92

      500

      ZOLL

      Zoll Medical Corporation

      7/16/92

      1000

      AMPXA

      Ampex Incorporated (Cl A)

      7/17/92

      1000

      BLSAP

      Bolsa Chica Company (The) (Pfd)

      7/17/92

      1000

      IRPPF

      International Petroleum Corporation

      7/17/92

      1000

      MSBK

      Mutual Savings Bank, f.s.b.

      7/17/92

      1000

      COOP

      Cooperative Bank for Savings, Inc.

      7/21/92

      200

      HISS

      HealthCare Imaging Services, Inc.

      7/21/92

      1000

      HISSW

      HealthCare Imaging Services, Inc. (Wts)

      7/21/92

      1000

      MFCB

      Michigan Financial Corporation

      7/21/92

      500

      PURT

      Pure Tech International, Inc.

      7/21/92

      1000

      SWBC

      Sterling West Bancorp

      7/21/92

      500

      STRM

      StrataCom, Inc.

      7/21/92

      1000

      FPNX

      First Pacific Networks, Inc.

      7/22/92

      1000

      TWFSP

      TW Holdings, Inc. (Pfd)

      7/22/92

      200

      PYXS

      Pyxis Corporation

      7/23/92

      1000

      MEGF

      Megafoods Stores, Inc.

      7/24/92

      1000

      BSBC

      Branford Savings Bank

      7/28/92

      500

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since June 25, 1992:

      New/Old Symbol

      New/Old Security

      Date of Change

      ATLI/WMRK

      Advanced Technology Laboratories, Inc./Westmark International, Inc.

      6/29/92

      BUTL/NAVI

      Butler International, Inc./North American Ventures, Inc.

      6/29/92

      ICFI/ICFIA

      ICF International, Inc./ICF International, Inc. (Cl A)

      6/29/92

      EFSB/EFSB

      Elmwood Bancorp, Inc./Elmwood Federal Savings Bank

      7/1/92

      SCBC/FSFC

      Security Capital Bancorp/First Security Financial Corp.

      7/1/92

      FFSB/FFSB

      FF Bancorp, Inc./First Federal Savings Bank of New Smyrna

      7/8/92

      NCELW/NCELW

      Nationwide Cellular Service, Inc. (10/29/92 Wts)/Nationwide Cellular Service, Inc. (7/15/92 Wts)

      7/13/92

      SHOEZ/SHOEZ

      Millfeld Trading Co., Inc. (7/24/97 Wts)/Millfeld Trading Co., Inc. (7/22/92 Wts)

      7/14/92

      BLSA/HENP

      Bolsa Chica Company (The)(Cl A)/Henley Properties, Inc. (Cl A)

      7/17/92

      TUSC/TUSC

      Tuscarora Incorporated/Tuscarora Plastics Inc.

      7/20/92

      GCRA/GCRA

      CNL Realty Investors, Inc./Golden Corral Realty Corp.

      7/21/92

      CRVL/FORT

      CorVel Corp./FORTIS Corporation

      7/27/92

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      FRBK

      Fairfield First Bank and Trust Company

      6/30/92

      GBYLF

      Giant Bay Resources Ltd.

      6/30/92

      INRD

      INRAD Inc.

      6/30/92

      MIPS

      MIPS Computer Systems, Inc.

      6/30/92

      OWWH

      OW Office Warehouse, Inc.

      6/30/92

      OCGI

      Omni Capital Group, Inc.

      7/1/92

      RVAC

      Royal Appliance Mfg. Co.

      7/1/92

      FBTC

      FB & T Corporation

      7/2/92

      MORF

      Mor-Flo Industries, Inc.

      7/2/92

      SMCR

      Summcorp

      7/2/92

      PFLY

      Polifly Financial Corporation

      7/7/92

      STUH

      Stuart Hall Company, Inc.

      7/9/92

      PSYSE

      Programming and Systems, Inc.

      7/10/92

      TLMD

      Telemundo Group, Inc.

      7/10/92

      ANSY

      American Nursery Products, Inc.

      7/13/92

      IMGE

      IMNET, Inc.

      7/13/92

      NYMG

      NYMAGIC, Inc.

      7/13/92

      SMET

      SiMETCO, Inc.

      7/13/92

      NUCOL

      Nucorp, Inc. (Paired Wts)

      7/15/92

      NUCOW

      Nucorp, Inc. (Cl C Wts)

      7/15/92

      BAMI

      Basic American Medical, Inc.

      7/16/92

      HENG

      Henley Group, Inc. (The)

      7/17/92

      ASHBY

      Automated Security (Holdings) PLC

      7/22/92

      CGNEP

      Calgene, Inc. (Pfd)

      7/22/92

      FNPC

      First National Pennsylvania Corporation (The)

      7/24/92

      SLMAJ

      Student Loan Marketing Association (Voting Stock)

      7/24/92

      SNMD

      Sunrise Medical, Inc.

      7/27/92

      CNSLQ

      Consul Restaurant Corporation

      7/28/92

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

    • 92-45 SEC Adopts Temporary Risk Assessment Rules

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) in Release No. 34-30929 has announced the adoption of new temporary Rules 17h-1Tand 17h-2T establishing a risk assessment recordkeeping and reporting system for broker/dealers. Rule 17h-1T requires that members maintain and preserve certain records and other information of the broker/dealer's associated persons. Rule 17h-2T requires the quarterly filing of the 17h-1T information on new Form 17-H. A copy of the release follows the text of this Notice.

      BACKGROUND AND DESCRIPTION

      In Release No. 29635, August 30, 1991, the SEC proposed for comment two temporary rules, Rule 17h-1T and Rule 17h-2T, along with proposed Form 17-H. The SEC proposed these rules under Section 17(h), which provides the SEC with specific authority to obtain information regarding certain activities of broker/dealer affiliates and augments the SEC's authority on matters relating to the financial responsibility of broker/dealers.

      The rules would establish a recordkeeping and reporting system for broker/dealers to cover information on the financial and securities activities of holding companies, affiliates, or subsidiaries (associated persons) of the broker/dealer. These rules only apply to an associated person identified or designated as a "Material Associated Person (MAP)" whose "business activities are reasonably likely to have a material impact on the financial and operational condition" of the broker/dealer's "net capital, its liquidity, or its ability to finance its operations."

      The required records should concern the broker/dealer's "policies, procedures, or systems for monitoring and controlling financial and operational risks to it resulting from the activities" of its MAPs and should "describe, in the aggregate, each of the financial and securities activities conducted by, and the customary sources of capital and funding of associated persons whose business activities are reasonably likely to have a material impact on the broker/dealer.

      The SEC has changed the original proposal and adopted the risk assessment rules on a temporary implementation schedule to phase in the rules. Firms covered by the rules must maintain the organization chart, risk management policy, and disclosure of litigation information beginning September 30, 1992. Such firms must file this limited information on or before October 31, 1992. The rules become fully effective December 31, 1992.

      These rules are temporary because the SEC intends to evaluate this operation for two years, and within 90 days of the end of that period, the Division of Market Regulation will prepare a report to the SEC. Based on public comment and its own evaluation of the report, the SEC will decide what if any changes or modifications should be made.

      The number of registered broker/dealers subject to these two new rules is relatively small. Of the approximately 600 firms that clear and carry customer accounts, only 435 firms have capital in excess of $250,000. In addition, some 195 firms that don't carry customer accounts but have capital in excess of $20 million would also be affected, making a total of 630 firms subject to the rule.

      However, these 630 firms include some with no affiliations with other entities. Thus they are not subject to Section 17(h) of the Exchange Act. Consequently, the actual number of broker/dealers subject to these new rules will be smaller than the 630 firms potentially subject to the rules. Firms that have holding companies, affiliates, or subsidiaries are subject to the rules, but may qualify for one of the exemptions in paragraph (d) of Rule 17h-1T.

      Questions concerning this Notice may be directed to Walter Robertson, Associate Director, Financial Responsibility Department, (202) 728-8236.

      Federal Register / Vol. 57, No. 140 / Tuesday, July 21. 1992 / Rules and Regulations 32159

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Parts 240 and 249

      [(Release No. 34-30929; File No. S7-25-91)

      (International Series Release No. 421)]

      RIN: 323S-AF44

      Final Temporary Risk Assessment Rules

      AGENCY: Securities and Exchange Commission.

      ACTION: Adoption of rules.

      SUMMARY: The Securities and Exchange Commission is adopting Rules 17h-1T and 17h-2T (17 CFR 240.17h-1T and 17 CFR 240.17h-2T) under the Securities Exchange Act of 1934 (the "Exchange Act"). The rules are being adopted primarily pursuant to the authority conferred on the Commission by the Market Reform Act of 1990. Rule 17h-1T would require broker-dealers to maintain and preserve records and other information concerning certain of the broker-dealer's associated persons. The requirement to maintain and preserve information under Rule 17h-1T would extend to the financial and securities activities of the holding companies, affiliates, or subsidiaries of a broker-dealer that are reasonably likely to have a material impact on the financial or operational condition of the broker-dealer. Rule 17h-2T would require broker-dealers to file with the Commission quarterly reports concerning the information required to be maintained and preserved under Rule 17h-1T.

      dates: The rules become effective September 30, 1992. See section IV. of the Supplementary Information section of this release for the temporary implementation schedule.

      FOR FURTHER INFORMATION CONTACT:

      Michael A. Macchiaroli, (202) 272-2904 or Roger G. Coffin, (202) 272-7375, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION:

      I. Introduction
      A. Background

      On August 30, 1991, the Commission proposed for comment temporary Rules I7h-1T and 17h-2T, which, together with proposed Form 17-H, would establish a risk assessment recordkeeping and reporting system for broker-dealers.1 The Rules were proposed pursuant to the authority conferred on the Commission by the Market Reform Act of 1990 (the "Reform Act"), which added section 17(h) to the Exchange Act.2 Section 17(h) provides the Commission with specific authority to obtain information regarding certain activities of broker-dealer affiliates and augments the Commission's authority with respect to matters relating to the financial responsibility of broker-dealers.

      Section 17(h) requires broker-dealers to maintain and preserve such risk assessment information as the Commission by rule prescribes with respect to those associated persons of the broker-dealer whose "business activities are reasonably likely to have a material impact on the financial and operational condition" of the broker-dealer, including the broker-dealer's "net capital, its liquidity, or its ability to finance its operations".3 The statute provides that the records should concern the broker-dealer's "policies, procedures, or systems for monitoring and controlling financial and operational risks to it resulting from the activities" of its material associated persons and should "describe, in the aggregate, each of the financial and securities activities conducted by, and the customary sources of capital and funding" of associated persons whose business activities are reasonably likely to have a material impact on the broker-dealer".4 In addition, the Reform Act authorizes the Commission to require broker-dealers to file summary reports of the information and records maintained pursuant to the recordkeeping provisions.5

      The Commission's proposal contained two rules. Proposed Rule 17h-1T set forth the specific recordkeeping requirements applicable to broker-dealers and provided guidelines to be used in establishing which associated persons of the broker-dealer are subject to the recordkeeping and reporting requirements.

      Included in the recordkeeping requirements were risk management policy information, financial data, including consolidating and consolidated financial statements, securities and commodities position data, and other categories of financial and securities related information. Proposed Rule 17h-2T would require broker-dealers to file quarterly reports on proposed Form 17-H.

      Proposed Form 17-H contained general instructions for use in reporting information and included a separate section of line items to be used in reporting numerical data to the Commission. Recognizing that the proposal would establish new recordkeeping and reporting burdens on members of the securities industry, who in the past have been required to report on the financial and operational condition of the registered entity only, the Commission requested public comment on the scope of the proposal, the burdens of complying with the rules, as well as the specific recordkeeping and reporting requirements contained therein.
      B. Brief Summary of Comment and Commission Action

      In response to the request for comment, the Commission received 63 letters addressing the proposed risk assessment rules. Generally, the commentators criticized the breadth of the proposal and the level of detail in the information required to be maintained and reported. Many commentators urged the Commission to reduce the potential universe of broker-dealer affiliates as to which the broker-dealer would be required to maintain records. Other commentators addressed the application of the proposed roles to foreign entities. Many of these writers suggested that foreign affiliates operating under a regulatory scheme should be exempt from the proposed rules. Finally, the commentators suggested numerous technical changes to the recordkeeping and reporting requirements, many of which the Commission believes are helpful and have been incorporated into the rules being adopted today. Specific aspects of the comments are discussed in greater detail in the applicable sections of this release.

      In summary, today the Commission is adopting, with certain modifications, Rules 17h-1T and 17h-2T, together with Form 17-H. The general approach taken in the rules being adopted today remains as proposed. Broker-dealers will be required to designate, using the guidelines set forth in Rule 17h-1T and subject to Commission oversight, Material Associated Persons for the purposes of Rules 17h-1T and 17h-ZT. Broker-dealers will then be required to maintain certain information concerning the financial and securities activities of each Material Associated Person and will be required to file quarterly reports with the Commission on Form 17-H.

      The rules being adopted today differ from the proposal in several respects. The Commission has undertaken to address the primary objection to the proposal, which was the burden imposed by the detailed information required by the risk assessment rules. To address this issue, the amount of information required to be maintained has been reduced in those areas where the information would not significantly assist the Commission and especially where it could be costly for a broker-dealer to obtain. The Commission believes that the cumulative effect of the modifications to the proposal and to the amount and format of the data required will significantly reduce the burdens associated with complying with the new rules.

      The revisions to the proposed rules also incorporate certain of the commentators' suggestions with respect to the reporting and recordkeeping requirements. Additionally, special provisions for certain domestic and foreign entities have been added. Finally, the rules incorporate certain of the commentators' suggestions concerning the exemptive provisions; as proposed, the rules would exempt broker-dealers that maintain less than $5 million in capital and which do not carry customer accounts. The final rules raise this exemption to $20 million.

      The Commission is adopting temporary rules to commence the formal information gathering process envisioned by the Market Reform Act. The Commission believes it would be appropriate, after some experience is gained with the information obtained pursuant to the temporary rules, to evaluate the operation of the risk assessment rules. The Commission would require the Division of Market Regulation to prepare a study evaluating the effectiveness of the rules. The report will be issued within 90 days after the rules have been fully operative for two years, and will be issued for public comment Once the industry has commented, and the Commission has made its own evaluation, the Commission will decide what, if any, further refinements or modifications are appropriate.

      Because the Commission believes it is important to commence the risk assessment program as soon as possible, the rules will become effective pursuant to a temporary implementation schedule. Pursuant to this schedule, broker-dealers will be required to maintain the information required by paragraphs (a)(1)(i) (the organization chart), (a)(2)(ii) [risk management policy information] and (a)(1)(iii) (disclosure of litigation) of Rule 17h-1T commencing September 30, 1992. Rule 17h-2T will require broker-dealers to file this limited information with the Commission on or before October 31, 1992. The rules will become fully effective on December 31. 1992.
      II. Analysis of Public Comments

      The general areas of the Commission's proposal that drew the attention of the commentators may be described as follows: (1) Which broker-dealer affiliates should be covered by the rules and the amount of information required to be kept by a broker-dealer concerning each covered affiliate; (2) the application of the rules to foreign entities; (3) the treatment of affiliates which are regulated entities (including domestic and foreign banks, insurance companies and futures commission merchants); (4) the rules' general exemptive provisions; and (5) technical recordkeeping, reporting and filing issues.
      A. Scope of Risk Assessment Rules

      As noted above, section 17(h) requires broker-dealers to keep records with respect to the financial and securities activities of those associated persons of the broker-dealer whose "business activities are reasonably likely to have a material impact" on the broker-dealer's financial and operational condition.6 Section 17(h) does not indicate which associated persons of a broker-dealer should fail under this statutory standard; however, the legislative history accompanying the Reform Act suggests a flexible facts and circumstances approach.7

      To incorporate this approach, proposed Rule 17h-1T contained several factors to be used by broker-dealers in determining which affiliates are subject to the rules. For the purposes of the risk assessment rules, affiliates subject to the rules are known as "Material Associated Persons."

      The first factor set forth in Rule 17h-1T is the nature and proximity of the relationship between the registered firm and an associated person. Second is the overall funding needs of the broker-dealer and the degree, if any, to which the broker-dealer is financially dependent upon the associated person. Where a broker-dealer relies on the commercial paper or other unsecured credit of the holding company for financing, the broker-dealer would be materially affected by an acceleration or call by holders of such obligations because of events at the holding company level. Third is the degree to which the broker-dealer or its customers rely on the associated person for operational services or support. Merely offering products or services to the customers of broker-dealers, such as insurance products to brokerage customers will not, in and of itself, rise to the level of materiality called for by the risk assessment rules. However, if a broker-dealer relies on the associated person for significant operational facilities or services, the activities or financial difficulties of the associated person may well have a material impact on the broker-dealer. Fourth is the level of risk present in the types of activities of the broker-dealer or its associated person. Associated persons engaged in activities such as transactions in derivative products, merchant banking or venture capital activities are more likely to have a material impact on the broker-dealer than associated persons that engage in less risky activities. The final factor is the extent to which the associated person has the ability or the authority to cause a withdrawal of capital from the broker-dealer. These factors were intended to amplify the statutory standard and to suggest some, but not all, of the criteria that may be relevant to a determination of materiality.

      Because of the complexity and diversity of the various holding companies which own broker-dealers, the Commission's proposal would leave the initial determination of which associated persons are Material Associated Persons up to the reporting broker-dealer, subject to Commission oversight. The Commission believes this method remains the most practical way to implement the recordkeeping and reporting provisions of the risk assessment rules and is incorporating this approach into the final rules. The commentators raised a number of issues with regard to the designation of Material Associated Persons under the proposed rules.
      1. Financial Strength of the Affiliate

      Several commentators urged the Commission to incorporate other factors, such as the associated person's rating by a rating agency, the financial strength of the broker-dealer, or the financial strength of the associated person into Rule 17h-1T. According to this argument, a parent or affiliate in sound fiscal health is less likely to have a material impact on the financial and operational condition of the associated broker-dealer than a parent experiencing financial difficulties.

      While a well-capitalized parent or affiliate can be a source of strength to the registered entity, the Commission does not believe that the financial strength of the broker-dealer or an associated person should be relevant in designating Material Associated Persons under the risk assessment rules. The Commission's risk assessment program is designed to provide information regarding significant broker-dealer affiliates on a regular and continuing basis. It would be insufficient for the Commission to receive an incomplete picture of any single holding company structure, especially in light of the fact that the financial strength of the parent may rest behind the broker-dealer's credit rating or access to the commercial paper market. The Commission's risk assessment program is designed to enable the Commission to monitor the financial and securities activities of all associated persons whose business activities are, by themselves, reasonably likely to have a material impact on the broker-dealer. A broker-dealer could be impacted by a significant and sudden change in the fiscal position of a key affiliate or parent, despite the prior apparent financial stability of that entity.
      2. Factors in Designating Material Associated Persons

      The commentators also urged the Commission to refine or restrict the factors set forth in proposed Rule 17h-1T concerning the designation of Material Associated Persons. Essentially, these commentators suggested that the rules explicitly state that holding companies not primarily engaged in financial or securities activities should not be considered Material Associated Persons. While there may be instances where the activities of an ultimate parent or affiliate are not material to the financial condition of the broker-dealer, particularly if the parent or affiliate's primary business does not involve financial or securities activities, the Commission does not believe it would be appropriate to draw a bright line test in this regard. Instead, a facts and circumstances analysis is required. The first factor set forth in Rule 17h-1T, the nature and proximity of the relationship between the broker-dealer and the associated person, is intended to encompass these types of issues.

      To illustrate, certain broker-dealer holding companies consist of at least two layers. The first level usually includes the direct parent of the broker-dealer and a number of related financial services entities. As stated in the proposing release, the Commission believes, absent very unusual circumstances, that these entities should be designated Material Associated Persons. This is particularly true in light of the fact that many broker-dealers carry potentially risky or highly leveraged positions, including interest rate agreements and over-the-counter derivative products in these first-tier affiliates.

      The next layer may consist of a corporate holding company which has a controlling interest in the broker-dealer holding company and often one or more other intermediate holding companies that engage in businesses independent of the broker-dealer. The scope of the final risk assessment rules may, in some instances, extend to certain of these entities, especially if the broker-dealer depends on any of these companies as a source of funding. Alternatively, intermediate holding companies or an ultimate parent company may meet the material impact test. The financial distress or a potential bankruptcy filing by such an entity could directly threaten the broker-dealer's ability to obtain credit or might interfere with the broker-dealer's access to the clearance and settlement system. If the day-to-day operations of the broker-dealer are or could be affected by the activities of the affiliate or parent, then that affiliate is most likely a Material Associated Person. On the other hand, there may be situations where, after an evaluation of all the relevant facts and circumstances, it appears that associated persons in the upper levels of the holding company hierarchy are likely to have only a remote impact on the financial and operational condition of the broker-dealer, and should not be designated Material Associated Persons. If the ultimate parent in a multi-tiered holding company is primarily involved in non-financial and non-securities activities, such as retailing or manufacturing, the Commission believes the parent should not, absent unusual circumstances, be designated a Material Associated Person.
      3. Use of Exchange Act Reports

      Finally, several commentators suggested that the Commission create a separate category for Material Associated Persons that are subject to periodic Exchange Act reporting obligations. These public Material Associated Persons, argued the commentators, should be permitted to submit copies of reports on Forms 10-K and 10-Q for risk assessment purposes. While the Commission's goal is to incorporate as much readily available information as possible into the risk assessment program, it does not believe that Exchange Act reports, without additional disclosure, can be used by broker-dealers in reporting on a Material Associated Person. Exchange Act reports are public disclosure documents that do not contain the specialized data required to enable the Commission staff to adequately assess the overall financial condition of a holding company and the potential impact its key members can have on a registered broker-dealer. Moreover, the Commission needs to have uniformity in the reports filed under the rules. Even though some of the information required by Form 17-H is contained in Forms 10-K and 10-Q, the Commission does not believe it would be unduly burdensome to reformat it on Form 17-H.
      B. Treatment of Regulated Entities

      Proposed Rules 17h-1T and 17h-2T contained special provisions for associated persons or brokers or dealers subject to the regulatory supervision of certain federal and state regulatory authorities. These provisions were designed to diminish the need for broker-dealers to create an additional set of records where records substantially similar to those required by the risk assessment rules are created for the use of other federal or state regulators. The Commission is adopting the special provisions, with some refinements, as they apply to banks and insurance companies, and is adding a section for Material Associated Persons subject to the regulation of the Commodity Futures Trading Commission.
      1. Banks

      Proposed Rule 17h—IT provided that a broker-dealer would be deemed to be in compliance with the rule's recordkeeping requirements with respect to a Material Associated Person subject to the supervision of a federal banking agency if the broker-dealer maintained copies of the reports filed by the associated bank with its federal banking regulator. Proposed Rule 17h-2T permitted the broker-dealer to furnish copies of such reports to the Commission. The Commission is adopting these provisions substantially as proposed. Several commentators requested clarification on the application of these provisions to domestic and foreign banks.

      One commentator suggested that the rules should be clarified to specify which forms filed with bank regulators need to be maintained and filed by the broker-dealer. In addition, several commentators requested clarification with respect to the application of these provisions to foreign banks subject to federal banking regulation.8

      Proposed Rules 17h-1T and 17h-2T would require the broker-dealer to maintain and file copies of all the reports filed with a federal banking regulator. After analyzing the comments and the various federal banking reports, the Commission has determined that not all banking reports need be filed with the Commission as part of the risk assessment program. Rather, the rules being adopted today specify that the broker-dealer must maintain copies of all reports filed by the bank Material Associated Person to comply with Rule 17h-1T. However, Rule 17h-2T specifies that domestic banks will only be required to file copies of Forms FY-9C and Form FR Y-6 with the Commission.9 The Commission believes these forms are the only bank reporting forms essential to risk assessment.

      The proposed rules did not directly address the application of the rules to foreign banking organizations which are subject to regulation by U.S. banking regulators. The commentators, using an argument based on the language of the Reform Act and the legislative history, asserted that the intent of Congress was to include foreign banks that are subject to U.S. banking regulation under the special provisions for banks contained in the Reform Act and incorporated into the Commission's rules.10 After an examination of the content of these reports, and a comparison of their content to the reports filed by U.S. banks, the Commission has determined to permit foreign banking organizations that file reports under the banking statutes specified in the rules to file copies of their reports in the same fashion as domestic banks.
      2. Insurance Companies

      The Commission's proposal contained special provisions for insurance companies that are Material Associated Persons under the rules. A broker-dealer with an insurance company Material Associated Person would satisfy the recordkeeping requirements by maintaining copies of the annual and quarterly reports filed by the parent insurance company with the state insurance regulator of the parent's domiciliary state. A broker-dealer designating a stock insurance company as a Material Associated Person would be required to, in addition to maintaining state insurance reports, provide copies of the filings the insurance company makes under sections 13 or 15 of the Exchange Act, together with filings made under the Investment Company Act of 1940. For al! other insurance companies, the broker-dealer will be required to file copies of the reports prepared for state regulatory use. Two commentators discussed the provisions proposed for insurance companies.

      One commentator suggested that brokers or dealers associated with a mutual insurance company Material Associated Person should be exempt from the rules except to the extent that they should be required to file the annual and quarterly reports filed by the insurance company with state regulators. The Commission believes that it is appropriate to have access through the broker or dealer to all those reports filed by insurance company Material Associated Persons. By requiring the broker-dealer to maintain all reports filed, the Commission is assured of prompt access to the information contained therein when necessary.

      Another commentator noted that while all state insurance regulators require the insurance companies subject to their authority to file annual reports, only a limited number require quarterly statements while the risk assessment rules require quarterly disclosure. Although this commentator pointed out that states with quarterly filing requirements include the major markets for insurance companies, and that the major insurance companies therefore file quarterly reports, the Commission has a strong interest in receiving quarterly reports. Therefore, the rules provide that, in the event an insurance company does not prepare quarterly reports for a state, the associated broker-dealer must maintain the records required by Rule 17h-1T and file a Form 17-H on a quarterly basis. The commentator also indicated that reports are filed on forms adopted by the National Association of Insurance Commissioners, not on forms prescribed by the insurance company's domiciliary state. The text of the rules has been changed to reflect that distinction and to indicate that the reports are to be filed regardless of whom they are filed with at the state level. In conclusion, the Commission is adopting the provisions with respect to insurance companies as proposed with the clarification discussed above.
      3. Futures Commission Merchants

      The Commission has added a new provision to the rules adopted today with respect to Material Associated Persons subject to the supervision of the Commodity Futures Trading Commission (the "CFTC"). Pursuant to this section, a broker-dealer will be deemed in compliance with the recordkeeping and reporting requirements if it maintains and files copies of Forms 1 FR-FCM or 1 FR-IB filed by the Material Associated Person. The Commission believes that it is appropriate to add these provisions because entities regulated by the CFTC are subject to recordkeeping, reporting, and supervisory requirements similar to those imposed by the Commission on broker-dealers.
      C. Application of Rules to Non-Domestic Entities

      Proposed Rules 17h-1T and 17h-2T would require registered broker-dealers to make and keep records with respect to all of their Material Associated Persons, regardless of the nationality or regulatory status of such Material Associated Person. In order to assess the impact of these requirements on multi-national conglomerates, the Commission's proposal specifically requested comment on the application of the risk assessment rules to foreign entities. In response, several U.S. subsidiaries of foreign firms, together with a number of foreign regulatory authorities, commented on the proposed rules.

      The foreign commentators made the following suggestions. First, noting that many non-domestic Material Associated Persons are subject to the regulatory supervision of a foreign regulator, the commentators urged the Commission to exempt altogether any Material Associated Person subject to foreign regulation. As an alternative, the commentators requested that the Commission rely on the home country regulator of the Material Associated Person for assurances of the entities' financial soundness. In connection with this approach, the commentators urged the Commission to develop additional and more extensive information sharing agreements with international regulatory organizations in order to create a global risk management environment that primarily relies on the home country regulator of an international enterprise.

      The Commission believes in the principle of cooperation and information sharing among financial and securities regulators. However, the Reform Act requires the Commission to promulgate rules requiring broker-dealers to report on the financial condition of all affiliates that could have a material impact on the U.S. registered entity. In today's global marketplace, that impact could just as easily be caused by a non-domestic entity as a domestic one. In light of the Congressional mandate in this area, the Commission does not believe it is appropriate to exempt foreign entities from the application of the risk assessment rules, even if a foreign firm is regulated in its home country. Instead, the Commission has determined to adopt the approach suggested by certain commentators, which the Commission believes will enable the Commission to properly discharge its regulatory obligations while at the same time affording deference to the existence of foreign banking and securities regulators.

      In a new section added to Rules 17h-1T and 17h-2T, a broker-dealer will be allowed to maintain and file reports prepared by a Material Associated Person for a Foreign Financial Regulatory Authority as that term is defined in section 3(a)(51) of the Act in lieu of having to prepare a Form 17-H.11 The Commission believes this approach will not be unduly burdensome for foreign entities because the broker-dealer will be permitted to file copies of foreign regulatory reports directly with the Commission. The Commission notes that the treatment accorded to entities regulated by foreign authorities is similar to that accorded to regulated domestic entities. In effect, the Commission is not imposing any additional burdens on any regulated entity other than requiring an English translation of reports already produced.

      Under the rules adopted today, where a Material Associated Person is subject to the regulatory supervision of a Foreign Financial Regulatory Authority, the broker-dealer may maintain and file copies of the reports produced for that regulator.
      D. Exemptions

      In order to create a risk assessment program that both deploys the Commission's resources in a cost-effective manner and focuses in on the segment of the securities industry most likely to have a significant impact on the operation of the markets or on investors, proposed Rules 17h-1T and 17h-2T contained three exemptive provisions. The first would permit individual broker-dealers to apply for an exemption. Section 17(h) of the Act directs the Commission to consider in the exemptive process a number of factors that were contained in the proposed rules. Although the Commission believes it is appropriate for the Commission to consider exemptive applications from individual broker-dealers, because the factors for this general exemption are set forth in the text of the statute, it is unnecessary to repeat them in the text of the rules. Therefore, the language contained in the proposed rules duplicating the statutory language will not be repeated in the rules.

      The second category of exemption contained in Rules 17h-1T and 17h-2T would exempt limited purpose mutual fund brokers who are exempt from the provisions of the customer protection rule. Rule 15c3-3 pursuant to paragraph (k)(1) thereof.12 This category would include the firms associated with insurance companies that are registered with the Commission as broker-dealers in order to offer variable annuity and other related products. Because the Commission believes these limited purpose firms pose limited systemic or customer risk and are beyond the intended scope of the Reform Act, this aspect of the proposal is being adopted. This exemption will exempt these firms, regardless of the amount of capital they maintain.

      The third category of exemption contained in the proposed rules would also have exempted broker-dealers that maintain capital of less than $5 million and which do not carry customer accounts. The commentators who discussed this exemption generally agreed that the $5 million capital threshold was too low. Alternatives ranged from $25 to $100 million in capital or a sliding scale approach correlating the amount of capital with the nature and scope of the risk associated with different activities. Several commentators suggested that the rules exempt all but the largest 50 to 75 broker-dealers. Virtually all the commentators opposed the condition that would cause all broker-dealers that hold customer funds or securities or carry customer accounts to be subject to the rules.

      The Commission believes that, especially in the initial phases of the risk assessment program, caution is warranted in the setting of the exemptive provisions in the risk assessment rules. The Commission does conclude, however, that a refinement can be made to this exemptive provision that will reduce the overall number of subject broker-dealers without a corresponding trade-off in risk. Therefore, the rules being adopted today raise the $5 million to $20 million except as to firms that hold customer assets (unless they maintain less that $250,000 in net capital). Excluded also would be broker-dealers that clear customer trades but do not hold funds or securities for customers except to facilitate transactions and only for the time necessary to complete the transaction.

      As noted, as proposed, all firms that carry customer accounts would be covered by the rules. The commentators objected to this aspect of the rules because it would subject certain firms with minimal capital to the recordkeeping and reporting requirements solely because they carry customer accounts. The Commission considers this to be a valid point which can be addressed by putting a "floor" on these firms. Accordingly, the rules have been revised to limit their application to those carrying firms that maintain in excess of $250,000 in capital. Thus, all broker-dealers that carry customer accounts who maintain capital in excess of $250,000 would be subject to the rules.

      A review of the capitalization of the securities industry reveals that, of the approximately 5,600 broker-dealers that conduct a public business, approximately 600 firms clear and carry the accounts of customers. Of this number, approximately 435 firms have capital in excess of $250,000. Together with firms that maintain in excess of $20 million, today's action would subject approximately 630 firms to the risk assessment rules. However, Schedule I to the FOCUS Report requires broker-dealers to indicate whether or not the firm is a subsidiary of a parent which is not a registered broker-dealer. From this item an estimate of how many broker-dealers are part of a holding company structure (and could have Material Associated Persons) can be achieved. The most recent data from Schedule I shows that 280 broker-dealers indicated they were a subsidiary of a non-broker dealer. This data indicates that the actual number of broker-dealers that will be required to report on their Material Associated Persons will be considerably smaller than the approximately 630 firms potentially subject to the rules. Finally, while the staff plans to focus its efforts on the largest 90 to 75 broker-dealers, in the event of a problem with a firm that carries or holds customer accounts, the Commission and its staff will have access to this retained data and will be able to focus more promptly on customer exposure.
      III. Final Risk Assessment Rules
      A. Recordkeeping and Reporting Requirements

      Proposed Rule 17h-1T would require broker-dealers to maintain and preserve two general categories of information concerning each Material Associated Person of the broker-dealer. The first category concerned the holding company's organization and risk management policies. The second involved the financial condition of the organization, including financial statements together with specialized categories of financial and securities activity related data, such as information concerning interest rate swaps, financial instruments and Teal estate ventures. Proposed Rule 17h-2T would require broker-dealers to file quarterly reports of the information required to be maintained by Rule 17h-1T.

      The commentators to the Commission's proposal objected to the amount of information required to be maintained under proposed Rule 17h-1T. Moreover, the commentators argued that the level of detail required by proposed Form 17-H was excessive and beyond what the Commission requires for its regulatory purposes. The Commission is sensitive to the concerns articulated by the industry, and in adopting the risk assessment rules, is reducing, where possible, the recordkeeping and reporting burdens imposed by the rules. In addition, many of the commentators' suggestions with respect to the specifics of the proposal are being incorporated into the rules as adopted today.
      1. Organization and Risk Management Policies
      (a) Organizational chart. Paragraph (a)(1)(i) of Rule 17h-1T will require a broker-dealer to maintain an organizational chart of the holding company structure. The broker-dealer is required to indicate which associated persons of the broker-dealer are deemed to be Material Associated Persons. Associated persons that exist solely for tax reasons or that are shell companies that produce little or no revenue may either be omitted from the chart or combined into a single entry to reduce the number of entries. As proposed, paragraph (a)(l)(i) would have required the maintenance of a flowchart compiled during the audit process. Several commentators pointed out that certain organizations either do not prepare flowcharts, or prepare them on a business segment rather than a legal entity basis, as the proposal would require. Based in part on the comments, the Commission has decided to eliminate the flowchart requirement.

      Proposed Form 17-H specified that the organizational chart was to be filed in the broker-dealer's first risk assessment filing and at each year-end. Quarterly updates would be required only where a significant change has occurred in the information on file with the Commission. The Commission is adopting these filing requirements as proposed.13

      Form 17-H has been revised to conform to paragraph (a)(1)(i) and no longer calls for a narrative discussion concerning the criteria used in selecting Material Associated Persons, the business lines conducted, and the names of the chief executive, operating financial officers of each Material Associated Person. These requirements were burdensome, and the Commission can obtain this information on an ad hoc basis as needed. Form 17-H will require the name and telephone number of a contact person at the broker-dealer who will be available to answer questions concerning the information reported therein, including the holding company structure and the criteria used in designating Material Associated Persons.
      (b) Risk management policies. As proposed, paragraphs (a)(1) (ii) through (iv) would require a broker-dealer to maintain certain risk management policies for itself and each Material Associated Person. The Commission has reorganized these provisions into a single revised paragraph. As revised, the new paragraph no longer requires policies concerning credit controls and Collateral procedures.14 As adopted, Form 17-H will require a broker-dealer to file its policy information only in the first filing with the Commission; quarterly updates will be required only where a material change has occurred in the information on file with the Commission.

      In addition, a number of commentators argued that the policies required by the rules should be the policies of the broker-dealer only, and not each Material Associated Person. The Commission agrees that this clarification is warranted. Therefore, the proposal has been amended to state that the policies required to be maintained under Rule 17h-1T and filed under Rule 17h-2T should be the broker-dealer's policies only. Additionally, the final rules require the broker-dealer to maintain policies for monitoring and controlling financial and operational risks to itself based on the activities of its Material Associated Persons.

      Finally, some commentators were unsure whether the Commission's proposal instituted an affirmative burden to create policies and procedures in the risk management area if none previously existed. The Reform Act provided the Commission with authority to monitor existing procedures for controlling systemic risk in the securities industry. If a firm operates without the policies referred to in the rules, it will be sufficient for risk assessment purposes for the broker-dealer to document in writing, the absence of such policies.
      (c) Material legal proceedings. Proposed Rule 17h-1T would require broker-dealers to keep records that describe all material pending legal proceedings to which the broker-dealer or any Material Associated Person is a party, or to which any of its property is subject and that would be required to be disclosed under GAAP. The commentators requested clarification on the application of this paragraph. As revised, new paragraph (a)(1)(ii) will require broker-dealers to maintain a record of material legal proceedings that would be required to be disclosed under GAAP on a consolidated basis looking at the organization as a whole. The references to the form and content of Item 103 of Regulation S-K have been deleted. Rule 17h-2T and Form 17-H will require this information to be filed in the first Form 17-H delivered to the Commission, with quarterly updates only if necessary.
      2. Financial information. As noted above, the second general category of risk assessment information required to be maintained by Rule 17h-1T and filed on Form 17-H pursuant to Rule 17h-2T will include the financial data necessary to assess the risks to a registered firm caused by the activities of its Material Associated Persons. The Commission is adopting these provisions in modified form to respond to many of the commentators' suggestions.
      (a) Financial statements. As the Commission stated in its proposal, the information contained in the financial statements required by the rules will be one of the most important elements of the risk assessment program. This data will enable the Commission staff to evaluate the broker-dealer's position in the holding company hierarchy as a whole, and will give an overview of the financial condition of the organization.

      As proposed, Rule 17h-1T would require broker-dealers to make and keep consolidating and consolidated balance sheets, income statements and cash flow statements for the broker-dealer and each Material Associated Person prepared in accordance with GAAP. Form 17-H contained various instructions for guidance in reporting the financial data to the Commission. Specifically, Form 17-H required the financial statements to be prepared in the form and content specified by Regulation S-X. Proposed Form 17-H also required a reconciliation to U.S. GAAP in the event that the financial statements were prepared in accordance with a comprehensive set of accounting principles other than U.S. GAAP.

      Primarily, the commentators objected to the burdens imposed by the rule's requirement to present financial data in the form required by Regulation S-X. Broker-dealers that are non-public companies, or that have non-public Material Associated Persons, argued that the imposition of the S-X standards would, in essence, require the firms to develop new accounting and legal infrastructures for the sole purpose of complying with the Commission's risk assessment rules. In proposing this requirement, the Commission did not intend to impose unnecessary and costly burdens on those entities not otherwise subject to the requirements of Regulation S-X. Rather, the Commission intended to provide guidance regarding the form and content of the necessary financial disclosure. Therefore, in view of the opposition to this requirement, and the burdens cited by the industry in complying, the Commission has decided to revise tie requirements for financial disclosure under the rules. The revised rules and form will require consolidated and consolidating financial balance sheets, income statements and statements of cash flows prepared in accordance with GAAP and without reference to Regulation S-X. Additionally, the requirement for a reconciliation to U.S. GAAP has been deleted. Entities using a set of accounting principles other than U.S. GAAP will be required to disclose what the accounting principles are, but will not be required to reconcile the numbers to U.S. GAAP.

      Additionally, several commentators requested clarification as to whether, in the preparation of the consolidating financial statements, the rules would require separate stand-alone financial data for each Material Associated Person. The Commission has revised paragraphs (a)(1)(iv) and (a)(1)(v) of Rule 17h-1T and the corresponding sections of Form 17-H to specify that the consolidating and consolidated balance sheets, income statements, and statement of cash flows are required for the broker-dealer and the broker-dealer's ultimate holding company parent. Separate consolidating and consolidated information is not required for each Material Associated Person included in the consolidating and consolidated information.
      (b) Aggregate securities and commodities positions. Proposed Rule 17h-1T would require broker-dealers to maintain records of the amount at the end of the quarter, and the highest and lowest amounts during the quarter, of securities and commodities positions held by each Material Associated Person, including a separate listing of each position that exceeds a defined Materiality Threshold at any time during the quarter. Proposed Rule 17h-1T defined the term Materiality Threshold to mean the greater of: (A) $100 million; or (B) 10 percent of the broker-dealer's tentative net capital or 10 percent of the Material Associated Person's tangible net worth, whichever is greater. Proposed Form 17-H set forth a schedule to be used in reporting this data to the Commission.

      Generally, the commentators recognized the need for the Commission to compile and analyze position data. The writers did, however, offer a number of suggestions that the Commission believes are helpful and that can be incorporated into the final version of the rules being adopted today. Specifically, the Securities Industry Association (the "SIA") recommended that the highs and lows for single position tracking requirements in the rule should be determined on the basis of month-end figures, rather than daily figures, which would impose a costly and continuous monitoring requirement. The Commission agrees that month-end reporting would be sufficient for risk assessment purposes, and has modified the rule accordingly. As revised, Rule 17h-1T will require broker-dealers to maintain aggregate position data at quarter end, and at month end if greater than quarter end. Single position tracking for the purposes of monitoring positions that are larger than the Materiality Threshold will be required at month end. Finally, Item 5 of Form 17-H has been modified to conform to the language of Rule 17h-1T, and the line items in the Form have been revised to reflect the commentators' concerns regarding excessive detail in the disclosure of options positions.
      (c) Financial instruments. Proposed Rule 17h-1T required broker-dealers to maintain information concerning the activities of a Material Associated Person involving financial instruments with off-balance sheet risk, as that term is used in Statement of Financial Accounting Standards No. 105 ("SFAS 105"). SFAS 105, which applies to all companies preparing financial statements in accordance with GAAP, requires disclosure of information about financial instruments with off-balance sheet risk and financial instruments with concentration of credit risk. Off-balance sheet risk is referred to in SFAS 105 as the risk of accounting loss (defined as the loss that may have to be recognized due to credit and market risk as the result of the obligations from a financial instrument).

      Initially, several commentators noted that SFAS 105 requires the disclosure on an annual and not quarterly basis. The firms argued that quarterly reporting under the risk assessment rules would create additional and unneeded cost. The Commission recognizes that certain additional burdens will be created by the imposition of quarterly SFAS 105 disclosure; however, the market for these types of instruments is growing, and much of this activity is being booked outside of the registered broker-dealer. This area may be a source of concern in the future, as complex and risky financial products are developed and become more prevalent in the securities industry. For this reason, the Commission is requiring quarterly reporting of financial instrument data under Rule 17h-2T and Form 17-H.

      Additionally, the Commission had made certain revisions to the applicable provisions of the rule and form concerning the disclosure of financial instruments. Generally, these revisions clarify that the required records and disclosure under the rules would be substantially similar to that required by SFAS 105. Thus, paragraph (a)(1)(vii) of Rule 17h-1T will require broker-dealers to maintain the notional or contractual amounts, and in the case of options, the value of the underlying instruments, of financial instruments as the term is used in SFAS 105. The rules require a separate listing of each instrument where the credit risk with respect to any individual counterparty exceeds the Materiality Threshold at quarter end.15 As previously proposed, the rules would require the monitoring of large exposures on a daily basis. However, based in part on the recommendation of the SLA, rules have been revised to require tracking at quarter end rather than on a daily basis to reduce unnecessary burdens. The Commission wishes to point out that, because SFAS 105 leaves considerable discretion to a firm in the manner it discloses financial instrument data. Form 17-H contains detailed line item breakdowns of these instruments that will make the information reported to the Commission more meaningful than that would be disclosed under SFAS 105 in a Form 10-K.
      (d) Bridge loans and other extensions of credit. Paragraph (a)(1)(viii) of Rule 17h-1T will require the aggregate amount at the end of each quarter, and the amount at month end if greater than quarter end, of bridge loans or other similar extensions of credit by each Material Associated Person. In response to the suggestions of the commentators, and as in the case of position reporting, the highest and lowest amounts of bridge loans at any time during the quarter will not be required; similarly, exposures that exceed the Materiality Threshold need only be noted month end. Quarterly disclosure of this information will be required under the provisions of Rule 17h-2T and Form 17-H.
      (e) Commercial paper and other financing information. Paragraph (a)(1)(ix) of Rule 17h-1T will require broker-dealers to keep the aggregate amount at the end of each quarter, and the amount at month end if greater than quarter end, of commercial paper, secured and other unsecured borrowing, bank loans, lines of credit, and the principal installments of long-term or medium-term debt scheduled to mature within one year. The rule has been revised to clarify that this information should be kept for the broker-dealer and each Material Associated Person. Because large broker-dealers rely on the commercial paper market for a significant amount of their daily funding needs, the Commission believes funding data will be critical to the effective implementation of the risk assessment program. As in other areas, the Commission has revised this provision in response to the suggestions of the commentators to require broker-dealers to maintain, and report, the amounts of commercial paper and other financing sources outstanding at the end of each quarter and not the highest and lowest amounts during the quarter as the Commission's proposal would have required.
      (f) Real estate information. Proposed Rule 17h-1T required broker-dealers to maintain various detailed information concerning the real estate and mortgage loan activities of their Material Associated Persons. The Commission is particularly concerned about the impact mortgage loans and real estate investments made by a Material Associated Person could have on a registered broker-dealer. The Commission is adopting the rules' real estate provisions with a number of changes that respond to the issues raised by the commentators.

      Paragraph (a)(1)(x) of Rule 17h-1T will require a breakdown of real estate loans and investments by type of property: geographic distribution; the value of loans that are not current, are in the process of foreclosure, or have been restructured; the allowance for losses on loans and investments; and information concerning risk concentration. The rule specifically excludes information regarding trading positions in whole loans, which, as the commentators pointed out, are usually held for short periods of time. As proposed Rule 17h-1T would have required the maintenance of information concerning the Material Associated Person's lending and risk management policies and policies for placing loans on a non-accrual status. These requirements have not been adopted into the final rules as the Commission believes this is an area where a burden can be reduced without significant loss to the risk assessment program. The Material Associated Person would only be required to provide the criteria it uses for determining which loans are not current. In this regard, new Item 9 of Form 17-H has been streamlined by eliminating the requirement to produce a narrative analysis reflecting problem loans or investments. Section E of Part II of Form 17-H has similarly been revised by reducing the level of detail in reporting. The Commission believes that these revisions address the concerns of the commentators concerning the burdens of complying with the real estate provisions of the risk assessment rules.
      B. Location of records. In order to address the commentators' concern with maintaining and storing information about many different enterprises within the holding company, the Commission is adopting a new paragraph in Rule 17h-1T that would permit the required records to be maintained at a Material Associated Person, or at some other records storage facility. Any such location must be in the United States and the records must be kept in an easily accessible place as that term is used in Rule 17a-4. Moreover, in order to operate under this new provision, the broker-dealer must furnish to the Commission an undertaking permitting the examination of the records by the Commission or its designees similar to that currently required by the Commission's broker-dealer recordkeeping rules.
      C. Reporting requirements. Proposed Rule 17h-2T specified that Form 17-H would be required within 45 days after the end of each fiscal quarter. The rule permitted the filing of the year-end consolidating and consolidated financial statements within 90 days after the end of the fiscal year. Citing personnel and time problems, several broker-dealers, together with the SIA, requested that the filing deadlines be extended by IS days for both the quarter-end filings and the year-end filings. The Commission regards this concern as valid, and has extended the reporting timeframes set forth in paragraph (a)(1) of Rule 17h-2T to 60 and 105 days respectively.

      Rule 17h-2T has also been revised to conform to the various revisions made to rule 17h-1T. For example, paragraph (c)(1) of the rule's special provisions for banks has been refined to specify the particular banking reports that are required to be filed with the Commission. Paragraphs (c)(3) and (d) have been added for Material Associated Persons that are subject to the supervision of the CFTC and foreign regulatory authorities.
      IV. Temporary Implementation Schedule

      Many of the commentators to the Commission's proposal pointed to the personnel and systems adjustments that would be required to comply with the recordkeeping and reporting requirements set forth in the rules being adopted today. To ease the burdens associated with starting the risk assessment program, the Commission is adopting a temporary implementation schedule to phase-in the rules. During the comment process it was stated that certain of the items called for under the rules (such as the organization chart and risk management policy information) generally already exist. Therefore, it would not be difficult for broker-dealers to supply this information relatively shortly after the rules become effective. The remainder of the financial data will, it was argued, take sometime for the industry to compile.

      The Commission believes it is important to commence the information gathering process as soon as possible and therefore the rules will require that broker-dealers maintain the information required by paragraphs (a)(1)(i) (the organization chart), (a)(2)(ii) (risk management policy information) and (a)(1)(iii) (disclosure of litigation) of Rule 17h-1T commencing September 30, 1992. Rules 17h-2T will require broker-dealers to file this limited information with the Commission on or before October 31, 1992. The rules will become fully effective on December 31, 1992.
      V. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA") in accordance with 5 U.S.C. 630 concerning the final rules. The FRFA notes that the Commission did not receive any comments regarding the Initial Regulatory Flexibility Analysis. A copy of the FRFA may be obtained by contacting Roger G. Coffin, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., Washington DC, 20549, (202) 272-7375.
      VI. Statutory Analysis

      Pursuant to the Securities Exchange Act of 1934 and particularly sections 17 and 23 thereof, 15 U.S.C. 78q and 78w, the Commission is adding a new 240.17h-1T and 240.17h-2T to title 17 of the Code of Federal Regulations in the manner set forth below.
      VII. List of Subjects in 17 CFR Parts 240 and 249

      Reporting and recordkeeping requirements; Securities.
      VIII. Text of the Final Rules

      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 is amended by adding the following citation:

      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-H, unless otherwise noted.

      * * * * *

      Section 240.17h-1T also issued under 15US.C. 78q.
      2. By adding § 240.17h-1T to read as follows:

      § 240.17h-1T Risk assessment recordkeeping requirements for associated persons of brokers and dealers.
      (a) Requirement to maintain and preserve information.
      (1) Every broker or dealer registered with the Commission pursuant to section 15 of the Act, and every municipal securities dealer registered pursuant to Section 15B of the Act for which the Commission is the appropriate regulatory agency, unless exempt pursuant to paragraph (c) of this section, shall maintain and preserve the following information:
      (i) An organizational chart which includes the broker or dealer and all its associated persons. Included in the organizational chart shall be a designation of which associated persons are Material Associated Persons as that term is used in paragraph (a)(2) of this section;
      (ii) Written policies, procedures, or systems concerning the broker or dealer's:
      (A) Method(s) for monitoring and controlling financial and operational risks to it resulting from the activities of any of its associated persons, other than a natural person;
      (B) Financing and capital adequacy, including information regarding sources of funding, together with a narrative discussion by management of the liquidity of the material assets, the structure of debt capital, and sources of alternative funding; and
      (C) Trading positions and risks, such as records regarding reporting responsibilities for trading activities, policies relating to restrictions or limitations on trading securities and financial instruments or products, and a description of the types of reviews conducted to monitor existing positions, and limitations or restrictions on trading activities.
      (iii) A description of all material pending legal or arbitration proceedings involving a Material Associated Person or the broker or dealer that are required to be disclosed by the ultimate holding company under generally accepted accounting principles on a consolidated basis;
      (iv) Consolidated and consolidating balance sheets, prepared in accordance with generally accepted accounting principles, which may be unaudited and which shall include the notes to the financial statements, as of quarter end for the broker or dealer and its ultimate holding company;
      (v) Quarterly consolidated and consolidating income statements and consolidated cash flow statements, prepared in accordance with generally accepted accounting principles, which may be unaudited and which shall include the notes to the financial statements, for the broker or dealer and its ultimate holding company;
      (vi) The amount as of quarter end, and at month end if greater than quarter end, of the aggregate long and short securities and commodities positions held by each Material Associated Person, including a separate listing of each single unhedged securities or commodities position, other than U.S. government or agency securities, that exceeds the Materiality Threshold at any month end;
      (vii) The notional or contractual amounts, and in the case of options, the value of the underlying instruments, as of quarter end, of financial instruments with off-balance sheet risk and financial instruments with concentrations of credit risk (as those terms are used in Statement of Financial Accounting Standards No. 105) where the Material Associated Person operates a trading book, with a separate entry of each commitment where the credit risk for that term is used in Statement of Financial Accounting Standards No. 105) with respect to a counterparty exceeds the Materiality Threshold at quarter end;
      (viii) The aggregate amount as of quarter end, and the amount at month end if greater than quarter end, of all bridge loans and those other material unsecured extensions of credit (not including intra-group receivables) with an initial or remaining maturity of less than one year by each Material Associated Person, together with the allowance for losses for such transactions, including a specific description of any extensions of credit to a single borrower exceeding the Materiality Threshold at any month end;
      (ix) The aggregate amount as of quarter end, and the amount at month end if greater than quarter end, of commercial paper, secured and other unsecured borrowing, bank loans, lines of credit, or any other borrowings, and the principal installments of long-term or medium-term debt, scheduled to mature within twelve months from the most recent fiscal quarter for the broker or dealer and each Material Associated Person; and
      (x) Data relating to real estate activities, including mortgage loans and investments in real estate, but not including trading positions in whole loans, conducted by each Material Associated Person, including:
      (A) Real estate loans and investments by type of property, such as construction and development, residential, commercial and industrial or farmland;
      (B) The geographic distribution, as of quarter end, by type of loan or investment where the amount exceeds the Materiality Threshold at quarter end;
      (C) The aggregate carrying value of loans which each Material Associated Person deems to be not current as to interest or principal, together with the Material Associated Person's criteria for the determination of which loans are not current, or which are in the process of foreclosure or that have been restructured;
      (D) The allowance for losses on loans and on investment real estate by type of loan or investment, and the activity in the allowance for losses account; and
      (E) Information about risk concentration in the real estate investment and loan portfolio, including information about risk concentration to a single borrower or location of property if the risk concentration exceeds the Materiality Threshold at quarter end.
      (2) The determination of whether an associated person of a broker or dealer is a Material Associated Person shall involve consideration of all aspects of the activities of, and the relationship between, both entities, including without limitation, the following factors:
      (i) The legal relationship between the broker or dealer and the associated person:
      (ii) The overall financing requirements of the broker or dealer and the associated person, and the degree, if any. to which the broker or dealer and the associated person are financially dependent on each other;
      (iii) The degree, if any, to which the broker or dealer or its customers rely on the associated person for operational support or services in connection with the broker's or dealer's business;
      (iv) The level of risk present in the activities of the broker's or dealer's associated persons; and
      (v) The extent to which the associated person has the authority or the ability to cause a withdrawal of capital from the broker or dealer.
      (3) The information, reports and records required by the provisions of this section shall be maintained and preserved in accordance with the provisions of section 240.17a-4 and shall be kept for a period of not less than three years in an easily accessible place.
      (4) For the purposes of this section and section 240.17h-2T, the term "Materiality Threshold" shall mean the greater of:
      (i) $100 million: or
      (ii) 10 percent of the broker or dealer's tentative net capital based on the most recently filed Form X-17A-5 or 10 percent of the Material Associated Person's tangible net worth, whichever is greater.
      (b) Special provisions with respect to material associated persons subject to the supervision of certain domestic regulators. A broker or dealer shall be deemed to be in compliance with the recordkeeping requirements of paragraph (a) of this section with respect to a Material Associated Person if:
      (1) Such Material Associated Person is subject to examination by, or the reporting requirements of, a Federal banking agency and the broker or dealer maintains in accordance with the provisions of this section copies of all reports submitted by such Material Associated Person with the Federal banking agency pursuant to section 5211 of the Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) of the Home Owners' Loan Act, or section 5 of the Bank Holding Company Act of 1956 other than the Form FR 2068; or
      (2) if such Material Associated Person is subject to the supervision of an insurance commissioner or other similar official or agency of a state, and the broker or dealer maintains in accordance with tire provisions of this section copies of the Annual and Quarterly Statements with Schedules and Exhibits prepared by the insurance company on forms prescribed by the National Association of Insurance Commissioners; or
      (3) In the event an insurance company is not required to prepare Quarterly Statements on forms prescribed by the National Association of Insurance Commissioners, the broker or dealer must maintain and preserve the records required by paragraph (a) of this section on a quarterly basis; or
      (4) In the case of a Material Associated Person that is subject to the supervision of the Commodity Futures Trading Commission, the broker or dealer maintains in accordance with the provisions of this section copies of the reports filed on Forms 1 FR-FCM or 1 FR-IB by such Material Associated Person with the Commodity Futures Trading Commission.
      (c) Special provisions with respect to material associated persons subject to the supervision of a foreign financial regulatory authority. A broker or dealer shall be deemed to be in compliance with the recordkeeping requirements of paragraph (a) of this section with respect to a Material Associated Person if such broker or dealer maintains in accordance with the provisions of this section copies of the reports filed by such Material Associated Persons with a Foreign Financial Regulatory Authority. The broker or dealer shall maintain a copy of the original report and a copy translated into the English language. For the purposes of this section, the term Foreign Financial Regulatory Authority shall have the meaning set forth in section 3(a)(51) of the Act.
      (d) Exemptions.
      (1) The provisions of this section shall not apply to any broker or dealer which is exempt from the provisions of section 240.15c3-3:
      (i) Pursuant to paragraph (k)(1) of i 240.15c3-3; or
      (ii) Pursuant to paragraph (k)(2) of § 240.15c3-3; or
      (iii) If the broker or dealer does not qualify for an exemption from the provisions of § 240.15c3-3 and such broker or dealer does not hold funds or securities for, or owe money or securities to, customers and does net carry the accounts of or for customers; unless
      (iv) In the case of paragraphs (d)(1)(ii) or (d)(1)(iii) of this section, the broker or dealer maintains capital including debt subordinated in accordance with appendix D of § 240.15c3-1 equal to or greater than $20,000,000.
      (2) The provisions of this section shall not apply to any broker or dealer which maintains capital including debt subordinated in accordance with appendix D of section 240.15c3-1 of less than $250,000, even if the broker or dealer hold funds or securities for, or owes money or securities to, customers or carries the accounts of or for customers.
      (3) In calculating capital for the purposes of this paragraph, a broker or dealer shall include the equity capital and subordinated debt of any other registered brokers or dealers that are associated with the broker or dealer and are not otherwise exempt from the provisions pursuant to paragraph (d)(1)(i) of this section.
      (4) The Commission may, upon written application by a Reporting Broker or Dealer, exempt from the provisions of this section, either unconditionally or on specified terms and conditions, any brokers or dealers associated with such Reporting Broker or Dealer. The term "Reporting Broker or Dealer!' shall mean, in the case of a broker or dealer that is associated with other registered brokers or dealers, the broker or dealer which maintains the greatest amount of net capital as reported on its most recently fixed Form X-17A-5. In granting exemptions under this section, the Commission shall consider, among other factors, whether the records and other information required to be maintained pursuant to this section concerning the Material Associated Persons of the broker or dealer associated with the Reporting Broker or Dealer will be available to the Commission pursuant to § 240.17h-2T.
      (e) Location of records. A broker or dealer required to maintain records concerning a Material Associated Person pursuant to this section may maintain those records either at the Material Associated Person or at a records storage facility provided that the records are located within the boundaries of the United States and the records are kept in an easily accessible place, as that term is used in § 240.17a-4. In order to operate pursuant to the provisions of this paragraph, the Material Associated Person or other entity maintaining the records shall file with the Commission a written undertaking in form acceptable to the Commission, signed by a duly authorized person, to the effect that the records will be treated as if the broker or dealer was maintaining the records pursuant to this section and that the entity maintaining the records undertakes to permit examination of such records at any time or from time to time during business hours by representatives or designees of the Commission and to promptly furnish the Commission or its designee true, correct, complete and current hard copy of any or all or any part of such records. The election to operate pursuant to the provisions of this paragraph shall not relieve the broker or dealer required to maintain and preserve such records from any of its responsibilities under this section or section 240.17h-2T.
      (f) Confidentiality. All information obtained by the Commission pursuant to the provisions of this section from a broker or dealer concerning a Material Associated Person shall be deemed confidential information for the purposes of section 24(b) of the Act.
      (g) Temporary implementation schedule. Every broker or dealer subject to the requirements of this section shall maintain and preserve the information required by paragraphs (a)(1)(i), (ii), and (iii) of this section commencing September 30, 1992. Commencing December 31, 1992, the provisions of this section shall apply in their entirety.
      3. By adding § 240.17h-2T to read as follows:

      § 240.17h-2T Risk assessment reporting requirements for brokers and dealers.
      (a) Reporting requirements of risk assessment information required to be maintained by section 240.17h-1T.
      (1) Every broker or dealer registered with the Commission pursuant to section 15 of the Act, and every municipal securities dealer registered pursuant to section 15B of the Act for which the Commission is the appropriate regulatory agency, unless exempt pursuant to paragraph (b) of this section, shall file a Form 17-H within 60 calendar days after the end of each fiscal quarter. The Form 17-H for the fourth fiscal quarter shall be filed within 60 calendar days of the end of the fiscal year. The cumulative year-end financial statements required by section 240.17h-1T may be filed separately within 105 calendar days of the end of the fiscal year.
      (2) The reports required to be filed pursuant to paragraph (a)(1) of this section shall be considered filed when received at the Commission's principal office in Washington, DC.
      (3) For the purposes of this section, the term Material Associated Person shall have the meaning used in § 240.17h-1T.
      (b) Exemptions.
      (1) The provisions of this section shall not apply to any broker or dealer which is exempt from the provisions of section 240.15c3-3:
      (i) Pursuant to paragraph (k)(1) of § 240.15c3-3; or
      (ii) Pursuant to paragraph (k)(2) of § 240.15c3-3; or
      (iii) If the broker or dealer does not qualify for an exemption from the provisions of § 240.15c3-3 and such broker or dealer does not hold funds or securities for, or owe money or securities to, customers and does not carry the accounts of or for customers; unless
      (iv) In the case of paragraphs (b)(1)(ii) or (b)(1)(iii) of this section, the broker or dealer maintains capital including debt subordinated in accordance with appendix D of § 240.15c3-1 equal to or greater than $20,000,000.
      (2) The provisions of this section shall not apply to any broker or dealer which maintains capital including debt subordinated in accordance with appendix D of § 240.15c3-1 of less than $250,000, even if the broker or dealer hold funds or securities for, or owes money or securities to, customers or carries the accounts of or for customers.
      (3) In calculating capital and subordinated debt for the purposes of this section, a broker or dealer shall include the equity capital and subordinated debt of any other registered brokers or dealers that are associated with the broker or dealer and are not otherwise exempt from the provisions pursuant to paragraph (b)(1)(i) of this section.
      (4) The Commission may, upon written application by a Reporting Broker or Dealer, exempt from the provisions of this section, either unconditionally or on specified terms and conditions, any brokers or dealers associated with the Reporting Broker or Dealer. The term "Reporting Broker or Dealer" shall mean, in the case of a broker or dealer that is associated with other registered brokers or dealers, the broker or dealer which maintains the greatest amount of net capital as reported on its most recently filed Form X-17A-5. In granting exemptions under this section, the Commission shall consider, among other factors, whether the records and other information required to be maintained pursuant to § 240.17h-1T concerning the Material Associated Persons of the broker or dealer associated with the Reporting Broker or Dealer will be available to the Commission pursuant to the provisions of this section.
      (c) Special provisions with respect to material associated persons subject to the supervision of certain domestic regulators. A broker or dealer shall be deemed to be in compliance with the reporting requirements of paragraph (a) of this section with respect to a Material! Associated Person if:
      (1) Such Material Associated Person is subject to examination by or the reporting requirements of a Federal banking agency and the broker or dealer or such Material Associated Person furnishes in accordance with paragraph (a) of this section copies of reports filed on Form FR Y-9C, Form FR Y-6, Form FR Y-7, and Form FR 2066 by the Material Associated Person with the Federal banking agency pursuant to section 5211 of the Revised Statutes, section 9 of the Federal Reserve Act. section 7(a) of the Federal Deposit Insurance Act, section 10(b) of the Home-Owners' Loan Act, or section 5 of the Bank Holding Company Act of 1956; or
      (2) If the Material Associated Person is subject to the supervision of an insurance commissioner or other similar official agency of a state; and
      (i) In the case of a Material Associated Person organized as a public stock company, the broker or dealer furnishes in accordance with the provisions of this section copies of the filings made by the insurance company pursuant to sections 13 or 15 of the Act and the Investment Company Act of 1940; or
      (ii) In the case of Material Associated Person organized as a mutual insurance company or a non-public stock company, the broker or dealer furnishes in accordance with the provisions of this section copies of the Annual and Quarterly Statements prepared by the insurance company on forms prescribed by the National Association of Insurance Commissioners. The Annual Statement furnished to the Commission pursuant to this section shall include: The classification (distribution by state) section from the schedule of real estate; distribution by state, the interest overdue (more than three months), in process of foreclosure, and foreclosed properties transferred to real estate daring the year sections from the schedule of mortgages; and the quality and maturity distribution of all bonds at statement values and by major types of issues section from the schedule of bonds and stocks. All other Schedules and Exhibits to such Annual and Quarterly Statements shall be maintained at the broker-dealer pursuant to the provisions of § 240.17h-1T but not furnished to the Commission.
      (iii) In the event an insurance company organized as a stock or mutual company is not required to prepare Quarterly Statements, the broker or dealer must file with the Commission a Form 17-H in accordance with the provisions of this section on a quarterly basis.
      (3) In the case of a Material Associated Person that is subject to the supervision of the Commodity Futures Trading Commission, the broker or dealer furnishes in accordance with the provisions of this section copies of the reports filed by the Material Associated Person with the Commodity Futures Trading Commission on Forms 1 FR-FCM or 1 FR-IB.
      (4) No broker or dealer shall be required to furnish to the Commission any examination report of any Federal banking agency or any supervisory recommendations or analyses contained therein with respect to a Material Associated Person that is subject to the regulation of a Federal banking agency. AH information received by the Commission pursuant to this section concerning a Material Associated Person that is subject to examination by or the reporting requirements of a Federal banking agency shall be deemed confidential for the purposes of section 24(b) of the Act.
      (5) The furnishing of any information or documents by a broker or dealer pursuant to this section shall not constitute an admission for any purpose that a Material Associated Person is otherwise subject to the Act. Any documents or information furnished to the Commission by a broker or dealer pursuant to this rule shall not be deemed to be "filed" for the purposes of the liabilities set forth in section 18 of the Act.
      (d) Special provisions with respect to material associated persons subject to the supervision of a foreign financial regulatory authority. A broker or dealer shall be deemed to be in compliance with the reporting requirements of this section with respect to a Material Associated Person if such broker or dealer furnishes in accordance with the provisions of this section copies of the reports filed by such Material Associated Person with a Foreign Financial Regulatory Authority. The broker or dealer shall file a copy of the original report and a copy translated into the English language. For the purposes of this section, the term Foreign Financial Regulatory Authority shall have the meaning set forth in section 3(a)(51) of the Act.
      (e) Confidentiality. All information obtained by the Commission pursuant to the provisions of this section from a broker or dealer concerning a Material Associated Person shall be deemed confidential information for the purposes of section 24(b) of the Act.
      (f) Temporary implementation schedule. Every broker or dealer subject to the requirements of this section shall file the information required by Items 1. 2 and 3 of Form 17-H by October 31, 1992. Commencing December 31, 1992, the provisions of this section shall apply in their entirety.
      PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934
      4. The authority citation for part 249 continues to read as follows:

      Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
      5. By adding § 249.328T to read as follows:

      § 249.328T Form 17-H, Risk assessment report for brokers and dealers pursuant to section 17(h) of the Securities Exchange Act of 1934 and rules thereunder.

      This form shall be used by brokers and dealers in reporting information to the Commission concerning certain of their associated persons pursuant to section 17(h) of the Securities Exchange Act of 1934 (l5 U.S.C. 78q(h)] and Rules 17h-1T and 17h-2T thereunder [§§ 240.17h-1T and 240.17h-2T of this chapter].

      Note: This form will not appear in the Code of Federal Regulations.

      Securities and Exchange Commission, Washington, DC 20S49

      Form 17-H

      Risk Assessment Report for Brokers and Dealers

      Part I—Risk Assessment Reporting Requirements for Brokers and Dealers SEC File No.____________________
      Crd No.____________________
      Name of Reporting Broker-Dealer____________________
      Address of Principal Place of Business____________________
      Firm I.D. No.____________________
      For Period Beginning (MM/DD/YY) And Ending (MM/DD/YY)____________________
      Name and Telephone Number of Person To____________________
      Contact in Regard to This Report ____________________
      Name(s) of Material Associated Persons Contained in This Report:____________________
      Name of Associated Broker-Dealer(s) Not Filing (if applicable) ____________________

      Attention

      Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a].

      Intentional misstatements or omissions of facts may also result in civil fines and other sanctions pursuant to Section 20 of the Securities Exchange Act of 1934.

      The person signing this report represents hereby that all information contained in this Form is true, correct and complete. It is understood that all information in this Form is considered an integral part of this Form and that the submission of any amendment represents that all unamended information remains true, correct and complete as previously filed.

      Pursuant to the Securities Exchange Act of 1934. the undersigned has caused this report to be signed on its behalf in the City of__________and State of __________ on the __________day of__________ 19__________

      ______________________________

      (Name of Broker-Dealer)

      ______________________________

      (Signature and Title of Person Duly Authorized to Submit This Report)

      General Instructions
      1. This Form consists of two parts. Part I consists of the organizational, policy and legal information required by paragraphs (a)(1)(i) through (iii) of section 240.17h-1T, together with the financial statements required by paragraphs (a)(1)(iv) and (v) of § 240.17h-1T. Part II contains line items for reporting the numerical and other data required by paragraphs (a)(1)(vi) through (x) of § 240.17h-1T
      2. Report as of the last day of the fiscal quarter. This Form is to be filed within 60 calendar days of the end of each fiscal quarter by brokers and dealers concerning each Material Associated Person (as defined in Temporary Rules 17h-1T and 17h-2T). The Form for the fourth fiscal quarter shall be filed within 60 calendar days of the end of the fiscal year. The cumulative year end financial statements required by paragraphs (a)(1) (iv) and (v) of § 140.17h-1T may be filed separately within 105 calendar days of the end of the fiscal year.
      3. In the event a broker or dealer is associated with one or more other registered brokers or dealers, each broker or dealer is required to file a separate Form 17-H. The Commission may exempt from the filing requirements all brokers or dealers associated with a broker or dealer that has been designated a "Reporting Broker or Dealer." The term "Reporting Broker or Dealer" shall have the meaning set forth in Rules 17h-1T and 17h-2T. A broker or dealer seeking designation as a Reporting Broker or Dealer must apply to the Commission for an exemption pursuant to Rule 17h-2T. Pending such designation, each broker or dealer associated with the broker or dealer requesting such designation as a Reporting Broker or Dealer is required to file a separate Form 17-H.
      4. The information requested in Part II of this Form shall be completed separately for each Material Associated Person, even if the financial data contained in the broker or dealer's Form X-17A-5 contains information concerning a Material Associated Person. The broker-dealer should not include information concerning its activities in the information required by Part II of this Form if such information is filed with the Commission as part of the broker-dealer's Form X-17A-5 or Form G-405.
      Item 1.—Organizational Chart Reflecting the Associated Persons and the Broker-Dealer
      1. Provide a copy of the organizational chart maintained by the broker or dealer pursuant to paragraph (a)(1)(i) of § 240.17h-1T.
      2. The information provided pursuant to this Item should be included in the first Form 17-H filed by the broker or dealer and in the year end filing. Quarterly updates should be provided only where a material change in the information provided to the Commission has occurred.
      Item 2.—Risk Management and Other Policies
      1. Provide copies of the financing, capital adequacy, and risk management and other policies, procedures or systems maintained by the broker-dealer pursuant to paragraph (a)(1)(ii) of section 240.17h-1T.
      2. The information provided pursuant to this Item should be included in the first Form 17-H filed by the broker or dealer. Quarterly updates should be provided only where a material change in the information provided to the Commission has occurred.
      Item 3.—Legal Proceedings
      1. Provide the description of any material pending legal or arbitration proceedings maintained by the broker or dealer pursuant to paragraph (a)(1)(iii) of § 240.17h-1T.
      2. The information provided pursuant to this Item should be included in the first Form 17-H filed with the Commission. Quarterly updates should be provided only where a material change in the information provided to the Commission has occurred.
      Item 4.—Financial Statements
      1. Provide the information required to be maintained by the broker or dealer pursuant to paragraphs (a)(1)(iv) and (a)(1)(v) of § 240.17h-1T. The financial statements may be presented on an unaudited basis. The statement of cash flows and the notes to financial statements may be omitted for the consolidating financial statements. Entities using accounting principles other than U.S. GAAP should indicate in a note the accounting principles used.
      2. The consolidating financial statements must be presented on a subsidiary basis and shall indicate which subsidiaries are Material Associated Persons.
      Part II—General Instructions for Part II of This Form 1. Provide the following information for each Material Associated Person as of the end of the quarter. Indicate the name of each Material Associated Person in a separate column. In the event a separate listing of a position, financial instrument or otherwise is required pursuant to any of the provisions of § 240.17h-1T the broker or dealer should indicate as such in the appropriate section of this Part II. Indicate a separate listing for long and short positions.
      I. Aggregate Securities and Commodities Positions Indicate long and short positions separately)
      1. U.S. Treasury securities ....................
      2. U.S. Government agency ....................
      3. Securities issued by states and political subdivisions in the U.S..
      4. Foreign securities:
      (a) Debt securities ....................
      (b) Equity securities ....................
      5. Banker's acceptance ....................
      6. Certificates of deposit ....................
      7. Commercial paper ....................
      8. Corporate obligations ....................
      9. Stocks and warrants (other than arbitrage positions).
      10. Arbitrage:
      (a) Index arbitrage and program trading.
      (b) Risk arbitrage ....................
      (c) Other arbitrage ....................
      11. Options:
      (a) Market value of put options:
      (i) Listed ....................
      (ii) Unlisted ....................
      (b) Market value of call options:
      (i) Listed ....................
      (ii) Unlisted ....................
      12. Spot commodities ....................
      13. Investments with no ready market:
      (a) Equity ....................
      (b) Debt ....................
      (c) Other (include limited partner ship interests).
      14. Other securities of commodities....
      15. Summary of delta or similar analysis (if available).
      II. Financial Instruments With Off-Balance Sheet Risk and With Concentration of Credit Risk (Provide notional or contractual amounts where appropriate, or in the case of options, the values of the underlying instrument. In the event a separate listing of a position or instrument is required pursuant to the provisions of section 17h-1T separately state such position separately.
      A. Securities
      1. When-issued securities:
      (a) Gross commitments to purchase.
      (b) Gross commitments to sell ....................
      2. Written stock option contracts:
      (a) Market value, and the value of the underlying securities, of call contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      (b) Market value, and the value of the underlying securities, of put contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      (c) Market value, and the value of the underlying securities, of naked call contracts:
      (i) Listed
      (ii) Unlisted
      (d) Market value, and the value of the underlying securities, of naked put contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      3. Futures:
      (a) U.S. Treasury and mortgage-backed securities futures.
      (b) Other futures (specify)....................
      4. Forwards:
      (a) U.S. Treasury and mortgage-backed securities.
      (i) Aggregate current cost of replacing contracts by counterparty in which the Material Associated Person has a gain.
      (ii) Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      (b) Other forwards (specify)
      (i) Aggregate current cost of replacing contracts by counterparty in which the Material Associated Person has a gain.
      (ii) Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      B. Interest Rate Swaps
      1. U.S. dollar denominated swaps:
      (a) Total notional or contractual amount
      (b) Aggregate current cost of replacing contracts by counter party in which the Material Associated Person has a gain.
      (c) Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      2. Cross currency swaps:
      (a) Total notional or contractual amount.
      (b) Aggregate current cost of replacing contracts by counter party in which the Material Associated Person has a gain.
      (c) Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      C. Foreign exchange
      1. Swaps:
      (a) Total notional or contractual amount.
      (b) Aggregate current cost of re placing contracts by counter party in which the Material Associated Person has a gain.
      (c) Per counterparty breakdown where credit risk exceeds she Materiality Threshold.
      2. Notional or contractual amounts of commitments to purchase foreign currencies and U.S. dollar exchange:
      (a) Future ....................
      (b) Forwards ....................
      (i) Aggregate current cost of replacing contracts by counterparty in which the Material Associated Person has a gain.
      (ii) Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      3. Contractual value together with value of the underlying instruments of naked written option contracts.
      D. All other swap agreements (specify type)
      1. Total notional or contractual amount.
      2. Aggregate current cost of replacing contracts by counter party in which the Material Associated Person has a gain.
      3. Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      E. Commodities
      1. Futures ....................
      2. Forwards ....................
      (a) Aggregate current cost of replacing contracts by counter party in which the Material Associated Person has a gain.
      (b) Per counterparty breakdown where credit risk exceeds the Materiality Threshold.
      3. Sold option contracts (e.g., options on individual commodities and commodities indexes)
      (a) Market value, and the value of the underlying securities, of call contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      (b) Market value, and the value of the underlying securities, of put contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      (c) Market value, and the value of the underlying securities, of naked call contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      (d) Market value, and the value of the underlying securities, of naked put contracts:
      (i) Listed ....................
      (ii) Unlisted ....................
      F. Loan commitments
      1. Total amount ....................
      2. Unused portion ....................
      G. Total standby, commercial and similar letters of credit or guarantees.
      H. Assets sold with recourse ....................
      I. Other off-balance sheet items (specify).
      J. Summary of delta or similar analysis (if available).
      K. Provide a separate listing, by amount, of significant concentrations of credit risk as defined in Statement of Financial Accounting Standards 105.
      III. Bridge Loans and Other Extensions of Credit
      1. Bridge loans ....................
      2. Other material credit extensions (specify).
      3. Allowance for losses for credit extensions.
      IV. Funding Sources
      1. Short-term borrowings:
      (a) Commercial paper ....................
      (b) Bank loans-secured ....................
      (c) Bank loans-unsecured ....................
      (d) Other ....................
      (e) Total ....................
      2. Long and medium-term debt ....................
      3. Committed lines of credit ....................
      4. Amounts borrowed under credit lines.
      5. Credit ratings for commercial paper
      (a) Standard & Poor's Corporation.
      (b) Moody's Investor Service ....................
      (c) Other Nationally Recognized Statistical Rating Organization.
      V. Real Estate
      1. Real estate loans:
      (a) Construction and land development.
      (b) Secured by farmland ....................
      (c) Secured by residential properties.
      (d) Commercial and industrial ....................
      (e) Other ....................
      2. Real estate investments:
      (a) Construction and land development.
      (b) Farmland ....................
      (c) Residential properties ....................
      (d) Commercial and industrial ....................
      (e) Other ....................
      3. Provide a separate listing of the above information by geographic region where the amount exceeds the Materiality Threshold.
      4. Provide information about risk concentration to a single borrower, location or property in the in vestment or loan portfolio where the amount exceeds the Materiality Threshold

      Dated: July 16, 1992.

      By the Commission.

      Jonathan G. Katz,

      Secretary.

      [FR Doc. 92-17151 Filed 7-20-92; 12:01 am]

      BILLING CODE 8010-01-M


      1 Exchange Act Release No. 29635 (August 30, 1991); 56 FR 44014, (September 8, 1991).

      2 Pub. L. No. 101-432.104 Slat. 963 (1990); 15 U.S.C 7Bq(b).

      3 See section 17(h)(1) of the Act.

      4 Id.

      5 Id.

      6 The term "associated person of a broker or dealer" is defined in Section 3(a)(18) of the Exchange Act. For the purposes of the risk assessment rules, the term does not include natural persons.

      7 See H Rep. at 27.

      8 One commentator, noting the comprehensive scheme of federal banking regulation, suggested that Material Associated Persons that are banks should be exempt from the rules altogether. Despite this regulatory scheme. Congress provided the Commission with the authority to request information from banks for risk assessment purposes. The Commission believes that the risk assessment program would not be complete if such information is not obtained. As envisioned in the Reform Act, the Commission will obtain such information in the form presented to federal authorities.

      9 The Commission notes that the test of the Reform Act stated that broker-dealers, would be permitted to file copies of reports filed by a bank pursuant to section 8 of the Bank Holding Company Act of 1956. Section 8 of that Act refers to penalties; the correct citation should refer to section 5 of the Bank Holding Company Act. which refers to reporting obligations. The rules have been modified to correct this error.

      10 The proposed rules contained special provisions for banks "subject to examination by. and the reporting requirements of a Federal banking agency." The text of the Reform Act refers to the "examination by. or the reporting requirements of a Federal banking agency." The final rules have been revised to track the statutory language.

      11 Section 3(a)(51) of the Act defines a "foreign financial regulatory authority" to mean "any (A) Foreign securities authority. (B) other governmental body or foreign equivalent of a self-regulatory organization empowered by a foreign government to administer or enforce its laws relating to the regulation of fiduciaries, trusts, commercial lending, insurance, trading in contracts of sale of a commodity for future delivery, or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent, or other financial activities, or (C) membership organization a function of which is to regulate participation of its members in activities listed above."

      12 These broker-dealers are exempt from the provisions of Rule 15c3-3 pursuant to paragraph (k)(1) thereof. They must limit their activities to the purchase, sale, and redemption of redeemable securities of registered investment companies or of interests or participation in an insurance company separate account, whether or not registered as an investment company; the solicitation of share accounts for savings and loan associations insured by an instrumentality of the United States: and the sale of securities for the account of a customer to obtain funds for immediate reinvestment in redeemable securities of registered investment companies.

      13 Under the temporary implementation schedule set forth in this release, broker-dealers will be required to furnish an organizational chart 30 days after the initial effective date of the rules. Because the rules require broker-dealers to file the organizational chart in each year-end Form 17-H. broker-dealers operating on a calendar year end would technically be required to file another chart in the December filing. For the purposes of the phase-in of the rules, any broker-dealer filing an organizational chart under the temporary implementation schedule need not file the chart a second time in the first year-end filing unless a material change has occurred.

      14 The Commission notes that the information regarding capital adequacy formerly contained in paragraph (a)(1)(vi) of proposed Rule 17h-1T has been incorporated into the revised paragraph (a)(1)(ii). Proposed Item 4 of Form 17-H, dealing with capital adequacy information, has been deleted as unnecessary.

      15 SFAS 105 defines "credit risk" as the possibility that a loss may occur from the failure of another party to perform under the terms of the contract.

    • 92-44 Appointment of a SIPC Trustee for Two Firms

      SUGGESTED ROUTING:*

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

      On July 6, 1992, the Securities Investor Protection Corporation (SIPC) instituted a Direct Payment Procedure for:

      Alison Baer Securities, Inc.
      P.O.Box 811025
      Boca Raton, FL 33481-1015.

      Questions regarding the firm should be directed to SIPC:

      Securities Investor Protection Corporation
      805 15th Street, NW, Suite 800
      Washington, DC 20005-2207
      (202)371-8300.

      On July 9, 1992, the United States District Court for the Southern District of New York appointed Lee S. Richards, III, Esquire, Richards Spears Kibbe & Orbe Trustee for:

      W.H. Farr & Co., Inc.
      20 Exchange Place New York, NY 10005.

      Questions regarding the firm should be directed to SIPC Trustee:

      Lee S. Richards, III, Esquire
      Richards Spears Kibbe & Orbe
      140 Broadway
      New York, NY 10005
      (212)514-9000.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close out open over-the-counter contracts. Also, Municipal Securities Rulemaking Board Rule G-12(h) provides that members may use above procedures to close out transactions in municipal securities.

    • 92-43 Labor Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

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

      Securities exchanges and The Nasdaq Stock MarketSM will be closed on Monday, September 7, 1992, in observance of Labor Day. "Regular way" transactions made on the business days immediately preceding that day will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      August 28

      Sept. 4

      Sept. 9

      31

      8

      10

      Sept. 1

      9

      11

      2

      10

      14

      3

      11

      15

      4

      14

      16

      7

      Markets Closed

      -

      8

      15

      17

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

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

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

    • 92-42 Penny Stock Risk Disclosure Document

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The NASD is providing for members' use the Penny Stock Risk Disclosure Document as recently amended by the Securities Exchange Commission (SEC), which brokers/dealers are required to furnish customers prior to engaging in transactions in penny stocks, as defined by the SEC's Penny Stock Disclosure Rules.

      SEC Rule 15g-2 is part of the Penny Stock Disclosure Rules adopted pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Under Rule 15g-2, which became effective on July 15, 1992, a broker/dealer before effecting a transaction in a penny stock for a customer, must furnish that customer with a Penny Stock Risk Disclosure Document containing the precise language and format in Schedule 15G to the Rule. The SEC amended Schedule 15G to include a brief description of a broker/dealer's responsibilities pursuant to SEC Rule 15c2-61and to reflect January 1, 1993 as the effective date for the required disclosure of the: (1) current bid and ask quotation, if any; (2) compensation of the broker/dealer and the salesperson in the transaction; and (3) monthly account statements showing the market value of each penny stock held in the customer's account.

      The rule forbids a broker/dealer from omitting, adding to, or altering in any way the language of the disclosure document. The rule also forbids any change in the format of the document and sets minimum typesize requirements.

      To assist members in complying with SEC Rule 15g-2, the NASD is publishing the Penny Stock Risk Disclosure Document in this Notice. Members are encouraged to photocopy the document onto plain paper for distribution to customers. The SEC staff has advised that members may not use their letterhead paper for copying the document.

      Questions concerning this Notice should be directed to Daniel Sibears or Gary Carleton, NASD Compliance Division, at (202) 718-8959.


      SEC Release No. 34-30917 (July 13, 1992).


      IMPORTANT INFORMATION ON PENNY STOCKS

      This statement is required by the U.S. Securities and Exchange Commission (SEC) and contains important information on penny stocks. You are urged to read it before making a purchase or sale.

      Penny stocks can be very risky.

      • Penny stocks are low-priced shares of small companies not traded on an exchange or quoted on NASDAQ. Prices often are not available. Investors in penny stocks often are unable to sell stock back to the dealer that sold them the stock. Thus, you may lose your investment. Be cautious of newly issued penny stock.


      • Your salesperson is not an impartial advisor but is paid to sell you the stock. Do not rely only on the salesperson, but seek outside advice before you buy any stock. If you have problems with a salesperson, contact the firm's compliance officer or the regulators listed below.

      Information you should get.

      • Before you buy penny stock, [effective January 1, 1993] federal law requires your salesperson to tell you the "offer" and the "bid" on the stock, and the "compensation" the salesperson and the firm receive for the trade. The firm also must mail a confirmation of these prices to you after the trade.


      • You will need this price information to determine what profit, if any, you will have when you sell your stock. The offer price is the wholesale price at which the dealer is willing to sell stock to other dealers. The bid price is the wholesale price at which the dealer is willing to buy the stock from other dealers. In its trade with you, the dealer may add a retail charge to these wholesale prices as compensation (called a "markup" or "mark-down").


      • The difference between the bid and the offer price is the dealer's "spread." A spread that is large compared with the purchase price can make a resale of a stock very costly. To be profitable when you sell, the bid price of your stock must rise above the amount of this spread and the compensation charged by both your selling and purchasing dealers. If the dealer has no bid price, you may not be able to sell the stock after you buy it, and may lose your whole investment.

      Brokers' duties and customer's rights and remedies.

      • If you are a victim of fraud, you may have rights and remedies under state and federal law. You can get the disciplinary history of a salesperson or firm from the NASD at 1-800-289-9999, and additional information from your state securities official, at the North American Securities Administrators Association's central number: (202) 737-0900. You also may contact the SEC with complaints at (202) 272-7440.

      FURTHER INFORMATION

      THE SECURITIES BEING SOLD TO YOU HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. MOREOVER, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE FAIRNESS OR THE MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN ANY PROSPECTUS OR ANY OTHER INFORMATION PROVIDED BY AN ISSUER OR A BROKER OR DEALER.

      Generally, penny stock is a security that:

      • Is priced under five dollars;


      • Is net traded on a national stock exchange or on NASDAQ (the NASD's automated quotation system for actively traded stocks);


      • May be listed in the "pink sheets" or the NASD OTC Bulletin Board;


      • Is issued by a company that has less than $5 million in net tangible assets and has been in business less than three years, by a company that has under $2 million in net tangible assets and has been in business for at least three years, or by a company that has revenues of $6 million for 3 years.

      Use caution when investing in penny stocks:

      1. Do not make a hurried investment decision. High-pressure sales techniques can be a warning sign of fraud. The salesperson is not an impartial advisor, but is paid for selling stock to you. The salesperson also does not have to watch your investment for you. Thus, you should think over the offer and seek outside advice. Check to see if the information given by the salesperson differs from other information you may have. Also, it is illegal for salespersons to promise that a stock will increase in value or is risk-free, or to guarantee against loss. If you think there is a problem, ask to speak with a compliance official at the firm, and, if necessary, any of the regulators referred to in this statement.
      2. Study the company issuing the stock. Be wary of companies that have no operating history, few assets, or no defined business purpose. These may be sham or "shell" corporations. Read the prospectus for the company carefully before you invest. Some dealers fraudulently solicit investors' money to buy stock in sham companies, artificially inflate the stock prices, then cash in their profits before public investors can sell their stock.
      3. Understand the risky nature of these stocks. You should be aware that you may lose part or all of your investment. Because of large dealer spreads, you will not be able to sell the stock immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. New companies, whose stock is sold in an "initial public offering," often are riskier investments. Try to find out if the shares the salesperson wants to sell you are part of such an offering. Your salesperson must give you a "prospectus" in an initial public offering, but the financial condition shown in the prospectus of new companies can change very quickly.
      4. Know the brokerage firm and the salespeople with whom you are dealing. Because of the nature of the market for penny stock, you may have to rely solely on the original brokerage firm that sold you the stock for prices and to buy the stock back from you. Ask the National Association of Securities Dealers, Inc. (NASD) or your state securities regulator, which is a member of the North American Securities Administrators Association, Inc. (NASAA), about the licensing and disciplinary record of the brokerage firm and the salesperson contacting you. The telephone numbers of the NASD and NASAA are listed on the first page of this document.
      5. Be cautious if your salesperson leaves the firm. If the salesperson who sold you the stock leaves his or her firm, the firm may reassign your account to a new salesperson. If you have problems, ask to speak to the firm's branch office manager or a compliance officer. Although the departing salesperson may ask you to transfer your stock to his or her new firm, you do not have to do so. Get information on the new firm. Be wary of requests to sell your securities when the salesperson transfers to a new firm. Also, you have the right to get your stock certificate from your selling firm. You do not have to leave the certificate with that firm or any other firm.

      YOUR RIGHTS

      Disclosures to you. Under penalty of federal law, [effective January 1, 1993] your brokerage firm must tell you the following information at two different times—before you agree to buy or sell a penny stock, and after the trade, by written confirmation:

      • The bid and offer price quotes for penny stock, and the number of shares to which the quoted prices apply. The bid and offer quotes are the wholesale prices at which dealers trade among themselves. These prices give you an idea of the market value of the stock. The dealer must tell you these price quotes if they appear on an automated quotation system approved by the SEC. If not, the dealer must use its own quotes or trade prices. You should calculate the spread, the difference between the bid and offer quotes, to help decide if buying the stock is a good investment.

      A lack of quotes may mean that the market among dealers is not active. It thus may be difficult to resell the stock. You also should be aware that the actual price charged to you for the stock may differ from the price quoted to you for 100 shares. You should therefore determine, before you agree to a purchase, what the actual sales price (before the markup) will be for the exact number of shares you want to buy.

      • The brokerage firm's compensation for the trade. A markup is the amount a dealer adds to the wholesale offer price of the stock and a markdown is the amount it subtracts from the wholesale bid price of the stock as compensation. A markup/markdown usually serves the same role as a broker's commission on a trade. Most of the firms in the penny stock market will be dealers, not brokers.


      • The compensation received by the brokerage firm's salesperson for the trade. The brokerage firm must disclose to you, as a total sum, the cash compensation of your salesperson for the trade that is known at the time of the trade. The firm must describe in the written confirmation the nature of any other compensation of your salesperson that is unknown at the time of the trade.

      In addition to the items listed above, your brokerage firm must send to you:

      • Monthly account statements. In general, [effective January 1, 1993] your brokerage firm must send you a monthly statement that gives an estimate of the value of each penny stock in your account, if there is enough information to make an estimate. If the firm has not bought or sold any penny stocks for your account for six months, it can provide these statements every three months.


      • A Written Statement of Your Financial Situation and Investment Goals. In general, unless you have had an account with your brokerage firm for more than one year, or you have previously bought three different penny stocks from that firm, your brokerage firm must send you a written statement for you to sign that accurately describes your financial situation, your investment experience, and your investment goals, and that contains a statement of why your firm decided that penny stocks are a suitable investment for you. The firm also must get your written consent to buy the penny stock.

      Legal remedies. If penny stocks are sold to you in violation of your rights listed above, or other federal or state securities laws, you may be able to cancel your purchase and get your money back. If the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration. You may wish to contact an attorney. The SEC is not authorized to represent individuals in private litigation.

      However, to protect yourself and other investors, you should report any violations of your brokerage firm's duties listed above and other securities laws to the SEC, the NASD, or your state securities administrator at the telephone numbers on the first page of this document. These bodies have the power to stop fraudulent and abusive activity of salespersons and firms engaged in the securities business. Or you can write to the SEC at 450 Fifth St., N.W., Washington, D.C. 20549; the NASD at 1735 K Street, N.W., Washington, D.C. 20006; or NASAA at 555 New Jersey Avenue, N.W., Suite 750, Washington, D.C. 20001. NASAA will give you the telephone number of your state's securities agency. If there is any disciplinary record of a person or firm, the NASD, NASAA, or your state securities regulator will send you this information if you ask for it.

      MARKET INFORMATION

      The market for penny stocks. Penny stocks usually are not listed on an exchange or quoted on the NASDAQ system. Instead, they are traded between dealers on the telephone in the "over-the-counter" market. The NASD's OTC Bulletin Board also will contain information on some penny stocks. At times, however, price information for these stocks is not publicly available.

      Market domination. In some cases, only one or two dealers, acting as "market makers," may be buying and selling a given stock. You should first ask if a firm is acting as a broker (your agent) or as a dealer. A dealer buys stock itself to fill your order or already owns the stock. A market maker is a dealer who holds itself out as ready to buy and sell stock on a regular basis. If the firm is a market maker, ask how many other market makers are dealing in the stock to see if the firm (or group of firms) dominates the market. When there are only one or two market makers, there is a risk that the dealer or group of dealers may control the market in that stock and set prices that are not based on competitive forces. In recent years, some market makers have created fraudulent markets in certain penny stocks, so that stock prices rose suddenly, but collapsed just as quickly, at a loss to investors.

      Mark-ups and mark-downs. The actual price that the customer pays usually includes the mark-up or mark-down. Markups and markdowns are direct profits for the firm and its salespeople, so you should be aware of such amounts to assess the overall value of the trade.

      The "spread." The difference between the bid and offer price is the spread. Like a mark-up or mark-down, the spread is another source of profit for the brokerage firm and compensates the firm for the risk of owning the stock. A large spread can make a trade very expensive to an investor. For some penny stocks, the spread between the bid and offer may be a large part of the purchase price of the stock. Where the bid price is much lower than the offer price, the market value of the stock must rise substantially before the stock can be sold at a profit. Moreover, an investor may experience substantial losses if the stock must be sold immediately.

      Example: If the bid is $0.04 per share and the offer is $0.10 per share, the spread (difference) is $0.06, which appears to be a small amount. But you would lose $0.06 on every share that you bought for $0.10 if you had to sell that stock immediately to the same firm. If you had invested $5,000 at the $0.10 offer price, the market maker's repurchase price, at $0.04 bid, would be only $2,000; thus you would lose $3,000, or more than half of your investment, if you decided to sell the stock. In addition, you would have to pay compensation (a "mark-up," "mark-down," or commission) to buy and sell the stock.

      In addition to the amount of the spread, the price of your stock must rise enough to make up for the compensation that the dealer charged you when it first sold you the stock. Then, when you want to resell the stock, a dealer again will charge compensation, in the form of a markdown. The dealer subtracts the markdown from the price of the stock when it buys the stock from you. Thus, to make a profit, the bid price of your stock must rise above the amount of the original spread, the markup, and the markdown.

      Primary offerings. Most penny stocks are sold to the public on an ongoing basis. However, dealers sometimes sell these stocks in initial public offerings. You should pay special attention to stocks of companies that have never been offered to the public before, because the market for these stocks is untested. Because the offering is on a first-time basis, there is generally no market information about the stock to help determine its value. The federal securities laws generally require broker-dealers to give investors a "prospectus," which contains information about the objectives, management, and financial condition of the issuer. In the absence of market information, investors should read the company's prospectus with special care to find out if the stocks are a good investment. However, the prospectus is only a description of the current condition of the company. The outlook of the start-up companies described in a prospectus often is very uncertain.

      For more information about penny stocks, contact the Office of Filings, Information, and Consumer Services of the U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, (202) 272-7440.

    • 92-41 SEC Approval of Amendments to Article III, Section 26 of the NASD Rules of Fair Practice Regarding Limitations on Mutual Fund Asset-Based Sales Charges; Effective July 7, 1993

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On July 7, 1992, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 26 of the NASD Rules of Fair Practice relating to asset-based sales charges by mutual funds. The amendments establish limits on all types of . sales charges whether imposed individually or in combination, with or without service fees, and prohibit certain practices in the marketing of mutual funds. The amendments prohibit members from selling mutual funds that have sales charges in excess of 6.25 percent of new gross sales if the fund also pays a service fee, or 7.25 percent if it does not pay a service fee. The amendments also limit asset-based sales charges to .75 percent of net assets. The amendments take effect on July 7, 1993.

      BACKGROUND

      The SEC has approved amendments to subsections (b) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice that subject asset-based sales charges of mutual funds to the provisions of the NASD's maximum sales charge rule. Currently, the rule governs only front-end and deferred sales charges.

      At the time the maximum sales charge rule was originally adopted, the primary method used by mutual funds to finance sales related expenses was a front-end sales charge deducted from the offering price of mutual fund shares. Consequently, the rule specifically addressed front-end sales charges. Since its adoption in 1975, the mutual fund industry has devised other methods of assessing sales related charges. These methods include "asset-based sales charges" and "deferred sales charges," which include "contingent deferred sales charges," or "CDSCs," Contingent deferred sales charges are "contingent" since they are paid only on redemptions within a specified period after purchase. These charges may be expressed as a percentage of either the original purchase price or the redemption proceeds.

      The NASD has applied the existing maximum sales charge rule to contingent deferred sales charges even though such charges arguably do not fit within the literal definition of sales load contained in Section 2(a)(35) of the Investment Company Act of 1940 (Act).1 The rule has not been applied to asset-based sales charges, however. Such charges are the only type of mutual fund sales compensation not currently subject to NASD regulation. With the advent of these new methods of assessing sales charges on mutual funds, the NASD believed the Rules of Fair Practice should be specifically amended to encompass all sales charges. The NASD wanted to assure a level playing field for all members selling mutual fund shares. Moreover, it believed additional amendments were needed to prevent circumvention of the existing maximum sales charge rule. Funds could use plans approved under SEC Rule 12b-1, either separately or combined with initial or deferred sales loads, to charge investors more for distribution than could have been charged as an initial sales load under the existing maximum sales charge rule.

      DESCRIPTION OF AMENDMENTS

      The proposed rule change amends Sections (b) and (d) of Article III, Section 26 of the Rules of Fair Practice. Section (b) provides definitions applicable to transactions within Section 26, and Section (d) outlines the maximum sales charge provisions for the offer and sale of mutual fund shares by NASD members.

      A. Definitions.

      "Person." Section 26(b)(4) has been amended to define "person" as it is defined in the definitions section of the Act.

      "Sales Charges." Section 26(b)(8) has been added to define the term "sales charge(s)" to include all charges and fees described in the prospectus that are used to finance sales related expenses. Included in the definition are definitions of the terms front-end as well as deferred and asset-based sales charges. The NASD believes this definition will effectively capture all sales charges for sales-related expenses, no matter how they are imposed, and subject them to the NASD's maximum sales charge rule. The provisions of the rule govern only sales-related charges described as such in the mutual fund prospectus and members may rely on such prospectus disclosure for purposes of this section.

      Nominal, i.e., small or minimal, charges incurred by shareholders on redemption of mutual fund shares for special services are excluded from the definition of "deferred sales charges," as are redemption charges that, as described in a prospectus, discourage short-term trading and, generally, apply within one year of purchase of shares. Such nominal and short-term charges may not cover sales-related expenses and must be returned to the mutual fund.

      The term "asset-based sales charge" is not defined in terms of a specific rule, such as Rule 12(b)-1 under the Act. It is intended to encompass charges against net assets, disclosed in the prospectus, that are used to pay for sales-related expenses.

      "Service Fees." Further, the NASD wishes to clearly distinguish sales charges from service fees for the purposes of the maximum sales charge rule to ensure that members would be able to apply the appropriate caps. Accordingly, the definition of "asset-based sales charges" specifically excludes service fees, and Subsection (b)(9) has been amended to define the term "service fees" as payments by an investment company for personal service and/or the maintenance of shareholder accounts.

      During the comment period on these amendments, two commenters requested that the definition of service fees be amended to specifically exclude transfer agent, maintenance, and custodian fees. Service fees are intended to be distinguished from other fees because they relate to personal services provided to the customer, such as a registered representative providing information on investments. Service fees, therefore, do not include recordkeeping charges, accounting expenses, transfer costs, or custodian fees.

      Section 26(b)(10) has been added to define the term "prime rate" as the most preferential rate of interest charged by the largest commercial banks on loans to their corporate clients. The prime rate appears daily in The Wall Street Journal.
      B. Sales Charge Rule.

      Section 26(d) embodies the NASD's maximum sales charge rule on mutual fund sales. Under the current rule, NASD members are prohibited from offering or selling shares of an open-end investment company "if the public offering price includes a sales charge which is excessive." The NASD has amended this section to be applicable to all types of sales charges, whether they are front-end, deferred, or asset-based. Accordingly, Section 26(d) has been amended to prohibit members from offering or selling mutual fund shares if "sales charges described in the prospectus are excessive." The maximum sales charge rule does not directly govern the mutual fund itself in setting fees. Rather, it governs the NASD member who underwrites and distributes the fund's shares to investors. Sales charges shall be deemed excessive if they do not conform to the provisions of Section 26(d).

      Section 26(d)(1) addresses mutual funds that do not have an asset-based sales charge and is substantially the same as the current provision with minor changes designed to include deferred sales charges. New Subsections (d)(1)(E) and (d)(1)(F) codify the principle that, if charges are made for services, or if services are not offered but charges are incurred, an appropriate reduction will be made from the maximum permitted sales charge. Subsection (d)(1)(E) prohibits an NASD member from offering or selling shares in a mutual fund that has an aggregate sales charge of more than 7.25 percent of the offering price if the fund also has a service fee. Subsection (d)(1)(F) permits a fund without an asset-based sales charge that reinvests dividends at the offering price to have a service fee provided that: (1) the aggregate front-end and/or deferred sales charges do not exceed 6.25 percent of the offering price and (2) the fund offers quantity discounts and rights of accumulation.

      New Section 26(d)(2) has been added to expand the rule to govern the sale of mutual funds shares with asset-based sales charges. Subsection (d)(2)(A) establishes a sales charge cap of 6.25 percent of new gross sales, plus an interest rate equal to the prime rate plus one percent per annum of the total charges — asset-based, front-end, and deferred — levied by a mutual fund that pays a service fee. Under Subsection (d)(2)(B), a mutual fund with asset-based sales charges, but no service fee, is subject to a sales charge cap of 7.25 percent of the total new gross sales, rather than 6.25 percent, plus an interest rate equal to the prime rate plus one percent, per annum. The caps in new Subsections (d)(2)(A) and (B) are calculated against new gross sales made after the effective date of the new rules. However, these caps also apply to all sales charges which may be imposed on existing shareholders in connection with any transaction which occurs after the effective date of the new rules.

      Subsection (d)(2)(C) permits a mutual fund that has had an asset-based sales charge in the past to increase its maximum aggregate sales charge on total new gross sales by applying the appropriate cap of 6.25 percent or 7.25 percent to new gross sales retrospectively from the time it first adopted an asset-based sales charge until the effective date of the amendments. The amount thus calculated is increased by an interest rate equal to the prime rate plus 1 percent per annum and reduced by any sales charges — front-end, deferred, or asset-based — on such sales or from net assets resulting from such sales. The net total is added to the total calculated by the application of the provisions of Subsections (d)(2)(A) or (B). The grand total would be reduced over time by sales charges received after the effectiveness of the proposed amendments. New Subsection (d)(2)(C) permits past unreimbursed sales-related expenses to be accommodated within the provisions of the sales charge rule and provides for their gradual amortization.

      During the comment period on the amendments, a commenter noted that the term "plus interest charges on such amount" used in proposed Subparagraphs (d)(2)(A), (d)(2)(B), and (d)(2)(C) would require that interest be calculated on the gross cap rather than the remaining balance and, furthermore, noted that there is no standard mandating the frequency at which the remaining balance be determined. The NASD is therefore clarifying that the interest should be calculated on the remaining balance and not the gross cap.

      Under new Subsection (d)(2)(D), mutual funds are permitted to keep records of exchanges between mutual funds in the same complex, between classes of shares of mutual funds with multiple classes, and between series shares of series mutual funds. Such mutual funds may increase the maximum aggregate sales charges permitted under the previous sections by including such exchanges as new gross sales, provided the maximum aggregate sales charges of the mutual fund, class, or series of the redeeming mutual fund are reduced by the amount of the increase.

      With regard to exchanges, during the comment period on these amendments, clarification was requested as to: (i) whether exchanges are treated as new sales or if the number of years in which sales charges were previously paid are taken into consideration; (ii) whether the current market value or the original cost is used; and (iii) what transpires if the "from" fund cap is already at zero. It is the position of the NASD that exchanges are treated as new sales of the fund into which monies are transferred; the current market value of the new fund is used to determine cost and all associated charges; and if the "from" fund is at zero, the new fund sets up new maximums and the old caps would no longer be applicable.

      New Subsection (d)(2)(E)(i) prohibits NASD members from offering or selling the shares of a mutual fund that has an asset-based sales charge in excess of .75 percent of its average annual net assets. Subsection 26(d)(2)(E)(ii) prohibits a member from offering or selling the shares of a mutual fund if the caps described in Subsections (d)(2)(A), (B), (C), and (D) are reduced to zero, a mutual fund still continues to receive deferred sales charges on redemption, and such sales charges are used to pay for sales related expenses.

      New Section 26(d)(3) prohibits any NASD member or associated person from describing a fund orally or in writing as a "no-load" fund or as having "no sales charge" if the fund has a front-end, deferred, or asset-based sales charge, except for funds which have only combined asset-based sales charges and service fees of no more than .25 percent of average annual net assets. The NASD added this de minimis exception in response to the request of a commenter who argued that funds with Rule 12b-1 fees of .25 percent or less resemble traditional "no-load" funds (funds with no front-end or deferred loads and no Rule 12b-1 fees) much more than load funds (funds with front-end or deferred loads or larger Rule 12b-1 fees). The commenter contended that, without the exception, it would be difficult for investors to distinguish between funds that use relatively small Rule 12b-1 fees to finance advertising and other sales promotion activities and funds that use larger Rule 12b~l fees as alternatives to front-end sales loads.

      New Section 26(d)(4) addresses issues raised by the different accounting approaches used to calculate the maximum sales charge. Because the amendments contemplate a minimum standard of fund-level accounting rather than individual shareholder accounting, it is possible that long-term shareholders in a mutual fund that has an asset-based sales charge may pay more in total sales charges than they would have paid if the mutual fund did not have an asset-based sales charge. In light of this possibility, Section 26(d)(4) prohibits a member from offering or selling shares of such mutual funds if the fund does not disclose this information near the fee table at the front of the prospectus.

      Finally, new Section 26(d)(5) prohibits NASD members and their associated persons from offering or selling the shares of a mutual fund if it pays a service fee in excess of .25 of 1 percent of its average annual net assets. With regard to the service fee limitations, one commenter noted that the language of the rule change does not specifically limit fees paid by an "underwriter" to the actual party providing services to the customer. In responding to the comment, the NASD pointed out that, as a matter of NASD jurisdiction, fees paid directly to a member by an investment company may be, and are, limited. Thus, where the "underwriter" uses another member to actually provide the service to the customer, the rule change will limit the investment company's fees to the "underwriter," and the fees paid by the "underwriter" to the member provider may not exceed the limitations set forth in the rule.

      These amendments will be effective on July 7, 1993, one year from the date of the SEC's approval. Questions concerning this Notice should be directed to Clark Hooper, Vice President, Investment Companies/Insurance Affiliates at (202) 728-8329 or Elliott R. Curzon, Senior Attorney, Office of General Counsel at (202) 728-8451.


      1 In Section 2(a)(35) of the 1940 Act, the term "sales load" is defined as the difference between the offering price and that part of the offering price that is retained for investment, less any charges that are not for sales or promotional activities. 15 U.S.C. Section 80a-2(a)(35). The NASD interpreted this definition to apply to contingent deferred sales charges and therefore informed its members that it was a misrepresentation to assert that a fund with a contingent deferred sales load was a "no load fund." See, NASD Notice to Members 89-35, April 1989.


      TEXT OF AMENDMENTS TO SECTION 26 OF THE RULES OF FAIR PRACTICE

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

      Investment Companies

      Sec. 26

      * * * * *

      Definitions

      (b)

      * * * * *
      (4) Person ["Any person"] shall mean "person" ["any person"] as defined in [subsection (a), or "purchaser" as defined in subsection (b), of Rule 22d-1 under] the Investment Company Act of 1940.
      * * * * *
      (8) "Sales charge" and "sales charges" as used in subsection (d) of this section shall mean all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees. For purposes of this section, members may rely on the sales-related fees and charges disclosed in the prospectus of an investment company.
      (A) A "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.
      (B) A "deferred sales charge" is a sales charge that is deducted from the proceeds of the redemption of shares by an investor, excluding any such charges that are (i) nominal and are for services in connection with a redemption or (ii) to discourage short-term trading, that are not used to finance sales-related expenses, and that are credited to the net assets of the investment company.
      (C) An "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company and does not include a service fee.
      (9) "Service fees" as used in subsection (d) of this section shall mean payments by an investment company for personal service and/or the maintenance of shareholder accounts.
      (10) "Prime rate" as used in subsection (d) of this section shall mean the most preferential interest rate on corporate loans at large U.S. money center commercial banks.
      * * * * *

      Sales Charges

      (d) No member shall offer or sell the shares of any open-end investment company or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the Investment Company Act of 1940 if the sales charges described in the prospectus are excessive, [if the public offering price includes a sales charge which is excessive, taking into consideration all relevant circumstances.] Aggregate [S]sales charges shall be deemed excessive if they do not conform to the following provisions:
      (1) Investment Companies Without an Asset-Based Sales Charge
      [(1)](A) Front-end and/or deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge [The maximum sales charge on any transaction] shall not exceed 8.5% of the offering price.
      [(2)(A)](B)(i) Dividend reinvestment may [shall] be made available at net asset value per share to any person who requests such reinvestment [at least ten days prior to the record date subject only to the right to limit the availability of dividend reinvestment to holders of securities of a stated minimum value, not greater than $1,200].
      [(B)](ii) If dividend reinvestment is not made available as specified [on terms at least as favorable as those] in subparagraph (B)(i) [(2)(A)], the maximum aggregate sales charge [on any transaction] shall not exceed 7.25% of the offering price.
      [(3)(A)](C)(i) Rights of accumulation (cumulative quantity discounts) may [shall] be made available to any person [for a period of not less than 10 years from the date of first purchase] in accordance with one of the alternative quantity discount schedules provided in subparagraph (D)(i) [(4)(A)] below, as in effect on the date the right is exercised. [(B)](ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph (C)(i) [(3)(A)] the maximum aggregate sales charge [on any transaction] shall not exceed:
      [(i)](a) 8% of offering price if the provisions of subparagraph (B)(i) [(2)(A)] are met; or
      [(ii)](b) 6.75% of offering price if the provisions of subparagraph (B)(i) [(2) (A)] are not met. [(4)(A)](D)(i) Quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of the following two alternatives: [(i)](a) A maximum aggregate sales charge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more, or (b) A maximum aggregate sales charge of 7.50% on purchases of $15,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more.
      [(B)](ii) If quantity discounts are not made available on terms at least as favorable as those specified in subparagraph (D)(i) [(4)(A)] the maximum aggregate sales charge [on any transaction] shall not exceed:
      [(i)](a) 7.75% of the offering price if the provisions of subparagraphs (B)(i) and (C)(i) [(2)(A) and (3)(A)] are met. [(ii)](b) 7.25% of the offering price if the provisions of subparagraph (B)(i) [(2) (A)] are met but the provisions of subparagraph (C)(i) [(3)(A)] are not met.
      [(iii)](c) 6.50% of the offering price if the provisions of subparagraph (C)(i) [(3)(A)] are met but the provisions of subparagraph (B)(i) [(2)(A)] are not met.
      [(iv)](d) 6.25% of the offering price if the provisions of subparagraphs (B)(i) and (C)(i) [(2)(A) and (3)(A)] are not met.
      (E) If an investment company without an asset-based sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering price.
      (F) If an investment company without an asset-based sales charge reinvests dividends at offering price, it shall not offer or pay a service fee unless it offers quantity discounts and rights of accumulation and the maximum aggregate sales charge does not exceed 6.25% of the offering price.
      (2) Investment Companies With an Asset-Based Sales Charge
      (A) Except as provided in subparagraphs (2)(C) and (2)(D), the aggregate asset-based, front-end and deferred sales charges described in the prospectus which may be imposed by an investment company with an asset-based sales charge, if the investment company has adopted a plan under which service fees are paid, shall not exceed 6.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of shares of an investment company with multiple classes of shares or between series shares of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 6.25% of the amount invested.
      (B) Except as provided in subparagraphs (2)(C) and (2)(D), if an investment company with an asset-based sales charge does not pay a service fee, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 7.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of shares of an investment company with multiple classes of shares or between series shares of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 1.25% of the amount invested. (C) The maximum aggregate sales charge on total new gross sales set forth in subparagraphs (2)(A) and (B) may be increased by an amount calculated by applying the appropriate percentages of 6.25% or 7.25% to total new gross sales which occurred after an investment company first adopted an asset-based sales charge until July 7, 1993, plus interest charges on such amount equal to the prime rate plus one percent per annum less any front-end, asset-based or deferred sales charges on such sales or net assets resulting from such sales. (D) The maximum aggregate sales charges of an investment company in a single complex, a class of shares issued by an investment company with multiple classes of shares or a separate series of a series investment company, may be increased to include sales of exchanges shares provided that such increase is deducted from the maximum aggregate sales charges of the investment company, class or series which redeemed the shares for the purpose of such exchanges. (E) No member shall offer or sell the shares of an investment company with an asset-based sales charge if:
      (i) The amount of the asset-based sales charge exceeds .75 of 1% per annum of the average annual net assets of the investment company, or (ii) Any deferred sales charges deducted from the proceeds of a redemption after the maximum cap described in subparagraphs (2)(A), (B), (C) and (D) has been attained are not credited to the investment company. (3) No member or person associated with a member shall, either orally or in writing, describe an investment company as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or whose total charges against net assets to provide for sales related expenses and/or service fees exceed .25 of 1% of average net assets per annum.
      (4) No member or person associated with a member shall offer or sell the securities of an investment company with an asset-based sales charge unless its prospectus discloses that longterm shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section. Such disclosure shall be adjacent to the fee table in the front section of a prospectus.
      (5) No member or person associated with a member shall offer or sell the securities of an investment company if the service fees paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets or if a service fee paid by the investment company, as disclosed in the prospectus, to any person who sells its shares exceeds .25 of 1 % of the average annual net asset value of such shares.
      * * * * *

    • 92-40 Nasdaq National Market Additions, Changes, and Deletions as of June 26, 1992

      SUGGESTED ROUTING:*

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

      As of June 26, 1992, the following 47 issues joined the Nasdaq National Market, bringing the total number of issues to 2,900:

      Symbol

      Company

      Date

      SOES Execution Level

      TDSRF

      3-D Systems, Inc. (Rts)

      5/27/92

      1000

      MSYSW

      Medical Technology Systems, Inc. (8/15/92 Wts)

      5/27/92

      1000

      DWCH

      Datawatch Corporation

      5/28/92

      500

      DWCHW

      Datawatch Corporation (Wts)

      5/28/92

      500

      FINF

      Financial Federal Corporation

      5/28/92

      1000

      PBIO

      PerSeptive Biosystems, Inc.

      5/29/92

      1000

      SPNSF

      Sapiens International Corporation N.V.

      5/29/92

      1000

      STRL

      STERIS Corporation

      6/1/92

      200

      TECUA

      Tecumseh Products Company (Cl A)

      6/1/92

      1000

      RIVL

      Rival Company (The)

      6/2/92

      1000

      QRST

      Quantum Restaurant Group, Inc.

      6/3/92

      500

      SALM

      Salem Sportswear Corporation

      6/3/92

      1000

      USPC

      United States Paging Corporation

      6/3/92

      1000

      AGLFV

      Atlantic Gulf Communities Corporation (WI)

      6/4/92

      500

      HCRC

      Hallwood Consolidated Resources Corporation

      6/4/92

      1000

      NETF

      NetFRAME Systems Incorporated

      6/4/92

      1000

      TMAN

      Today's Man, Inc.

      6/4/92

      1000

      BBBY

      Bed Bath & Beyond, Inc.

      6/5/92

      1000

      CACC

      Credit Acceptance Corporation

      6/5/92

      500

      DRHI

      D. R. Horton, Inc.

      6/5/92

      1000

      HMIS

      Homecare Management, Inc.

      6/5/92

      1000

      KRON

      Kronos Incorporated

      6/5/92

      1000

      MIAMP

      Mid Am, Inc. (Pfd)

      6/5/92

      1000

      NCDI

      Network Computing Devices, Inc.

      6/5/92

      1000

      PHSYB

      PacifiCare Health Systems, Inc. (Cl B)

      6/5/92

      1000

      RCII

      RehabClinics, Inc.

      6/5/92

      1000

      ARRO

      Arrow International, Inc.

      6/9/92

      1000

      ESRX

      Express Scripts, Inc. (Cl A)

      6/9/92

      1000

      FINL

      Finish Line, Inc. (The) (Cl A)

      6/9/92

      1000

      UHOS

      Universal Hospital Services, Inc.

      6/9/92

      1000

      CABKZ

      Capital Bancorporation, Inc. (Dep. Shrs.)

      6/12/92

      200

      ETRC

      Equitrac Corporation

      6/12/92

      1000

      BSIS

      Broadway & Seymour, Inc.

      6/16/92

      200

      COTTF

      Cott Corporation

      6/16/92

      1000

      CRFT

      Craftmade International, Inc.

      6/16/92

      1000

      PHNI

      Phoenix Resource Companies, Inc. (The)

      6/16/92

      1000

      SIHS

      SI Handling Systems, Inc.

      6/16/92

      500

      SLMD

      SpaceLabs Medical, Inc.

      6/17/92

      1000

      XCOM

      CrossComm Corporation

      6/18/92

      500

      HAMP

      Hampshire Group, Limited

      6/18/92

      1000

      LGFB

      LGF Bancorp, Inc.

      6/18/92

      1000

      SECDP

      Second Bancorp, Incorporated (Pfd)

      6/18/92

      500

      GENCV

      General Cable Corporation (WI)

      6/19/92

      1000

      SWBI

      Southwest Bane shares, Inc.

      6/24/92

      1000

      TAPI

      Tapistron International, Inc.

      6/24/92

      500

      TAPIW

      Tapistron International, Inc. (Wts)

      6/24/92

      500

      WINR

      Winthrop Resources Corporation

      6/24/92

      500

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since May 27, 1992:

      New/Old Symbol

      New/Old Security

      Date of Change

      RKSF/OSGI

      RKS Financial Group, Inc./OTRA Securities Group, Inc.

      5/28/92

      TUBO/TUBO

      Tuboscope Vetco International Corp./Tuboscope Corporation

      5/28/92

      STIQ/SURV

      Survival Technology, Inc./Survival Technology, Inc.

      6/1/92

      TMRK/VDMK

      Trimark Holdings, Inc./Vidmark, Inc.

      6/2/92

      ATIS/ATISA

      Advanced Tissue Sciences, Inc./Advanced Tissue Sciences, Inc. (Cl A)

      6/4/92

      BEAV/BEAV

      BE Aerospace, Inc./BE Avionics, Inc.

      6/5/92

      PHSYA/PHSY

      PacifiCare Health Systems, Inc. (Cl A)/PacifiCare Health Systems, Inc.

      6/5/92

      PSCX/PSCX

      PSC Inc./Photogenic Sciences Corporation

      6/16/92

      DOSEW/DOSEW

      Choice Drag Systems, Inc. (10/31/92 Wts.)/Choice Drug Systems, Inc. (6/30/92 Wts)

      6/22/92

      NALR/NALR

      Naylor Industries, Inc./Naylor Inds., Inc.

      6/25/92

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      HSSI

      Hospital Staffing Services, Inc.

      6/1/92

      SLCR

      Salem Carpet Mills, Inc.

      6/1/92

      HMAIA

      Health Management Associates, Inc. (Cl A)

      6/3/92

      IBCC

      Interstate Bakeries Corp.

      6/3/92

      COVT

      Covington Development Group, Inc.

      6/11/92

      PICN

      Pic'N'Save Corporation

      6/11/92

      USAB

      USA Bancorp Inc.

      6/12/92

      SUPRP

      Super Rite Corporation (Pfd)

      6/17/92

      WMOR

      Westmoreland Coal Company

      6/17/92

      MNTL

      Manufacturers National Corporation

      6/18/92

      TDSRF

      3-D Systems, Inc. (Rts)

      6/19/92

      HRHC

      Hilb, Rogal and Hamilton Company

      6/19/92

      OFSB

      Oriental Federal Savings Bank

      6/19/92

      DOCO

      D.O.C. Optics Corporation

      6/22/92

      ATCMA

      American Television and Communications Corporation (Cl A)

      6/26/92

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

    • 92-39 Confirmation Disclosure Requirements for Transactions in Nasdaq Small-Cap Stocks

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      On June 29; 1992. the SEC approved amendments to Schedule D of the NASD By-Laws regarding confirmation disclosure requirements for Nasdaq Small-Cap stocks. The new rules require members to furnish specific information related to markups and markdowns in connection with transactions in Nasdaq Small-Cap securities to their customers, identical to the disclosures already required by the SEC for Nasdaq National Market System (Nasdaq/NMS) securities. The amendments will become effective August 15, 1992. The text of the amendments follows the discussion below.

      DESCRIPTION OF AMENDMENTS

      On June 15, 1992, members began reporting transactions in Nasdaq Small-Cap securities within 90 seconds after execution, replicating the reporting procedures for Nasdaq/NMS securities. The new section in Schedule D applies to the information contained in confirmations sent by members to customers buying or selling stocks in Nasdaq Small-Cap companies.

      The new NASD rule mirrors the SEC's confirmation disclosure requirements, specifically the provisions dealing with disclosure of markups or markdowns on customer confirmations in SEC Rule 10b-10(a)(8), and extends the disclosure requirements to transactions in Nasdaq Small-Cap securities. The SEC rule requires broker/dealers that are not market makers to disclose markups and markdowns on riskless principal transactions and also requires market makers to disclose the difference, if any, between the price of a transaction as reported to the tape and the price to the customer. However, the SEC rule applies only to "reported" securities that are defined as "national market system" securities.

      Although Nasdaq Small-Cap securities are now trade-reported at the point of sale like Nasdaq/NMS securities, they are not considered national market system stocks because of the different listing criteria, corporate governance requirements, margin treatment, and state merit review requirements applicable to these smaller companies. Accordingly, the SEC's confirmation disclosure requirements dealing with disclosure of markups or markdowns on customer confirmations do not apply to transactions in Nasdaq Small-Cap securities, and the NASD has adopted requirements identical to those of the SEC.

      The NASD believes that it is in the best interests of investors to require members to disclose markups and markdowns taken from the reported price. Just as real-time trade reporting enhances the credibility and image of the Nasdaq Small-Cap Market, more informative disclosure to the public of the prices at which its securities transactions are effected improves the transparency of this market. The NASD also notes that some members have indicated that they have already made arrangements to begin supplying customers with this additional disclosure. Therefore, the rule changes codifying the requirements in this area do not appear to be burdensome to the membership.

      Although the amendments will become effective on August 15, 1992, members are encouraged to comply with these new confirmation disclosures as soon as possible. Questions regarding this Notice may be directed to P. William Hotchkiss, Director, Surveillance Department, at (202) 728-8235.

      TEXT OF NEW RULES (Note: Additions are in italics)

      SCHEDULE D

      Part XIII

      Section 3 Customer Confirmations

      Members shall not effect transactions in regular Nasdaq securities unless such member shall, at or before completion of such transaction, give or send to its customer written notification disclosing if the member is acting as principal for its own account, (i)(A) if it is not a market maker in that security, and if, after having received an order to buy from such customer, it purchased the security from another person to offset a contemporaneous sale to such customer, or after having received an order to sell from such customer it sold the security to another person to offset a contemporaneous purchase from such a customer, the amount of any mark-up, mark-down, or similar remuneration received in an equity security; or (B) in any other case of a transaction in a regular Nasdaq equity security, the trade price reported in accordance with this Part, the price to the customer in the transaction, and the difference, if any, between the reported trade price and the price to the customer, and (ii) whether the member is a market maker in the security (otherwise than by reason of its acting as a block positioner in that security.) The terms used in this subsection shall have the same meaning as provided for in the Securities Exchange Act of 1934 and the rules adopted thereunder.

    • 92-38 SEC Adoption of Penny-Stock Disclosure Rules Under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990

      SUGGESTED ROUTING:*

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently adopted seven rules ("Rules") under the Securities Exchange Act of 1934 requiring broker/dealers engaging in certain recommended transactions with their customers in specified equity securities falling within the definition of "penny stock" (generally non-Nasdaq securities priced below $5 per share) to provide to those customers certain specified information.

      Unless the transaction is exempt under the Rules, broker/dealers effecting customer transactions in such defined penny stocks are required to provide their customers with: (1) a risk disclosure document; (2) disclosure of current bid and ask quotations, if any; (3) disclosure of the compensation of the broker/dealer and its salesperson in the transaction; and (4) monthly account statements showing the market value of each penny stock held in the customer's account. These SEC Rules were adopted in April 1992 pursuant to the requirements of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 ("Penny Stock Act"). The penny-stock definition and exemptive provisions are currently effective. The requirement for the delivery of the risk disclosure document to the customer became effective July 15, 1992. The other disclosure requirements take effect January 1, 1993. (A Federal Register copy of the rules is attached to this Notice.)

      I. DEFINITION OF PENNY STOCK

      SEC Rule 3a51-1 defines the term "penny stock" as "any equity security" other than the following excluded securities:
      A. "Reported securities" — those for which last-sale reports are collected and made available pursuant to an effective transaction reporting plan. Included are Nasdaq/NMS securities, securities listed on the New York Stock Exchange (NYSE) and the American Stock Exchange (Amex) (including securities listed on the Amex Emerging Company Marketplace), and securities meeting NYSE and Amex listing standards that are listed on other national stock exchanges.
      B. Securities registered, or approved for registration upon notice of issuance, on a national securities exchange provided that price and volume information with respect to transactions in that security is required to be reported on a current and continuing basis and is made available to vendors pursuant to the exchange's rules, and that the security is bought or sold in a transaction effected on or through the facilities of the exchange, or is part of the distribution of the security. Currently qualifying for this exclusion are equity securities listed on the NYSE, Amex, the Boston Stock Exchange, the Cincinnati Stock Exchange, the Midwest Stock Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, and the Chicago Board Options Exchange.
      C. Securities authorized or approved for authorization upon notice of issuance for quotation in the regular Nasdaq market (known as "Nasdaq Small-Cap Market"SM), provided that price and volume information about transactions in the security is reported on a current and continuing basis and made available to vendors pursuant to NASD rules. This exclusion for Nasdaq Small-Cap Issues was based in part on the recent commencement of last-sale price and volume reporting for those securities.
      D. Securities priced at $5 per share or more, excluding any broker/dealer commission, commission equivalent, markup or markdown. The actual transaction price is used or, in the absence of a transaction, the price is the inside bid quotation for the security displayed on an automated interdealer quotation system having characteristics specified by the Exchange Act, including dissemination of last-sale information. (No such system currently exists.) If there is no inside bid quotation, the price will be determined by the average of three or more bid quotations by market makers in an interdealer quotation system, which includes the OTC Bulletin Board" and other quotation media of general circulation such as the "Pink Sheets."
      E. Securities of an issuer having either:
      1. More than $2 million of net tangible assets (total assets less intangible assets less liabilities), if the issuer has operated continuously for at least three years, or at least $5 million, if the issuer has operated continuously for less than three years; or
      2. Average revenue of at least $6 million for the last three years.
      F. Securities issued by an investment company registered under the Investment Company Act of 1940; or
      G. Put and call options issued by the Options Clearing Corporation.
      II. TRANSACTION EXEMPTIONS FROM THE DISCLOSURE RULES

      SEC Rule 15g-1 exempts the following penny-stock transactions from the disclosure requirements of Rules 15g-2 through 15g-6:
      A. Transactions by broker/dealers that derived less than 5 percent of their revenues from penny-stock purchases and sales during a specified period. However, no such limited-activity exemption is available when the broker/dealer is a market maker in the penny stock that is the subject of the transaction.
      B. Transactions in which the customer is an institutional accredited investor as defined in Regulation D under the Securities Act of 1933, including specifically defined banks, savings and loan associations, investment companies, business development companies, and employee benefit plans.
      C. Transactions by issuers in limited offerings that satisfy the requirements of Regulation D under the 1933 Act, or transactions by an issuer not involving any public offering pursuant to Section 4(2) of the Securities Act of 1933;
      D. Transactions in which the customer is the issuer or a director, officer, general partner or a direct or indirect beneficial owner of more than 5 per cent of any class of equity security of the issuer of the penny stock involved in the transaction;
      E. Transactions not recommended by a broker or dealer; or
      F. Any other transaction or class of transactions or persons or classes of persons that, upon prior written request or upon its own motion, the Commission exempts by order as consistent with the public interest and protection of investors.
      III. DISCLOSURE REQUIREMENTS
      A. Risk Disclosure Document (Effective July 15, 1992)

      SEC Rule 15g-2 requires broker/dealers to provide to customers for or with whom they are effecting penny-stock transactions, before the transactions, a standard risk disclosure document as set forth in Schedule 15G under the Rule (see page 18035 of the attached Federal Register. Among other things, the disclosure document describes the customer's right to disclosures of the: (1) current bid and ask quotation, if any; (2) compensation of the broker/dealer and the salesperson in the transaction; and (3) monthly account statements showing the market value of each penny stock held in the customer's account. However, the document prescribed by Schedule 15G doesn't mention that those disclosure requirements are not effective until January 1, 1993. Under these circumstances, the SEC staff will permit NASD members to use and provide to customers a risk disclosure document that adds the following bracketed language to reflect the effective date:
      " Your rights

      Disclosures to you. Under penalty of federal law, [effective January 1, 1993] your brokerage firm must tell you the following information at two different times . . .

      * * * * *

      In addition to the items listed above, [effective January 1, 1993] your brokerage firm must send to you:

      Monthly account statements ..."
      (See page 18036 of the Federal Register)

      In addition, the Commission has requested comment on whether the risk disclosure document should be required to be executed and returned by the customer, prior to the customer's first transaction in a penny stock with the broker/dealer, in order to evidence compliance with the rule.
      B. Bid and Offer Quotations (Effective January 1, 1993)

      SEC Rule 15g-3 requires broker/dealers to disclose to a customer with or for whom they plan to effect a penny-stock transaction current quotation prices (inside bid and offer) or similar market information regarding the penny stock before executing a transaction in the penny stock for the customer. This information also must be on the customer's confirmations.
      C. Broker/Dealer Compensation (Effective January 1, 1993)

      SEC Rule 15g-4 requires broker/dealers to disclose to customers for or with whom they effect penny-stock transactions, both prior to and when confirming the transaction, the amount of any compensation the broker/dealer received from the transactions.
      D. Associated Persons' Compensation (Effective January 1, 1993)

      SEC Rule 15g-5 requires broker/dealers effecting transactions in penny stocks with or for customers to disclose certain associated persons' compensation information to those customers (orally or in writing) before effecting a transaction and (in writing) when confirming each transaction at or before sending a confirmation to the customer.
      E. Monthly Account Statements (Effective January 1, 1993)

      SEC Rule 15g-6 requires broker/dealers that have sold penny stocks to customers in transactions not exempt under Rule 15g-1 to send those customers monthly account statements containing the following information regarding the securities within 10 days after the end of the month: (1) the issuer's name; (2) the number of shares, and (3) the estimated market value.
      Relation to SEC Rule 15c2-6 (the "Penny Stock Cold Call Rule")

      The Penny Stock Disclosure Rules are in addition to the suitability and record-keeping requirements of SEC Rule 15c2-6. The SEC has published for comment certain proposed amendments to conform certain provisions of the Cold Call Rule to the recently enacted disclosure rules. In particular, the Commission proposes to replace the definition of "designated security" in Rule 15c2-6(d)(2) with the definition of "penny stock" under Rule 3a51-1, and to replace the list of exempt transactions in 15c2-6(c)(1) with those enumerated in Rule 15g-l. Furthermore, the Commission proposes to amplify the risk disclosure document required by Rule 15g-2 to include a brief statement of the customer suitability process embodied in the Cold Call Rule. The SEC also proposes to retain the "established customer" exemption in Rule 15c2-6. The comment deadline was May 28, 1992. See SEC Release No. 34-30610 (April 20, 1992), 57 FR 18046 (April 28, 1992).
      IV. FURTHER INFORMATION

      Attached to this Notice is a copy of Rules 3a51-1 and 15g-1 through 15g-6. Any member that wants a copy of the entire 163-page SEC release discussing the rationale for the rules may obtain it by calling Zena Ferguson in the NASD Compliance Division at (202) 728-8230. A copy will be mailed promptly.

      For further information or questions regarding these Rules, please contact Robert L.D. Colby, Chief Counsel; John M. Ramsay, Branch Chief (Rules 15g-5 and g-6); Belinda Blaine, Attorney (Rules 3a51-1 and 15g-1); or Alexander Dill, Attorney (Rule 15g-2 and Schedule 15G, Rules 15g-3 and g-4); all at (202) 504-2418, Office of Chief Counsel, Division of Market Regulation, SEC, 450 Fifth Street, NW, Mail Stop 5-1, Washington, DC 20549. You also may contact Daniel M. Sibears, Director, NASD Compliance Division, at (202) 728-8959 or Gary Carleton, Senior Attorney, NASD Compliance Division, at (202) 728-8022.

      Federal Register / Vol. 57, No. 82 / Tuesday, April 28, 1992 / Rules and Regulations

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

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

      Authority: 15 U.S.C. 77c, 77d, 77s, 77ttt, 78c, 76d, 78i, 78j, 781, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 79q, 79t, 80a-29, 80a-37, unless otherwise noted.
      2. By adding § 240.3a51-1 to read as follows:

      § 240.3a51-1 Definition of penny stock.

      For purposes of section 3(a)(51) of the Act, the term "penny stock" shall mean any equity security other than a security:
      (a) That is a reported security, as defined in 17 CFR 240.11Aa3-1(a) of this chapter;

      except that a security that is registered on the American Stock Exchange, Inc. pursuant to the listing criteria of the Emerging Company Marketplace, but that does not otherwise satisfy the requirements of paragraphs (b), (c), or (d) of this section, shall be a penny stock for purposes of section 15(b)(6) of the Act;-
      (b) That is issued by an investment company registered under the Investment Company Act of 1940;
      (c) That is a put or call option issued by the Options Clearing Corporation;
      (d) That has a price of five dollars or more;
      (1) For purposes of paragraph (d) of this section:
      (i) A security has a price of five dollars or more for a particular transaction if the security is purchased or sold in that transaction at a price of five dollars or more, excluding any broker or dealer commission, commission equivalent, mark-up, or mark-down; and
      (ii) Other than in connection with a particular transaction, a security has a price of five dollars or more at a given time if the inside bid quotation is five dollars or more; provided, however, that if there is no such inside bid quotation, a security has a price of five dollars or more at a given time if the average of three or more interdealer bid quotations at specified prices displayed at that time in an interdealer quotation system, as defined in 17 CFR 240.15c2-7(c)(1), by three or more market makers in the security, is five dollars or more.
      (iii) The term "inside bid quotation" shall mean the highest bid quotation for the security displayed by a market maker in the security on an automated interdealer quotation system that has the characteristics set forth in section 17B(b)(2) of the Act, or such other automated interdealer quotation system designated by the Commission for purposes of this section, at any time in which at least two market makers are contemporaneously displaying on such system bid and offer quotations for the security at specified prices.
      (2) If a security is a unit composed of one or more securities, the unit price divided by the number of shares of the unit that are not warrants, options, rights, or similar securities must be five dollars or more, as determined in accordance with paragraph (d)(1) of this section, and any share of the unit that is a warrant, option, right, or similar security, or a convertible security, must have an exercise price or conversion price of five dollars or more;
      (e) That is registered, or approved for registration upon notice of issuance, on a national securities exchange that makes transaction reports available pursuant to 17 CFR 240.11Aa3-1 of this chapter, provided that:
      (1) Price and volume information with respect to transactions in that security is required to be reported on a current and continuing basis and is made available to vendors of market information pursuant to the rules of the national securities exchange; and
      (2) The security is purchased or sold in a transaction that is effected on or through the facilities of the national securities exchange, or that is part of a distribution of the security;

      except that a security that satisfies the requirements of this paragraph, but that does not otherwise satisfy the requirements of paragraphs (a), (b), (c), or (d) of this section, shall be a penny stock for purposes of Section 15(b)(6) of the Act;
      (f) That is authorized, or approved for authorization upon notice of issuance, for quotation in the National Association of Securities Dealers' Automated Quotation system (NASDAQ), provided that price and volume information with respect to transactions in that security is required to be reported on a current and continuing basis and is made available to vendors of market information pursuant to the rules of the National Association of Securities Dealers, Inc.;

      except that a security that satisfies the requirements of this paragraph, but that does not otherwise satisfy the requirements of paragraphs (a), (b), (c), or (d) of this section, shall be a penny stock for purposes of section 15(b)(6) of the Act: or •
      (g) Whose issuer has:
      (1) Net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of 82,000,000, if the issuer has been in continuous operation for at least three years, or $5,000,000, if the issuer has been in continuous operation for less than three years; or
      (2) Average revenue of at least $6,000,000 for the last three years.
      (3) For purposes of paragraph (g) of this section, net tangible assets or average revenues must be demonstrated by financial statements dated less than fifteen months prior to the date of the transaction that the broker or dealer has reviewed and has a reasonable basis for believing are accurate in relation to the date of the transaction, and:
      (i) If the issuer is other than a foreign private issuer, are the most recent financial statements for the issuer that have been audited and reported on by an independent public accountant in accordance with the provisions of 17 CFR 210.2-02; or
      (ii) If the issuer is a foreign private issuer, are the most recent financial statements for the issuer that have been filed with the Commission or furnished to the Commission pursuant to 17 CFR 240.12g3-2(b); provided, however, that if financial statements for the issuer dated less than fifteen months prior to the date of the transaction have not been filed with or furnished to the Commission, financial statements dated within fifteen months prior to the transaction shall be prepared in accordance with generally accepted accounting principles in the country of incorporation, audited in compliance with the requirements of that jurisdiction, and reported on by an accountant duly registered and in good standing in accordance with the regulations of that jurisdiction.
      (4) The broker or dealer shall preserve, as part of its records, copies of the financial statements required by paragraph (g)(3) of this section for the period specified in 17 CFR 240.17a-4(b).
      3. By adding § 240.15g-1 to read as follows:

      §240.15g-1 Exemptions for certain transactions.

      The following transactions shall be exempt from 17 CFR 240.15g-2,17 CFR 240.15g-3.17 CFR 240.15g-4,17 CFR 240.15g-5, and 17 CFR 240.15g-6:
      (a) Transactions by a broker or dealer:
      (1) Whose commissions, commission equivalents, mark-ups, and mark-downs from transactions in penny stocks during each of the immediately preceding three months and during eleven or more of the preceding twelve months, or during the immediately preceding six months, did not exceed five percent of its total commissions, commission equivalents, mark-ups, and mark-downs from transactions in securities during those months; and
      (2) Who has not been a market maker in the penny stock that is the subject of the transaction in the immediately preceding twelve months.
      Note: Prior to April 28, 1993. commissions, commission equivalents, mark-ups, and mark-downs from transactions in designated securities, as defined in 17 CFR 240.15c2-6(d)(2) as of April 15, 1992. may be considered to be commissions, commission equivalents, mark-ups, and mark-downs from transactions in penny stocks for purposes of paragraph (a)(1) of this section.
      (b) Transactions in which the customer is an institutional accredited investor, as defined in 17 CFR 230.501(a) (1). (2), (3). (7). or (8).
      (c) Transactions that meet the requirements of Regulation D (17 CFR 230.501-230.508), or transactions with an issuer not involving any public offering pursuant to section 4(2) of the Securities Act of 1933.
      (d) Transactions in which the customer is the issuer, or a director, officer, general partner, or direct or indirect beneficial owner of more than five percent of any class of equity security of the issuer, of the penny stock that is the subject of the transaction.
      (e) Transactions that are not recommended by the broker or dealer.
      (f) Any other transaction or class of transactions or persons or class of persons that, upon prior written request or upon its own motion, the Commission conditionally or unconditionally exempts by order as consistent with the public interest and the protection of investors.
      4. By adding § 240.15g-2 to read as follows:

      § 240.15g-2 Risk disclosure document relating to the penny stock market.

      It shall be unlawful for a broker or dealer to effect a transaction in any penny stock for or with the account of a customer unless, prior to effecting such transaction, the broker or dealer has furnished to the customer a document containing the information set forth in Schedule 15G, 17 CFR 240.15g-100.
      5. By adding section 240.15g-3 to read as follows:

      § 240.15g-3 Broker or dealer disclosure of quotations and other Information relating to the penny stock market
      (a) Requirement. It shall be unlawful for a broker or dealer to effect a transaction in any penny stock with or for the account of a customer unless such broker or dealer discloses to such customer, within the time periods and in the manner required by paragraph (b) of this section, the following information:
      (1) The inside bid quotation and the inside offer quotation for the penny stock.
      (2) If paragraph (a)(1) of this section does not apply because of the absence of an inside bid quotation and an inside offer quotation:
      (i) With respect to a transaction effected with or for a customer on a principal basis (other than as provided in paragraph (a)(2)(ii) of this section):
      (A) The dealer shall disclose its offer price for the security:
      (1) If during the previous five days the dealer has effected no fewer than three bona fide sales to other dealers consistently at its offer price for the security current at the time of those sales, and
      (2) If the dealer reasonably believes in good faith at the time of the transaction with the customer that its offer price accurately reflects the price at which it is willing to sell one or more round lots to another dealer. For purposes of paragraph (a)(2)(i)(A) of this section, "consistently" shall constitute, at a minimum, seventy-five percent of the dealer's bona fide interdealer sales during the previous five-day period, and, if the dealer has effected only three bona fide inter-dealer sales during such period, all three of such sales.
      (B) The dealer shall disclose its bid price for the security:
      (1) If during the previous five days the dealer has effected no fewer than three bona fide purchases from other dealers consistently at its bid price for the security current at the time of those purchases, and
      (2) If the dealer reasonably believes in good faith at the time of the transaction with the customer that its bid price accurately reflects the price at which it is willing to buy one or more round lots from another dealer. For purposes of paragraph (a)(2)(i)(B) of this section, "consistently" shall constitute, at a minimum, seventy-five percent of the dealer's bona fide interdealer purchases during the previous five-day period, and, if the dealer has effected only three bona fide inter-dealer purchases during such period, all three of such purchases.
      (C) If the dealer's bid or offer prices to the customer do not satisfy the criteria of paragraphs (a)(2)(i)(A) or (a)(2)(i)(B) of this section, the dealer shall disclose to the customer:
      (1) That it has not effected inter dealer purchases or sales of the penny stock consistently at its bid or offer price, and
      (2) The price at which it last purchased the penny stock from, or sold the penny stock to, respectively, another dealer in a bona fide transaction, (ii) With respect to transactions effected by a broker or dealer with or for the account of the customer:
      (A) On an agency basis or
      (B) On a basis other than as a market maker in the security, where, after having received an order from the customer to purchase a penny stock, the dealer effects the purchase from another person to offset a contemporaneous sale of the penny stock to such customer, or, after having received an order from the customer to sell the penny stock, the dealer effects the sale to another person to offset a contemporaneous purchase from such customer, the broker or dealer shall disclose the best independent interdealer bid and offer prices for the penny stock that the broker or dealer obtains through reasonable diligence. A broker-dealer shall be deemed to have exercised reasonable diligence if it obtains quotations from three market makers in the security (or all known market makers if there are fewer than three).
      (3) With respect to bid or offer prices and transaction prices disclosed pursuant to paragraph (a) of this section, the broker or dealer shall disclose the number of shares to which the bid and offer prices apply.
      (b) Timing.
      (1) The information described in paragraph (a) of this section:
      (i) Shall be provided to the customer orally or in writing prior to effecting any transaction with or for the customer for the purchase or sale of such penny stock; and
      (ii) Shall be given or sent to the customer in writing, at or prior to the time that any written confirmation of the transaction is given or sent to the customer pursuant to 17 CFR 240.10b-10 of this chapter.
      (2) A broker or dealer, at the time of making the disclosure pursuant to paragraph (b)(1)(i) of this section, shall make and preserve as part of its records, a record of such disclosure for the period specified in 17 CFR 240.17a-4(b).
      (c) Definitions. For purposes of this section:
      (1) The term bid price shall mean the price most recently communicated by the dealer to another broker or dealer at which the dealer is willing to purchase one or more round lots of the penny stock, and shall not include indications of interest.
      (2) The term offer price shall mean the price most recently communicated by the dealer to another broker or dealer at which the dealer is willing to sell one or more round lots of the penny stock, and shall not include indications of interest.
      (3) The term inside bid quotation for a security shall mean the highest bid quotation for the security displayed by a market maker in the security on a Qualifying Electronic Quotation System, at any time in which at least two market makers are contemporaneously displaying on such system bid and offer quotations for the security at specified prices.
      (4) The term inside offer quotation for a security shall mean the lowest offer quotation for the security displayed by a market maker in the security on a Qualifying Electronic Quotation System. at any time in which at least two market makers are contemporaneously displaying on such system bid and offer quotations for the security at specified prices.
      (5) The term Qualifying Electronic Quotation System shall mean an automated interdealer quotation system that has the characteristics set forth in section 17B(b)(2) of the Act. or such other automated interdealer quotation system designated by the Commission for purposes of this section.
      6. By adding § 240.15g-4 to read as follows:

      § 240.15g-4 Disclosure of compensation to brokers or dealers.

      Preliminary Note: Brokers and dealers may wish to refer to Securities Exchange Act Release No. 30608 (April 20, 1992) for a discussion of the procedures for computing compensation in active and competitive markets, inactive and competitive markets, and dominated and controlled markets.
      (a) Disclosure requirement. It shall be unlawful for any broker or dealer to effect a transaction in any penny stock for or with the account of a customer unless such broker or dealer discloses to such customer, within the time periods and in the manner required by paragraph (b) of this section, the aggregate amount of any compensation received by such broker or dealer in connection with such transaction.
      (b) Timing.
      (1) The information described in paragraph (a) of this section:
      (i) Shall be provided to the customer orally or in writing prior to effecting any transaction with or for the customer for the purchase or sale of such penny stock: and
      (ii) Shall be given or sent to the customer in writing, at or prior to the time that any written confirmation of the transaction is given or sent to the customer pursuant to 17 CFR 240.10b-10.
      (2) A broker or dealer, at the time of making the disclosure pursuant to paragraph (b)(1)(i) of this section, shall make and preserve as part of its records, a record of such disclosure for the period specified in 17 CFR 240.17a-4(b).
      (c) Definition of Compensation. For purposes of this section, compensation means, with respect to a transaction in a penny stock:
      (1) If a broker is acting as agent for a customer, the amount of any remuneration received or to be received by it from such customer in connection with such transaction:
      (2) If. after having received a buy order from a customer, a dealer other than a market maker purchased the penny stock as principal from another person to offset a contemporaneous sale to such customer or, after having received a sell order from a customer, sold the penny stock as principal to another person to offset a contemporaneous purchase from such customer, the difference between the price to the customer and such contemporaneous purchase or sale price; or
      (3) If the dealer otherwise is acting as principal for its own account, the difference between the price to the customer and the prevailing market price.
      (d) "Active and competitive" market. For purposes of this section only, a market may be deemed to be "active and competitive" in determining the prevailing market price with respect to