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  • 1998

    • 98-108 NASD Extends Deadline For Updating Firm Contact Information Via The NASD Regulation Web Site To February 1,1999

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      Senior Management
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      Legal & Compliance
      Operations
      Registered Representatives



      Executive Summary

      As published in NASD Notice to Members 98-77 (September), Article IV, Section 3 of the National Association of Securities Dealers, Inc. ( NASD®) By-Laws has been amended. This By-Law change, which takes effect January 1, 1999, requires members to: (1) obtain an Internet e-mail account and Internet access for their Executive Representative; and (2) update their firm's contact information via the NASD Regulation, Inc. (NASD Regulation SM) Web Site www.nasdr.com to include the Executive Representative's e-mail address.

      By this time members should be in the process of obtaining, or have already obtained, the required Internet access and e-mail account for their Executive Representative. Members should have also returned the User Request Form, which was mailed to each Executive Representative on November 17, 1998, to request a User ID and password required to update the firm's Contact Questionnaire. NASD Regulation is currently processing requests for User IDs and passwords which should be mailed to members on or about December 16, 1998. Since the User ID and password are required to gain access to the Contact Questionnaire on the NASD Regulation Web Site and given the holiday season with its inherent postal delays, the deadline for updating the Questionnaire has been extended to February 1, 1999.

      Additionally, members are reminded that effective January 1, 1999, the primary means of distribution of NASD Notices to Members and the Regulatory & Compliance Alert is in electronic form via the NASD Regulation Web Site. Members are advised that the schedule for posting the monthly NASD Notices to Members to the Web Site will be on or about the 10th of each month. Once Executive Representatives have updated their Contact Questionnaire to include their Internet e-mail address, NASD Regulation will provide e-mail notification of new Notices and other updates posted to the Web Site.

      Since the complimentary print distribution of these publications will terminate in January, member firms that wish to continue to receive the printed versions may subscribe at cost by contacting NASD Media- Source SM at (301) 590-6142. Each Executive Representative will be eligible for one subscription to Notices to Members at cost, i . e . $15 per year; each branch office will be eligible for one subscription to Regulatory and Compliance Alert at cost, also $15 per year.

      While members may choose to rely on the printed NASD Notices to Members, it does not relieve them of the requirement for the Executive Representative to maintain an Internet e-mail account on behalf of the firm, effective January 1, 1999, and to update the firm's Contact Questionnaire via the NASD Regulation Web Site by February 1, 1999.

      For questions regarding the Contact Questionnaire, or to receive a copy of the User Request Form, please call (301) 869-6699.

    • 98-107 NASD Reminds Members Of Their Obligations To Disclose Mutual Fund Fees

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      Senior Management
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      Internal Audit
      Legal & Compliance
      Mutual Fund
      Training



      Executive Summary

      This Notice reminds National Association of Securities Dealers, Inc. (NASD®) members of their obligation to ensure that discussions concerning fees and expenses in mutual fund advertisements and sales literature as defined in NASD Rule 2210(a) are fair, balanced, and not misleading. This Notice also provides guidance concerning fee and expense disclosure in certain types of mutual fund sales material, and announces an NASD initiative to review this issue further.

      Questions concerning this Notice may be directed to Thomas M. Selman, Vice President, Investment Companies/ Corporate Financing, NASD Regulation, Inc. (NASD RegulationSM), at (240) 386-4533, or Robert J. Smith, Assistant General Counsel, NASD Regulation, at (202) 728-8176.

      Requirements Concerning Disclosure Of Fees And Expenses

      Lists Of Fees And Expenses That Do Not Apply

      NASD Rule 2210(d)(1) generally requires that all member communications with the public provide a sound basis for evaluating the facts regarding a particular security or service and that they include material qualifications necessary to ensure that the communications are fair, balanced, and not misleading.1 Rule 2210 also prohibits the use of exaggerated, unwarranted, or misleading statements or claims. NASD Regulation has long interpreted Rule 2210 to prohibit members from making misleading or confusing presentations in their sales material concerning the fees and expenses associated with a variety of investment products and services, including discount brokerage, wrap accounts, and variable products.

      In particular, NASD Regulation strongly objects to presentations that list specific fees that do notapply, without discussing the fees or expenses that doapply. Such presentations raise investor protection concerns because of the possibility that the presentations may confuse investors about the range of fees and expenses that the investors must pay when they purchase and own particular products.

      NASD Regulation reminds members that all of their mutual fund sales material must similarly comply with NASD rules. Discussions of factors such as fees and expenses should be fair and balanced, whether the investment decision concerns the purchase of mutual funds or other investment products. In order to ensure greater consistency in the application of the principles concerning disclosure of fees and expenses, NASD Regulation now takes the interpretive position that if an item of sales material lists specific mutual fund fees and expenses thatdo not apply to the purchase, redemption, or ownership of the fund's shares, then this sales material ordinarily must list specific fees and expenses that do apply ( e.g., applicable maximum front-end and deferred sales charges and redemption fees, and operating expenses). As always, NASD Regulation staff will respond to questions from members who file such sales material, concerning the practical application of this interpretive position.

      Disclosure Of Sales Loads Under SEC Rule 482

      Members also are reminded that Securities and Exchange Commission (SEC) Rule 482 under the Securities Act of 1933 and SEC Rule 34b-1 under the Investment Company Act of 1940 require that sales material presenting data about the performance of an advertised mutual fund, also disclose the maximum amount of any sales load or other nonrecurring fee. In addition, SEC Rule 156 under the Securities Act of 1933, which provides guidance on when sales material may be misleading, indicates that statements about investment expenses may be relevant to whether an implicit representation about future performance has been made.

      Use Of The Term "No-Load"

      NASD Regulation does not currently interpret the SEC and NASD rules to require disclosure of total fund operating expenses or other applicable fees when sales material merely refers to the advertised mutual fund as "no-load" or part of a "no-load" family of funds. In addition, this type of disclosure is not currently required when, in discussing how to invest in the fund, the sales material states merely that the mutual fund imposes no sales charge.

      Members are on notice, however, that NASD Regulation now takes the position that in all such cases, the sales material must disclose the fact that other fees and expenses do apply to a continued investment in the fund and are described in the fund's current prospectus. (This disclosure could accompany the disclosure telling investors to read the prospectus before investing.) Similarly, sales material that discloses the load charged by a mutual fund also must disclose that other expenses apply to a continued investment in the fund and are described in the fund's current prospectus, to ensure that investors are not confused about whether the load represents the only fee or expense associated with the purchase or continued investment in the mutual fund.

      Future Initiatives

      NASD Regulation and its Investment Companies Committee (the Committee) recognize the importance of ensuring that presentations in member sales material concerning mutual fund fees and expenses are fair, balanced, and not misleading. Consequently, the Committee has recommended that the NASD Regulation staff comprehensively evaluate the standards applicable to the disclosure of fees and expenses in mutual fund sales material. The staff intends to consider, among other issues, whether:

      • the existing NASD standards are adequate;


      • certain types of sales material present specific concerns that should be addressed through new NASD standards;


      • NASD Regulation should impose specific requirements concerning the prominence of fee and expense disclosure in sales material; and


      • other types of sales material should describe the fees and expenses that an investor could expect to incur when purchasing and holding an advertised mutual fund, including the fund's expense ratio, maximum sales charge, redemption fee, and maximum deferred sales load.

      During its evaluation of these issues, NASD Regulation intends to seek the views of NASD members and the investing public.


      Endnote

      1 Rule 2210(d)(2)(E) specifically prohibits any statement that a service is furnished without any charge unless the service is furnished free without condition or obligation.

    • 98-106 Trade Date - Settlement Date Schedule For 1999

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

      The Nasdaq Stock Market® and the securities exchanges will be closed on Monday, January 18, 1999, in observance of Martin Luther King, Jr., 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*
      Jan. 12 Jan. 15 Jan. 20
      13 19 21
      14 20 22
      15 21 25
      18 Markets Closed
      19 22 26

      Presidents Day: Trade Date - Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 15, 1999, in observance of Presidents Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Feb. 9 Feb. 12 Feb. 17
      10 16 18
      11 17 19
      12 18 22
      15 Markets Closed
      16 19 23

      Good Friday: Trade Date - Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, April 2, 1999. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      March 29 April 1 April 6
      30 5 7
      31 6 8
      April 1 7 9
      2 Markets Closed
      5 8 12

      Memorial Day: Trade Date - Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 31, 1999, 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 25 May 28 June 2
      26 June 1 3
      27 2 4
      28 3 7
      31 Markets Closed
      June 1 4 8

      Independence Day: Trade Date - Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, July 5, 1999, 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 29 July 2 July 7
      30 6 8
      July 1 7 9
      2 8 12
      5 Markets Closed
      6 9 13

      Labor Day: Trade Date - Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, September 6, 1999, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Aug. 31 Sept. 3 Sept. 8
      Sept. 1 7 9
      2 8 10
      3 9 13
      6 Markets Closed
      7 10 14

      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, 1999. On this day, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date Settlement Date Reg. T Date*
      Oct. 5 Oct. 8 Oct. 12
      6 12 13
      7 13 14
      8 14 15
      11 14 18
      12 15 19

      Note: October 11, 1999, 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 14. 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.

      Veterans Day And Thanksgiving Day: Trade Date - Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veterans Day, Thursday, November 11, 1999, and Thanksgiving Day, Thursday, November 25, 1999. On Thursday, November 11, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veterans Day. All securities markets will be closed on Thursday, November 25, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 5 Nov. 10 Nov. 12
      8 12 15
      9 15 16
      10 16 17
      11 16 18
      12 17 19
      19 24 29
      22 26 30
      23 29 Dec. 1
      24 30 2
      25 Markets Closed
      26 Dec. 1 3

      Note: November 11, 1999, 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 16. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

      Christmas Day: Trade Date - Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Friday, December 24, 1999, in observance of Christmas Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Dec. 20 Dec. 23 Dec. 28
      21 27 29
      22 28 30
      23 29 31
      24 Markets Closed
      27 30 Jan. 3, 2000

      Note: The Nasdaq Stock Market and the securities exchanges will be open on December 31, 1999, and January 3, 2000.

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

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


      * 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 five 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 titled "Reg. T Date."

    • 98-105 NASD 1999 Holiday Schedule

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      Internal Audit
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      Municipal
      Operations
      Syndicate
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      The National Association of Securities Dealers, Inc. (NASD®) will observe the following holiday schedule for 1999:

      January 1 New Years Day
      January 18 Birthday of Martin Luther King, Jr.
      (Observed)
      February 15 Presidents Day
      April 2 Good Friday
      May 31 Memorial Day
      July 5 Independence Day (Observed)
      September 6 Labor Day
      November 25 Thanksgiving Day
      December 24 Christmas Day (Observed)

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

    • 98-104 Fixed Income Pricing System Additions, Changes, And Deletions As Of October 23, 1998

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      Institutional
      Legal & Compliance
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      Trading



      As of October 23, 1998, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      ACFL.GA ACC Consumer Finl Corp. 10.250 12/01/03
      ANCP.GB Anacomp Inc 10.875 04/01/04
      CSUD.GA Corning Consumer Prod. Co. 9.625 05/01/08
      DDBD.GA Diamond Brands Inc. 12.875 04/15/09
      DMBD.GA Diamond Brands Oper Corp. 10.125 04/15/08
      DSUO.GA Doe Run Resources Corp. 0.000 03/15/03
      DSUO.GB Doe Run Resources Corp. 11.250 03/15/05
      FNVW.GA Fountain View Inc. 11.250 04/15/08
      ICIX.GC Intermedia Communication Inc. 13.500 06/01/05
      IMTN.GB Iron Mountain Inc. 8.750 09/30/09
      JAII.GB Johnstown America Industries Inc. 11.750 08/15/05
      JKPD.GA Jackson Products Inc. 9.500 04/15/05
      KTTY.GA Kitty Hawk Inc. 9.950 11/15/04
      LAQU.GA La Quintas Inns Inc. 7.400 09/15/05
      LAQU.GB La Quintas Inns Inc. 7.250 03/15/04
      LI.GA Lilly Industries Inc. 7.750 12/01/07
      MAM.GA Maxxim Medical Inc. 10.500 08/01/06
      MCLL.GB Metrocall Inc. 9.750 11/01/07
      MNRH.GA Mariner Health Group Inc. 9.500 04/01/06
      MT.GA Meditrust Corp. 7.375 07/15/00
      MT.GB Meditrust Corp. 7.600 07/15/01
      MT.GC Meditrust Corp. 7.820 09/10/26
      MT.GD Meditrust Corp. 7.000 08/15/07
      NFX.GA Newfield Exploration Co. 7.450 10/15/07
      OEI.GC Ocean Energy Inc. 8.375 07/01/08
      OEI.GD Ocean Energy Inc. 7.625 07/01/05
      OEI.GE Ocean Energy Inc. 8.250 07/01/18
      SKS.GA Saks Inc. 8.250 11/15/08
      SUAS.GA South Seas Prop L.P. 10.000 04/15/03
      SVIS.GA Spectra Vision Inc. 11.650 12/01/02

      As of October 23, 1998, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      AVLM.GA Avalon Marketing Inc. 14.000 11/01/98
      AXTO.GA Abraxas Petro Corp./Cn Abraxas 11.500 11/01/04
      DOPD.GA Doane Products Co. 10.625 03/01/06
      GTCO.GA Great American Cookie 10.875 01/15/01
      HRJZ.GA Harrahs Jazz Co. 14.250 11/15/01
      MAG.GA Magnetek Inc. 10.750 11/15/98
      MDCA.GA Maryland Cable Corp. 15.375 11/15/98
      NAV.GA Navistar Financial Corp. 8.875 11/15/98
      PMIA.GA PMI Acquisition Corp. 10.250 09/01/03
      SMU.GA Simula Inc. 12.000 11/15/98
      SVIS.GA Spectra Vision Inc. 11.650 12/01/02
      UIS.GF Unisys Corp. 10.625 10/01/99
      VDKP.GA Van de Kamps Inc. 12.000 09/15/05
      VIA.GB Viacom Inc. 7.750 06/01/05
      VIA.GC Viacom Inc. 6.750 05/15/03
      VIA.GD Viacom Inc. 7.625 01/15/16
      WHLP.GA Windy Hill Pet Food Co. 9.750 05/15/07

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, Market Regulation, NASD Regulation, Inc. (NASD RegulationSM), at (301) 590-6451.

      Any questions regarding the FIPS master file should be directed to Cheryl Glowacki, Nasdaq® Market Operations, at (203) 385-6310.

    • 98-103 Maximum SOES Order Sizes Set To Change January 1, 1999

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      Legal & Compliance
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      Trading



      Executive Summary

      Effective January 1, 1999, the maximum Small Order Execution SystemSM (SOESSM) order sizes for 476 Nasdaq National Market® (NNM) securities will be revised in accordance with National Association of Securities Dealers, Inc. (NASD®) Rule 4710(g).

      For more information, please contact Nasdaq® Market Operations at (203) 378-0284.

      Description

      Under Rule 4710, the maximum SOES order size for an NNM security is 1,000, 500, or 200 shares, depending on the trading characteristics of the security. The Nasdaq Workstation II® (NWII) indicates the maximum SOES order size for each NNM security. The indicator "NM10," "NM5," or "NM2" displayed in NWII corresponds to a maximum SOES order size of 1,000, 500, or 200 shares, respectively.1

      The criteria for establishing maximum SOES order sizes are as follows:

      (1) a 1,000-share maximum order size shall apply to NNM securities on SOES with an average daily non-block volume of 3,000 shares or more a day, a bid price of less than or equal to $100, and three or more Market Makers;
      (2) a 500-share maximum order size shall apply to NNM securities on SOES with an average daily nonblock volume of 1,000 shares or more a day, a bid price of less than or equal to $150, and two or more Market Makers; and
      (3) a 200-share maximum order size shall apply to NNM securities with an average daily non-block volume of less than 1,000 shares a day, a bid price of less than or equal to $250, and two or more Market Makers.

      In accordance with Rule 4710, Nasdaq periodically reviews the maximum SOES order size applicable to each NNM security to determine if the trading characteristics of the issue have changed so as to warrant an adjustment. Such a review was conducted using data as of September 30, 1998, pursuant to the aforementioned standards. The maximum SOES order-size changes called for by this review are being implemented with three exceptions.

      • First, issues were not permitted to move more than one size level. For example, if an issue was previously categorized in the 1,000-share level, it would not be permitted to move to the 200-share level, even if the formula calculated that such a move was warranted. The issue could move only one level to the 500-share level as a result of any single review.


      • Second, for securities priced below $1 where the reranking called for a reduction in the level, the maximum SOES order size was not reduced.


      • Third, for the top 50 Nasdaq securities based on market capitalization, the maximum SOES order sizes were not reduced, regardless of whether the reranking called for a reduction.

      In addition, with respect to initial public offerings (IPOs), the SOES ordersize reranking procedures provide that a security must first be traded on Nasdaq for at least 45 days before it is eligible to be reclassified.

      Thus, IPOs listed on Nasdaq within the 45 days prior to September 30, 1998, were not subject to SOES order-size reranking procedures.

      Following is a listing of the 476 NNM issues that will have the maximum SOES order size changed on January 1, 1999.


      Endnote

      1 Previously, Nasdaq Market Makers were required to maintain a minimum quotation size for an NNM security in an amount equal to the maximum SOES order size for that security. See generally, NASD Rule 4613(a)(1) - (2). On July 15, 1998, the Securities and Exchange Commission approved an amendment to NASD Rule 4613(a)(1)(C), which reduced the minimum quotation size for all Nasdaq securities to one normal trading unit when a Market Maker is not displaying a limit order, and which thus eliminated the requirement that Market Makers quote a size equal to the maximum SOES order size.

      Maximum SOES Order Size Changes In NNM Securities
      All Issues In Alphabetical Order By Security Name
      (Effective January 1, 1999)
      Symbol Security Name Old Level New Level
      A
      ABANP ABI CAP TRUST PFD 200 500
      ABBKP ABINGTON TR PFD 200 500
      ABFI AMERICAN BUS FIN S 500 1000
      ABFSP ARKANSAS BEST CV P 200 500
      ABGX ABGENIX INC 200 500
      ACLE ACCEL INTL CP 1000 500
      ACLNF A C L N LIMITED 200 500
      ACMTA A C M A T CP CL A 200 500
      ACTU ACTUATE SOFTWARE 200 500
      ADGO ADAMS GOLF INC 200 500
      ADPI AMERICAN DENTAL 500 1000
      ADSC ATLANTIC DATA SVCS 200 500
      AHAA ALPHA INDS INC 200 500
      AIRS AMERICAN AIRCARRIE 200 500
      AKZOY AKZO NOBEL NV ADR 500 1000
      ALGX ALLEGIANCE TELECOM 200 500
      ALREF ANNUITY AND LIFE 500 1000
      AMBC AMER BNCP OHIO 1000 500
      AMBCP AMER BNCP CAP TR 200 500
      AMCT AMRESCO CAP TRUST 500 1000
      AMKR AMKOR TECHNOLOGY 500 1000
      ANAT AMER NATL INS CO 500 1000
      ANCOW ANACOMP INC WTS 500 200
      ANDR ANDERSEN GROUP INC 1000 500
      ANSR ANSWERTHINK CONS 200 500
      ARDNA ARDEN GROUP CL A 200 500
      ARGX ARGUSS HOLDINGS INC 500 1000
      ARMHY ARM HLDGS ADS 500 1000
      ARSCW ARIS CORP WTS 200 500
      ARTW ART S WAY MFG CO I 200 500
      ASAM ASAHI/AMERICA INC 500 1000
      ASPCE ASPEC TECH INC 500 1000
      ASTI ALLERGAN SPEC WI 500 1000
      ASYCF ARCHITEL SYST CORP 200 500
      ASYM ASYMETRIX LEARNING 200 500
      ATGC ATG INC 500 1000
      ATPX ADV TEC PROD 500 1000
      AXTI AMERICAN XTAL TECH 200 500
      AZTC AZTEC TECH PTNRS 200 500
      B
      BARI BANK RHODE ISLAND 500 1000
      BAYB BAY BANCSHARES 500 1000
      BBAR BALANCE BAR CO 200 500
      BCORY BIACORE INTL AB ADR 500 200
      BCSB BCSB BANKCORP 200 500
      BCST BROADCAST.COM 200 500
      BEBE BEBE STORES INC 200 500
      BEERF BIG ROCK BREWERY LTD 500 200
      BESIF B E SEMICON ORD SHRS 500 200
      BEYE BOLLE INC 500 1000
      BHAG B H A GP HLDGS 1000 500
      BIORY BIORA AB ADR 1000 500
      BKCT BANCORP CONN INC 1000 500
      BKUNZ BANKUNITED CAP II 500 1000
      BLCA BOREL BK & TR (CA) 500 200
      BNBC BROAD NATL BNCP 1000 500
      BNCM BNC MORTGAGE INC 500 1000
      BNSC BANK OF SANTA CLAR 500 200
      BOGN BOGEN COMMUN INT 200 500
      BOGNW BOGEN COMMUN WT 200 500
      BOKF B O K FINL CP 500 1000
      BORAY BORAL LTD ADS 200 500
      BOYD BOYD BROS TRANS IN 500 1000
      BPAO BALDWIN PIANO ORGA 1000 500
      BPFH BOSTON PVT FIN 500 1000
      BRCM BROADCOM CORP CL A 500 1000
      BRGP BUSINESS RESOURCE 500 1000
      BRID BRIDGFORD FOODS CP 500 1000
      BRKL BROOKLINE BANCORP 500 1000
      BRYO BRIO TECHNOLOGY 500 1000
      BTBTY B T SHIP SPONSOR ADR 200 500
      BTSR BRIGHTSTAR INFO 500 1000
      BUCK BUCKHEAD AMERICA C 1000 500
      BVEW BINDVIEW DEV CORP 200 500
      BWCF BWC FINANCIAL CORP 200 500
      BYND SOFTWARE.NET CP 200 500
      C
      CANI CARREKER-ANTINORI 200 500
      CASA CASA OLE' RESTRS I 500 1000
      CAVB CAVALRY BANCORP 500 1000
      CBBI C B BANCSHARES 500 1000
      CBCI CALUMET BANCORP IN 500 1000
      CBMD COLUMBIA BANCORP M 500 1000
      CBNY COMMERCIAL BK OF N 1000 500
      CBRNB CANANDAIGUA BRANDS 500 200
      CCBG CAPITAL CITY BANK 500 1000
      CCBN CENTRAL COAST BCP 200 500
      CCHE CLINICHEM A 200 500
      CCHM COMBICHEM INC 500 1000
      CCPRZ COAST FED LIT CPR 500 1000
      CDIR CONCEPTS DIRECT IN 1000 500
      CEBK CENTRAL CO OP BANK 500 1000
      CERB C E R B C O INC 500 1000
      CFBC COMMUNITY FIRST BN 500 1000
      CFIC COMMUNITY FIN CP 1000 500
      CFKY COLUMBIA FIN KY 500 1000
      CGII CUNNINGHAM GRAPHIC 500 1000
      CHANF CHANDLER INS CO LTD 500 1000
      CHAS CHASTAIN CAP CORP 500 1000
      CHKE CHEROKEE INC 500 1000
      CIBN CALIFORNIA IND BNC 500 200
      CITC CITADEL COMMUN CP 200 500
      CITZ CFS BANCORP INC 200 500
      CLBR CALIBER LEARN NTWK 500 1000
      CLEC US L E C CP 500 1000
      CLRS CLARUS CORPORATION 200 500
      CLTDF COMPUTALOG LTD 200 500
      CLTX COLLATERAL THERAP 200 500
      CMIV IVI CHECKMATE CORP 200 500
      CMLS CUMULUS MEDIA INC 200 500
      CMND COMMAND SYSTEMS 500 1000
      CMPS COMPASS INTL SVCS 500 1000
      CMTO COM21 INC 200 500
      CNAF COMMERCIAL NATL FI 500 200
      CNBA CHESTER BANCORP IN 500 1000
      CNBF C N B FINANCIAL CP 500 1000
      CNBKP CENTURY BCP CAP TR 200 500
      CNDSP CELLNET FNDG PFD 500 1000
      CNRD CONRAD INDS INC 200 500
      CNTBY CANTAB PHARM 500 200
      COBZ COLORADO BUS BCSHS 200 500
      COLM COLUMBIA SPRTSWR 500 1000
      COLTY C O L T TELECOM AD 500 1000
      COOL CYBERIAN OUTPOST 200 500
      CRAI CHARLES RIVER 500 1000
      CRDT CREDITRUST CORP 200 500
      CRGN CURAGEN CORP 500 1000
      CRHCY C R H PLC ADR 200 500
      CRSB CRUSADER HLDG CORP 1000 500
      CSCQW CORRECTIONAL SVCS 1000 500
      CSON COHESION TECHS 200 500
      CSTL CASTELLE 1000 500
      CTSH COGNIZANT TECH SOL 200 500
      CTWS CONN WATER SVCS IN 500 1000
      CULS COST-U-LESS INC 200 500
      CVBK CENTRAL VA BKSHS I 200 500
      CVOL COVOL TECHS INC 500 1000
      CWCOF CAYMAN WATER ORD 1000 500
      CWLZ COWLITZ BANCORPN 500 1000
      D
      DACG DA CONSULTING GRP 500 1000
      DCBI DELPHOS CITIZENS B 500 1000
      DCBK DESERT COMMUNITY B 200 500
      DCLK DOUBLECLICK INC 500 1000
      DCPI DICK CLARK PROD IN 500 200
      DCRNW DIACRIN INC WT 500 1000
      DECO DECORA INDS 500 1000
      DGIC DONEGAL GROUP INC 500 1000
      DIIBF DOREL INDS CL B 500 1000
      DLVRY CORTECS INTL SPO ADR 1000 500
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    • 98-102 Calculating Margin For Day-Trading And Cross-Guaranteed Accounts

      View PDF File

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations



      Executive Summary

      Federal Reserve Board Regulation T governs the extension of credit to customers by broker/dealers. Among the provisions of Regulation T are requirements governing the initial margin requirements for certain securities transactions. In addition, National Association of Securities Dealers, Inc. (NASD®) Rule 2520 requires NASD members to impose additional margin requirements on customer accounts.1 The purpose of this Notice is to communicate the opinion of the NASD on the margin requirements under Regulation T and Rule 2520 for day-trading and cross-guaranteed accounts with the expectation that members will calculate margin for such accounts in a manner that is consistent with Regulation T and Rule 2520.

      The NASD believes that some members are calculating margin for daytraders and cross-guaranteed accounts in a manner that is not consistent with the requirements of Regulation T and Rule 2520. Accordingly, members are advised to review their margin calculation practices to ensure that they conform to the requirements of these rules. Adherence to the margin requirements is in the best interest of the investing public and serves to protect the financial security of members that extend credit.

      Finally, the NASD believes that some members may be failing to take certain account-related charges when computing their net capital pursuant to Securities and Exchange Commission (SEC) Rule 15c3-1. These harges include those specified in Rule 2520(f)(4) for certain guaranteed accounts. Members should review the requirements of SEC Rule 15c3-1 and Rule 2520 to determine whether they are in compliance with these rules.

      Members should be aware that the NASD believes compliance with the margin and net capital requirements is of paramount importance and intends to examine member firms for compliance with these rules.

      Questions concerning this Notice may be directed to Samuel Luque, ssociate Director, Member Regulation, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8472, or Susan DeMando, Regional Compliance Supervisor, Member Regulation, NASD Regulation, at (202) 728-8411.

      Discussion

      This Notice addresses some of the most frequently asked questions regarding the application of Regulation T and Rule 2520 to day-trading and cross-guaranteed accounts. In addition, this Notice addresses only common scenarios and questions relating to marginable equity securities and is not meant to be a complete discussion of the application of Regulation T and Rule 2520 to all possible trading strategies utilized by day-trading and/or cross-guaranteed accounts.

      In order to clarify member understanding of the requirements relating to day-trading and cross-guaranteed accounts, highlighted below in plain English are some of the fundamental requirements and provisions of these rules.

      General

      • Members must perform two separate margin calculations for each account each day; one for Regulation T and one for Rule 2520. The calculations should be performed at the end of each trade date; intra-day calculations are not permitted. Members must comply with the requirements of both rules at all times.


      • "Day-trading" means buying and selling the same security on the same day. A "day-trader" is any customer whose trading shows a pattern of day-trading (see Rule 2520(f)(8)(B)). (See also the Securities Industry Association's Credit Division Manual's definition of "daytrading" as "selling first and then repurchasing" the same security on the same day.)


      • Day-trades should occur only in margin accounts. Day-trading in a cash account may amount to free riding ( i.e., purchasing a security and then selling it without having paid for the purchase).


      • Regulation T requires initial margin of 50 percent for new purchases and 150 percent for short sales (of which 100 percent can come from the proceeds of the short sale, with the customer depositing the remaining 50 percent). (See Regulation T, Sections 220.12(a) and (c)(1).)


      • Rule 2520 requires maintenance margin of 25 percent of the current market value for all long positions, and $5 per share or 30 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at $5 per share or above (see Rule 2520(c)(1) and (c)(3)). If a customer's account is both "long" and "short" the same security, Rule 2520(e)(1) requires five percent maintenance margin of the current market value of the long security. The short position must be marked to the market.


      • If two accounts are cross-guaranteed and one is long the same security that the other is short the same number of securities, the maintenance margin requirement on the combined positions is five percent. This five percent maintenance margin requirement in no way eliminates the requirement to comply with the initial margin requirements of Regulation T on the original purchase and short sale.


      • When calculating Regulation T margin, cross guarantees have no effect (see Regulation T, Section 3(d)). Therefore, members must apply Regulation T to each account separately, notwithstanding the fact that Rule 2520 permits certain special maintenance margin treatment for transactions in cross-guaranteed accounts.


      • Rule 2520(f)(4) permits cross guarantees for maintenance margin purposes so that the amount of maintenance margin excess in one account may be used to offset a maintenance margin deficit in the other cross-guaranteed account. In any given situation, the account with the maintenance margin excess is considered the guaranteeing account and the account with the maintenance margin deficit is considered the guaranteed account.


      • The fact that Regulation T margin is calculated at the end of the business day only does not mean that broker/dealers can disregard intraday risk. Reliance on the proceeds of anticipated sales to pay for purchases exposes the broker/dealer to risk.

      Regulation T

      • Margin is required for each long or short securities position unless an exception or special provision is available (see Regulation T, Section 4(b)). The required margin is set forth in Section 12 (the Supplement).


      • Regulation T margin is calculated at the end of the business day. All transactions on the same day are combined to determine the Regulation T requirement. Therefore, Regulation T does not distinguish between day-trading and other forms of trading (see Regulation T, Section 4(c)(1)).


      • A Regulation T margin requirement may be satisfied by a transfer from the Special Memorandum Account (SMA), or by a deposit of cash, margin securities, or exempted securities, in any combination (see Regulation T, Section 4(c)(2)).


      • Regulation T treats a short sale "against the box" as a long sale (see Regulation T, Section 4(b)(2)). As a result, there is no Regulation T requirement on the transaction; however, Rule 2520(e)(1) imposes a five percent margin requirement on the market value of the long position and requires the short position to be marked to the market.


      • A sale cannot be treated as a short sale " against the box," nor can it be treated as a long sale, if the account making the sale is not long the same number of shares of the same security, even if another cross-guaranteeing account is long the security. Because cross guarantees have no effect under Regulation T, the fact that another cross-guaranteeing account is long the security is meaningless for Regulation T purposes and the sale must be regarded as a short sale subject to a margin requirement of 150 percent (see Regulation T, Section 12(c)(1)).


      • Regulation T has no margin requirements for day-trading per se. Regulation T margin is calculated on the position in the account at the end of the day. Therefore, if a day-trader engages in numerous day-trades throughout the day, but ends the day with no securities position, Regulation T requires margin equal to the net loss in the account at the end of the day. A Regulation T call must be issued for the entire amount of the loss. The call may be met by a deposit of cash or securities (margin or exempted), a transfer from SMA, or any combination (see Regulation T, Section 4(c)(2)).

      Rule 2520

      • While often thought of as a "maintenance" margin rule, Rule 2520 also contains initial margin requirements (see paragraph (b)). Initial margin is always the greater of the amount specified in Regulation T or the maintenance margin specified in paragraph (c). This requirement applies to both non day-traders (see paragraph (B)) and day-traders (see paragraph (f)(8)(B)).


      • Rule 2520 was created to work in tandem with Regulation T. Therefore, because Regulation T calculations are made only at the end of the day, Rule 2520 maintenance margin calculations must be made only at the end of the day.

      Although firms may calculate margin intra-day for risk assessment and risk avoidance purposes, and may impose margin calls based on such intra-day calculations, members may not grant additional buying power2 to a customer on the basis of such intraday calculations. Buying power may only be based on the preceding day's end-of-the-day margin calculations.

      • A maintenance margin call may be satisfied by a deposit of cash, margin securities, or exempted securities, in any combination. A maintenance margin call may not be satisfied by a transfer from the SMA.


      • Rule 2520(f)(4) permits special margin treatment for transactions in cross-guaranteed accounts if certain conditions are met. Since Regulation T does not recognize cross guarantees, nothing in Rule 2520 is intended to grant guaranteed accounts any benefit that would circumvent the provisions of Regulation T.


      • Day-trading is recognized by Rule 2520 through the definitions of "daytrading," "day-trader" and the margin requirements specified in Rule 2520 (f)(8)(B). The paragraph states:

      Whenever day-trading occurs in a customer's margin account the margin to be maintained shall be the margin on the " long" or " short" transaction, whichever occurred first, as required pursuant to the other provisions of this Rule. When day-trading occurs in the account of a "daytrader" the margin to be maintained shall be the margin on the "long" or "short" transaction, whichever occurred first, as required by Regulation T of the Board of Governors of the Federal Reserve System or as required pursuant to the other provisions of this Rule, whichever amount is greater.

      Questions And Answers Relating To The Calculation Of Initial And Maintenance Margin On Day-Trading And Cross-Guaranteed Accounts

      For the purpose of the illustrations contained in this Notice, the examples assume: 1) that the securities discussed are marginable equity securities; 2) that unless otherwise noted the maintenance margin requirement on short transactions is 30 percent of the current market value of the security; 3) the customer intends to meet his/her requirement with a deposit of cash; and 4) that each of the customers has a history of day-trading, whether or not the trades in a specific example are day-trades.

      1.

      Q. Customer A and Customer B cross guarantee each other's accounts. Customer A buys $1,000,000 of securities on Day 1 and is long the securities at the end of the day. Customer B sells short $1,000,000 of different securities on Day 1 and is short the securities at the end of the day. What are the Regulation T and maintenance margin requirements for each customer?

      A. Since Regulation T does not acknowledge the existence of the cross guarantee, Regulation T would require Customer A to put up margin of 50 percent or $500,000 in payment for the securities purchased in Customer A's account (see Regulation T, Section 220.12(a)). Regulation T would require Customer B to put up margin of 150 percent or $1,500,000 in payment for the securities sold short in Customer B's account, of which $1,000,000 could come from the proceeds of the short sale (see Regulation T, Section 220.12(c)(1)).

      Rule 2520 requires maintenance margin for Customer A of $250,000 (25 percent of the market value long) and maintenance margin for Customer B of $300,000 (30 percent of the market value short). (See Rule 2520, paragraphs (c)(1) and (c)(3) respectively.)

      2.

      Q. Considering the facts in Question 1 again, would the answer be different if the securities bought by Customer A and sold short by Customer B were the same securities, i.e. , because of the cross guarantee the accounts were fully hedged?

      A. Again, since Regulation T does not acknowledge the existence of the cross guarantee, Regulation T would require Customer A to put up margin of 50 percent or $500,000 in payment for the securities purchased in Customer A's account (see Regulation T, Section 220.12(a)). Regulation T would require Customer B to put up margin of 150 percent or $1,500,000 in payment for the securities sold short in Customer B's account, of which $1,000,000 could come from the proceeds of the short sale (see Regulation T, Section 220.12(c)(1)).

      Rule 2520 (e)(1) permits maintenance margin of five percent of the current market value of the long securities for " Offsetting "Long" and "Short" Positions" where the same security is carried long and short for the same customer. Given the existence of the cross guarantee, Rule 2520(f)(4) allows any account guaranteed by another account to be consolidated with the other account, and the margin to be maintained may be determined on the net positions on both accounts. In this case, since Customer A and Customer B are long and short the same securities, and since they cross guarantee each other's accounts, they may utilize the five percent maintenance margin requirement outlined in paragraph (e)(1) on the offsetting positions. Therefore, the required maintenance margin for the combined position would be $50,000.

      3.

      Q. On Day 1, Customer C purchases $400,000 of securities. The Regulation T margin required is $200,000. The customer deposits $250,000 cash in the account and, as a result, has received a margin loan of $150,000 from the broker/dealer to complete the transaction. What is the customer's Regulation T buying power for Day 2? What is the customer's day-trading buying power for Day 2?

      A. Going into Day 2, Customer C has Regulation T buying power of $100,000 because the previous day's Regulation T excess of $50,000 would provide $100,000 in buying power. Thus, if Customer C purchases securities on Day 2 that he does not sell on Day 2, he can make such purchases up to $100,000 without incurring a Regulation T call. Buying power is calculated as follows: ($250,000 - ($400,000 x 50%)) x 2 = $100,000.

      Going into Day 2, the customer has day-trading buying power of $300,000 because the maintenance margin excess of $150,000 provides day-trading buying power of $300,000. If Customer C purchases securities on Day 2 which he subsequently sells on Day 2, i.e., he engages in day-trading, he can make such purchases up to $300,000 without incurring a day-trading call. This is calculated as follows: ($250,000 - ($400,000 x 25%)) x 2 = $300,000.

      The above answer presumes Customer C did not incur a loss on the day-trades (i.e., made a profit or broke even). If Customer C were to buy $300,000 of securities and sell them the same day for $280,000, he would have a Regulation T call for $20,000, or 100 percent of the loss. Regulation T requires additional margin when a transaction creates or increases a margin deficiency in an amount equal to the deficiency created or increased (see Regulation T, Section 220.4(c)(1)).

      4.

      Q. Customer D makes one purchase for $2,000,000 in the morning of Day 1 and then sells the securities at a profit in the afternoon of Day 1 for the same account ending the day with no securities position. What is the customer's margin requirement?

      A. Regulation T margin is calculated on the end of the day position. Because the customer has no securities position at the end of the day, and did not incur a loss, there is no Regulation T requirement. However, there is a required day-trading maintenance margin requirement of $1,000,000. The margin call would be classified as a Rule 2520 Call (not a Regulation T call) since it is Rule 2520 (b) that sets the margin for the trade.

      5.

      Q. On Day 1, Customer E buys 100 ABCD at $88 in an existing margin account that has no SMA, and deposits $4,400, which is the Regulation T requirement, into the account. She carries the position over into Day 2. On Day 2, she sells 100 ABCD at $89 at 11 a.m. What is impact of the sale on the customer's Regulation T buying power or daytrading buying power for the remainder of Day 2?

      A. Going into Day 2, the customer has zero Regulation T buying power since she deposited the exact amount of the Regulation T requirement into her account on Day 1, i.e., $8,800 x 50% = $4,400. Per Regulation T, Section 220.4(c)(1), buying power for Day 2 is based on the status of the account at the end of Day 1. Intra-day sales on Day 2 cannot be used to increase Regulation T buying power for Day 2. Therefore, Customer E's Regulation T buying power for Day 2 remains at zero, irrespective of the sale on Day 2.

      Going into Day 2, the customer has day-trading buying power of $4,400. If Customer E chooses to purchases securities on Day 2 that she subsequently sells on Day 2, i.e., she engages in day-trading, she can make such purchases up to $4,400 without incurring a day-trading call. This is calculated as follows: ($4,400 - ($8,800 x 25%)) x 2 = $4,400. The customer's day-trading buying power is set at $4,400 for Day 2. It can not be adjusted by intra-day activity.

      6.

      Q. On Day 1, Customer F has an account containing equity securities with a market value of $100,000, a debit balance of $70,000, equity of $30,000, and maintenance margin excess of $5,000. On Day 2, the customer purchases $100,000 in equity securities and later in the same day sells them for $105,000. What is the Regulation T requirement for Day 2?

      A. Regulation T margin is calculated on the end of the day position. Since the customer has no securities position at the end of Day 2 resulting from Day 2 transactions and earned a profit on the sale, there is no Regulation T requirement for Day 2.

      However, there is a Rule 2520 requirement. Going into Day 2, the customer may use the maintenance margin excess carried over from Day 1 to day-trade additional securities.

      Customer F has a maintenance margin excess of $5,000 ($30,000 - ($100,000 x 25%)). She could use this excess to day-trade $10,000 ($5,000 x 2) in equity securities on Day 2 without having to deposit any additional margin as long as she incurs no loss (i.e., she makes a profit or breaks even) on the Day 2 day-trades. Taking the above into account, the customer should receive a Rule 2520 day-trading margin call of $45,000 representing half of the purchase price not covered by the day-trading buying power.


      Endnotes

      1 Several years ago, the NASD amended Rule 2520 to make it substantially the same as New York Stock Exchange (NYSE) Rule 431, including paragraph numbering. Thus, for example, paragraph 2520(f)(4) is the same as NYSE Rule 431(f)(4). The NASD has also customized Rule 2520 in a few places in recognition of certain differences between the NASD and NYSE in rules, jurisdiction, and market structure. Members should be familiar with the requirements of either NASD Rule 2520 or NYSE Rule 431, depending upon which one applies to them.

      2 Buying power - either Regulation T or daytrading - represents the dollar value of securities that can be purchased with a given amount of Regulation T or maintenance margin excess respectively (usually twice the amount of the excess).

    • 98-101 NASD Requests Comment On Proposed Amendments To Disclosure Questions On Forms U-4 And U-5

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      NASD Regulation Request For Comment 98-101

      Executive Summary

      NASD Regulation, Inc. (NASD Regulation SM) is proposing to amend disclosure questions on the Form U-4 and Form U-5 that were approved by the Securities and Exchange Commission (SEC) in July 1996, but have not been made effective pending the full implementation of the modernized Central Registration Depository (CRDSM), and is soliciting comment on the proposed amendments. First, NASD Regulation proposes to amend Question 22I(2) on the 1996 Form U-4 and Question 17B on the 1996 Form U-5 to require the reporting of any settlement for $10,000 or more of an oral or written customer complaint alleging sales practice violations. The 1996 Forms U-4 and U-5 questions require such settlements to be reported only if the customer submits such a complaint in writing. Second, NASD Regulation proposes to amend Questions 14 and 15 on the 1996 Form U-5 to require a terminating firm to report certain criminal and regulatory actions on a former registered person that are initiated after that person is terminated if the action is in connection with events that occurred while the person was employed by or associated with the firm. The 1996 Form U-5 questions require a firm to report such actions only if the actions occurred while a person was employed by or associated with the firm. Finally, NASD Regulation proposes to amend Question 17 on the 1996 Form U-5, which requires a firm to report customer complaints filed against former registered persons, to harmonize it with the parallel question on the 1996 Form U-4 ( i.e., Question 22I). This proposed change is designed to permit the archiving of customer complaints that are more than 24 months old and no longer reportable, regardless of whether the customer complaint is reported on Form U-4 or Form U-5. The text of these disclosure questions with the amendments follows this Request For Comment.

      The North American Securities Administrators Association (NASAA) approved all of the amendments to the Forms U-4 and U-5 at its October 1998 membership meeting.

      Background And Discussion

      NASD Regulation is proposing amendments to four disclosure questions on the Forms U-4 and U-5 that were approved by SEC in July 1996, but have not been made effective pending the full implementation of the modernized CRD.1 As discussed below, these amendments involve changes to Question 22I(2) on the 1996 Form U-4, and Questions 14, 15, and 17 on the 1996 Form U-5. The text of these questions with the amendments marked follows this Request For Comment.

      First, NASD Regulation proposes to amend Question 22I(2) on the 1996 Form U-4 and Question 17B on the 1996 Form U-5 regarding the reporting of settled customer complaints. The 1996 questions require the reporting of any settlement for $10,000 or more of a written customer complaint alleging sales practice violations. NASD Regulation believes that a settlement of $10,000 or more should be reported, regardless of whether the complaint that led to the settlement was written or oral. Thus, NASD Regulation proposes that the 1996 Form U-4 Question 22I(2) be amended to read as follows: "Have you even been the subject of an investment-related, consumer-initiated complaint, not otherwise reported under question 22I(1) above, which alleged that you were involved in one or more sales practice violations, and which complaint was settled for an amount of $10,000 or more?" The question, as amended, would not require the reporting of all oral customer complaints alleging sales practice violations, just those that are settled for $10,000 or more. A corresponding change to Question 17B on the 1996 Form U-5 also is proposed.

      Second, NASD Regulation proposes to amend Questions 14 and 15 on the 1996 Form U-5, which require a terminating firm to report certain criminal actions and regulatory actions, respectively. The 1996 versions of these questions require a terminating firm to report criminal or regulatory actions involving an individual that occur while the individual was employed by or associated with the firm. NASD Regulation proposes to amend these questions by extending a firm's reporting obligation to include criminal and regulatory actions that are initiated after termination if the action is in connection with events that occurred while the individual was employed by or associated with the firm. This proposed amendment is intended to address those instances where a firm may have actual notice of the initiation of a criminal or regulatory action involving an individual after he or she has been terminated. Notwithstanding the proposed change, firms would not be required to report criminal or regulatory events that occur after an individual's termination if the firm has no notice of the event. In this regard, NASD Regulation is working with NASAA and other regulators to issue an interpretation that provides guidance on what constitutes actual notice. Generally speaking, firms would receive actual notice of the initiation of a criminal or regulatory action against a terminated person only if that action is based on events that occurred in connection with the former associated person's employment.

      Finally, NASD Regulation proposes amending Question 17 on the 1996 Form U-5, which requires the reporting of certain customer complaints, to harmonize it with the parallel question on the 1996 Form U-4 ( i.e., Question 22I). The proposed change is designed to permit the archiving of customer complaints that are more than 24 months old and no longer reportable, regardless of whether the customer complaint is reported on Form U-4 or Form U-5.

      Proposed Revisions

      (Note: New text is underlined; deletions are bracketed.)

      1996 Form U-4 Question 22I(2):2

      Have you ever been the subject of an investment-related, consumer-initiated [written] complaint, not otherwise reported under question 22I(1) above, which alleged that you were involved in one or more sales practice violations, and which complaint was settled for an amount of $10,000 or more?

      1996 Form U-5 Question 14:3

      While employed by or associated with your firm, or in connection with events that occurred while the individual was employed by or associated with your firm, was the individual:

      A. convicted of or did the individual plead guilty or nolo contendere ("no contest") in a domestic, or foreign or military court to any felony?
      B. charged with any felony?
      C. convicted of or did the individual plead guilty or nolo contendere ("no contest") in a domestic, foreign or military court to a misdemeanor involving: investments or an investment-related business, or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?
      D. charged with a misdemeanor specified in 14(C)?

      1996 Form U-5 Question 15:4

      While employed by or associated with your firm, or in connection with events that occurred while the individual was employed by or associated with your firm, was the individual involved in any disciplinary action by a domestic or foreign governmental body or self regulatory organization (other than those designated as a "minor rule violation" under a plan approved by the U.S. Securities and Exchange Commission) with jurisdiction over the investment-related businesses?

      1996 Form U-5 Question 17:5

      A. In connection with events that occurred while the individual was employed by or associated with your firm, was the individual:
      (1) named as a respondent/defendant in an investment-related, consumerinitiated arbitration or civil litigation which alleged that the individual was involved in one or more sales practice violations and which:
      (a) is still pending, or;
      (b) resulted in an arbitration award or civil judgment against the individual, regardless of amount, or;
      (c) was settled for an amount of $10,000 or more?[, or;]
      (2) the subject of an investmentrelated,consumer-initiated [written] complaint, not otherwise reported under question17(A)(1) above, which alleged that the individual was involved in one or more sales practice violations, and which complaint was settled for an amount of $10,000 or more?
      B. In connection with events that occurred while the individual was employed by or associated with your firm, [but for a period not to exceed the most recent twenty-four (24) months of employment,] was the individual the subject of an investment-related, consumer-initiated written complaint, not otherwise reported under question 17(A) above, which:

      [(1) alleged that the individual was involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or];
      (1) would be reportable under question 22I(3)(a) on Form U-4, if the individual were still employed by your firm, but which has not previously been reported on the individual's Form U-4 by your firm; or

      [(2) alleged that the individual was involved in forgery, theft, misappropriation or conversion of funds or securities?]
      (2) would be reportable under question 22I(3)(b) on Form U-4, if the individual were still employed by your firm, but which has not previously been reported on the individual's Form U-4 by your firm.

      Questions concerning this Request For Comment may be directed to Ann E. Bushey, Assistant Director, CRD/Public Disclosure, NASD Regulation, at (301) 590-6389; Mary M. Dunbar, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8252; or Richard E. Pullano, Associate Director and Counsel, CRD/Public Disclosure, NASD Regulation, at (301) 212-3789.

      Request For Comment

      NASD Regulation encourages all interested parties to comment on the roposal. Comments should be mailed to:

      Joan Conley
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW Washington, D.C. 20006-1500

      or e-mailed to:
      pubcom@nasd.com

      Important Note: The only comments that will be considered are those submitted via e-mail or in writing.

      Comments must be received by January 15, 1999. Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.


      Endnotes

      1 The NASD is currently using the Interim Forms U-4 and U-5 that were approved by the SEC in January 1998 for use until the modernized CRD is completed. The Interim Forms include all of the substantive changes and some of the changes to the instructions that were approved in 1996 and reformatted them in a manner that is compatible with the current CRD system.

      2 This Question appears as Question 22H(2) on the Interim Form U-4 (Rev. 11/97).

      3 This Question appears as Question 13C on the Interim Form U-5 (Rev. 11/97).

      4 This Question appears as Question 13A on the Interim Form U-5 (Rev. 11/97).

      5 This Question appears as Question 13B on the Interim Form U-5 (Rev. 11/97).

    • 98-100 FOCUS Filing Due Dates For 1999

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      NASD Regulation, Inc. (NASD RegulationSM) would like to remind members of their obligation to file the appropriate FOCUS reports by their due dates. The following schedule outlines due dates for 1999.

      In particular, members are reminded that Schedule I of Form X-17A-5 for the 1998 calendar year must be filed electronically via PC FOCUSSM by Wednesday, January 27, 1999. This due date applies to members regardless of their fiscal year end. Those firms that engage in municipal securities activities must disclose income from such activity under the NASD Miscellaneous Information section of the Schedule I form as it appears in PC FOCUS.

      Anyone having difficulty filing FOCUS reports electronically can refer to Appendix A - Error Messages and Appendix B - Troubleshooting in the PC FOCUS User Guide(Version 2.01). In addition, Appendix E - Schedule I Informational Guide contains information on common errors and error resolution for Schedule I specifically.

      Questions regarding the information to be filed can be directed to the appropriate District Office. Questions concerning software, hardware, or the transmission of the FOCUS filing can be directed to the NASD toll-free hotline at (800) 321-NASD.

      FOCUS Reports Schedule For 1999

      Schedule I for 1998 Year End Due Date
      1998 FOCUS Schedule I January 27, 1999
      Quarterly FOCUS Part II/IIA for 1998
      Period Ending Due Date
      December 31, 1998 January 27, 1999
      Monthly And Fifth* FOCUS II/IIA Filings for 1999
      Period Ending Due Date
      January 31, 1999 February 24, 1999
      February 28,1999 March 23, 1999
      April 30, 1999 May 25, 1999
      May 31, 1999 June 23, 1999
      July 31, 1999 August 24, 1999
      August 31, 1999 September 24, 1999
      October 31, 1999 November 23, 1999
      November 30, 1999 December 23, 1999
      Quarterly FOCUS Part II/IIA Filings For 1999
      Quarter Ending Due Date
      March 31, 1999 April 26, 1999
      June 30, 1999 July 26, 1999
      September 30, 1999 October 25, 1999
      December 31, 1999 January 27, 2000
      Schedule I for 1999 Year End Due Due Date
      1999 FOCUS Schedule I January 27, 2000

      * A Fifth FOCUS report is an additional report that is due from a member whose fiscal year end is a date other than the calendar quarter.

    • 98-99 SEC Issues No-Action Letter On Proprietary Accounts Of Introducing Broker/Dealers

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      Executive Summary

      On November 3, 1998, the Securitiesand Exchange Commission (SEC)issued a No-Action Letter to clarify itsposition under SEC Rule 15c3-1 (NetCapital Rule) regarding the capital treatment of assets in the proprietary account of an introducing broker/dealer (PAIB) held by a clearing broker/dealer. The letter allows introducing broker/dealers to include PAIB assets as allowable assets in their net capital computations, provided the clearing broker/dealer establishes a separate reserve account for PAIB assets in accordance with SEC Rule 15c3-3 (Customer Protection Rule) and both the introducing broker/ dealer and the clearingbroker/dealer enter into a written agreement whereby the clearing broker/ dealer will perform the PAIB calculationin accordance with theprovisions, procedures, and interpretations set forth in the letter. Firms must begin adhering to the requirements stated in the No-Action Letter on June 1, 1999; until then introducing broker/dealers may continue their current practice of treating PAIB assets as allowable.

      A copy of the No-Action Letter is attached. Questions concerning this Notice may be directed to Samuel Luque, Jr., Associate Director, Member Regulation, NASD Regulation, Inc. (NASD RegulationSM), (202) 728- 8472, or Susan DeMando, Regional Compliance Supervisor, Member Regulation, NASD Regulation, (202) 728-8411.

      Background

      The Net Capital Rule requires broker/dealers to have sufficient liquid capital to protect the assets of customers and to meet their obligations to other broker/dealers. In calculating net capital, broker/dealers begin with their net worth and then make various positive and negative adjustments. The Customer Protection Rule requires broker/dealers that carry customer accounts to maintain physical possession or control of all customer fully paid and excess margin securities, and periodically to compute and set aside in a special reserve bank account a certain amount of money that is customer money or money obtained from using customer securities.

      Introducing broker/dealers typically include their proprietary cash and securities held by their clearing firms as allowable assets in calculating their net capital. However, clearing broker/dealers are not required to maintain physical possession or control of these PAIB assets, or include them as customer credits in their customer reserve formula calculation, because the Customer Protection Rule specifically excludes broker/dealers from the definition of "customer." Therefore, since clearing broker/dealers are free of these customer-protection restrictions, it is possible for them to treat PAIB assets as their own. In fact, clearing broker/dealers have never been precluded from using PAIB assets in the normal course of their business. However, this means that introducing broker/dealers may have assets that are not always readily available to them. Under the Net Capital Rule, any assets "not readily convertible into cash" must be deducted from net worth and should be classified as non-allowable assets when calculating net capital.

      This situation prompted concerns by NASD Regulation and the New York Stock Exchange (NYSE) that both an introducing broker/dealer and a clearing broker/dealer may be using the same proprietary assets in conducting their individual businesses. NASD Regulation and the NYSE requested the SEC to clarify its position regarding PAIBs.

      Treatment Of Assets Held In A PAIB

      In order for an introducing broker/dealer to treat its PAIB assets as allowable assets in calculating its net capital, the introducing firm and its clearing broker/ dealer must enter into a written agreement providing that the clearing broker/dealer will perform the PAIB calculation in accordance with the following provisions:

      1. A clearing broker/dealer must perform a computation for PAIB assets (PAIB reserve computation) of all its introducing broker/dealers in accordance with the customer reserve computation set forth in the Customer Protection Rule (customer reserve formula) with the following modifications:
      A. Any credit (including a credit applied to reduce a debit) that is included in the customer reserve formula cannot be included as a credit in the PAIB reserve computation;
      B. Note E(3) to Rule 15c3-3a which reduces debit balances by one percent under the basic method and subparagraph (a)(1)(ii)(A) of the Net Capital Rule which reduces debit balances by three percent under the alternative method will not apply; and
      C. Neither Note E(1) to Rule 15c3-3a nor NYSE Interpretation /04 to Item 10 of Rule 15c3-3a regarding securities concentration charges is applicable to the PAIB reserve computation.
      2. The PAIB reserve computation must include all the proprietary accounts of all introducing broker/dealers covered by the PAIB Agreement. All PAIB assets must be kept separate and distinct from customer assets under the customer reserve formula in the Customer Protection Rule.
      3. The PAIB reserve computation must be prepared within the same time frames as those prescribed by the Customer Protection Rule for the customer reserve formula.
      4. The clearing broker/dealer must establish and maintain a separate "Special Reserve Account for the Exclusive Benefit of Customers" with a bank in conformity with the standards of paragraph (f) of the Customer Protection Rule (PAIB Reserve Account). Cash and/or qualified securities as defined in the customer reserve formula must be maintained in the PAIB Reserve Account in an amount equal to the PAIB reserve requirement.
      5. If the PAIB reserve computation results in a deposit requirement, the requirement can be satisfied to the extent of any excess debit in the customer reserve formula of the same date. However, a deposit requirement resulting from the customer reserve formula cannot be satisfied with excess debits from the PAIB reserve computation.
      6. Within two business days of entering into any PAIB Agreement, an introducing broker/dealer must notify its designated examining authority (DEA) in writing that it has entered into such an agreement with a clearing broker/dealer.
      7. Commissions receivable and other receivables of an introducing broker/dealer from its correspondent clearing broker/dealer (excluding clearing deposits) that are otherwise allowable assets under the Net Capital Rule are not to be included in the PAIB reserve computation, provided the amounts have been clearly identified as receivables on the books and records of the introducing broker/dealer and as payables on the books of the clearing broker/dealer.
      8. The proprietary account of an introducing broker/dealer that is a guaranteed subsidiary of a clearing broker/dealer or that guarantees a clearing broker/dealer ( i.e., guarantees all liabilities and obligations) is to be excluded from the PAIB reserve computation.
      9. Upon discovery that any deposit made to the PAIB Reserve Account did not satisfy its deposit requirement, a clearing broker/dealer shall by facsimile or telegram immediately notify its DEA and the SEC. Unless a corrective plan is found to be acceptable by the SEC and the DEA, the clearing broker/dealer must provide written notification within five business days of the date of discovery to its introducing broker/dealers that PAIB assets held by the clearing broker/dealer will not be deemed allowable assets for net capital purposes.The letter should also state that if the introducing broker/dealer wishes to continue to count its PAIB assets as allowable, it has until the last business day of the month following the month in which the notification was made to transfer all PAIB assets to another clearing broker/dealer. However, if the deposit deficiency is remedied before the time at which the introducing broker/dealer must transfer its PAIB assets to another clearing broker/dealer, the introducing broker/dealer may choose to keep its assets at the original clearing broker/dealer.

      Interpretations

      In addition, the No-Action Letter stipulates that certain interpretations are applicable to PAIBs. These interpretations were developed in conjunction with representatives from the Capital and Clearing Firm Committees of the Securities Industry Association. See the attached No-Action Letter for details.


      Attachment — No-Action Letter


      UNITED STATES
      SECURITIES AND EXCHANGE COMMISSION
      WASHINGTON,D.C. 20549

      November 3, 1998

      Mr. Raymond J. Hennessy
      Vice President
      New York Stock Exchange, Inc.
      Member Firm Regulation
      20 Broad Street
      New York, New York 10005

      Mr Thomas Cassella
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, D.C. 20006-1500

      Re: Propreitary Accounts of Introducing Brokers and Dealers

      Dear Messrs. Hennessy and Cassella:

      The New York Stock Exchange, Inc. ("NYSE") and NASD Regulation, Inc. ("NASDR") have raised concerns regarding the capital treatment of assets of broker-dealers that introduce their proprietary accounts on a fully disclosed basis ("introducing brokers") to other broker-dealers ("clearing brokers") for clearance and settlement. You have advised us that under certain circumtances an introducing broker and its correspondent clearing broker may each utilize the same proprietary assets of the introducing broker in their individual operations. You have requested that the Division of Market Regulation ("Division") clarifyits position as to the capital treatment of assets in the proprietary account of an introducing broker ("PAIB") held by a clearing broker, and you propose a methodology under which introducig brokers may properly account for PAIB assets for purposes of the net capital computation required by Rule 15c-1 ("net capital").1

      I. BACKGROUND

      A. Rules 15c-1 and 15c3-3

      Rule 15c3-1 requires every broker-dealer to maintain at all times specified minimum levels of liquid assets, or net capital, sufficient to enable a firm that falls below its minimum requirement to liquidate in an orderly fashion. The rule is designed to protect the customers of a broker-dealertat fails. To compute its current amount of liquid assets, a broker-dealer begins with its net worth and then makes various positive and negative adjustments to arrive at its net capital. This amount is then compared against the firm's minimum net capital requirement. If a firm's net capital computation yields an amount less than its minimum net capital requirement, the firm must immediatey cease doing business.

      Rule 15c3-3 ("customer protection rule") generally requires every broker-dealerthat carries customer accounts tp maintain physical possession or control of all fully-paid and excess margin securities. The customer protection rule also requires firms to make a periodic computation ("customer reserve formula") to ascertain the amount of money it holds that is either customer money or money obtained from the use of customer securities (i.e., customer credits). If customer credits exceed the amount customers owe the firm (i.e., customer financing or debits), the broker-dealer must deposit the excess in a special reserve bank account for the exclusive benefit of its customer. In this way . Rule 15c3-3 protects customer funds and securities held at a broker-dealer by requiring firms to maintain possession or control of customer securities, and by permitting firms to use customer money only to the extent necessary to finance customer related business.
      B. Treatment of Assets Held in a PAIB

      In addition to the regular customer accounts held by a clearing broker on behalf of the introducing broker, an introducing broker itself may maintain a proprietary trading account , or PAIB, with a clearing broker. When computing its net capital, an introducing broker typicaly includes its proprietary cash and securities held by the clearing broker as allowable assets. However, because the customer protection rule spicifically excludes brokers and dealers from the defination of "customer"2 the clearing broker is not subject to the restrictions of Rule 15c3-3 with regard to PAIB assets. Therefore, a clearing broker is not required to maintain the physical possession or control of PAIB assets, or is the clearing broker restricted as to its use of PAIB assets which, if attribute to "customers," would constitute customer credits in the customer reserve formula.

      Consequently, this interation between the net capital rule and the customer protection rule serves to permit an introducing broker to treat PAIB assets as allowable assets for purposes of Rule 15c3-1 while a clearing broker can exclude these assets as credits from the customer reserve formula. In effect, this permits clearing brokers to use the same PAIB assets free of the restrictions imposed by Rule 15c3-3 that are otherwise applicable to a broker-dealer's use of customer funds and securities. In effect, the clearing broker cn treat the assets as their own, free of any restriction. Consequently, the assets may not be readily available to the introducing broker it its correspondent clearing broker fails or otherwise experiences financial difficulties. this result is inconsistent with subparagraph (c)(2)(iv) of net capital rule which requires that assets "not readily convertible into cash" be deducted from a broker-dealer's net worth, and accordingly, PAIB assets should be considered as non-allowable assets, and an introducing broker should deduct such assets from its net worth when calculating its net capital.

      II. PROPASAL

      A. PAIB Agreement: You believe that under certain circumtances, it may be appropriate for an introducing broker to be permitted to treat such assets as allowable for purposes of the net capital rule. Accordingly, you have proposed the methodology set forth below as an elective procedure to be followed by an introducing broker and its correspondent clearing broker that would permit the introducing broker to treat its PAIB assets as allowable for purposes of its net capital calculation. Specifically, you propose that for an introducing broker to treat its PAIB assets held at clearing firm as allowable for purposes of the net capital rule, an introducing broker and its correspondent clearing broker must agree (in writing) to perform the PAIB calculation in accordance with the following provisions ("PAIB Agreement"):
      1. A clearing broker must perform a computation for PAIB assets ("PAIB reserve computation") of all its introducing brokers in acordance with the customer reserve computation set forth in Rule 15c3-3 ("customer reserve formula") with the following modifications:
      A. any credit (including a credit applied to reduce a debit) that is included in the customer reserve formula cannot be included as a credit in the PAIB reserve computation;
      B. Note E(3) to Rule 15c3-3a which reduces debit balances by 1% under the basic method and subparagrph (A)(1)(ii)(A) of the net capital rule which reduces debit balances by 3% under the alternative method will not apply; and
      C. Neither Note E(1) to Rule 15c3-3a nor NYSE Interpretation /04 to Item 10 of Rule 15c3-3a regarding securities concentration charges is applicable to the PAIB reserve computation.
      2. The PAIB reserve computation must include all the proprietary accounts of all introducing brokers covered by the PAIB Agreement. All PAIB assets must be kept separate and distinct from customer assets under the customer reserve formula in Rule 15c3-3.
      3. The PAIB reserve computation must be prepared within the same time frames as those prescribed by Rule 15c3-3 for the customer reserve formula.
      4. The clearing broker must establish and maintain a separate "Special Reserve Account for the Exclusive Benefit of Customers" with a bank in conformity with the standards of paragraph (f)of Rule 15c3-3 ("PAIB Reserve Account"). Cash and/or qualified securitiesas defined in the customer reserve formula must be maintained in the PAIB Reserve Account in an amount equal to the PAIB reserve requirement.
      5. If the PAIB reserve computation results in a deposit requirement, the requirement can be satisfied to the extent of any excess debit in the customer reserve formula of the same date. However, a deposit requirement resulting from the customer reserve formula cannot be satisfied with excess debits from the PAIB reserve computation.
      6. Within two business days of entering into any PAIB Agreement, an introducing broker must notify its designated examining authorityin writing that it has entered into such agreement with a clearing broker.
      7. Commissions receivable and other receivables of an introducing broker from its correspondent clearing broker (excluding clearing deposits) that are otherwise allowable assets under the net capital rule are not to be included in the PAIB reserve computation, provided the amounts have been clearly identified as receivables on the books and records of the introducing broker and as on the books of the clearing broker.
      8. The proprietary account of an introducingbroker that is a guaranteed subsidiary of a clearing broker or who guaratees a clearing broker (i.e., guarantees all liabilities and obligations) is to be excluded from the PAIB reserve computation.
      9. Upon discovery that any deposit made to the PAIB Reserve Account di not satisfy its deposit requirement, a clearing broker shallby facsimileor telegram immediately notifyits designated examining authority and the corrective plan is found acceptable by the Commission and the designated examining authority, the clearing broker must provide written notification within 5 business days of the date of discovery to its introducing brokers that PAIB assets held by the clearing broker will not be deemed allowable assets for net capital purpose. The letter should also state that if the introducing broker wishes to continue to count its PAIB assets as allowable, it has until the last business day of the month following the month in which the notification was made to transfer all PAIB assets to another clearing broker. However, if the deposit deficiency is remedied before the time at which introducing broker must transfer its PAIB assets to another clearing broker, the introducing broker may choose to keepits assets at the clearing broker.
      B. Interpretations: In addition, you have proposed the following interpretations regarding the PAIB reserve computation that were developed in conjunction with representatives from the Capital and Clearing Firm Committees of the Securities Industry Association. The Interpretations are as follows:
      1. Credit included in the PAIB reserve computation that result from the use of the PAIB securities pledged to meet intra-day margin calls in a cross margin account established between The Options Clearing Corporation and any regulated commodity exchange can be reduced to the extent that the excess margin held by the other clearing can be reduced corporation in the cross margin relationships is used the following business day to replace the PAIB securities that were previously pledged. In addition, balances resulting from a cross margin account which are segregated pursuant to Commodities Future Trading Commission regulations need not to be included in the PAIB reserve computation.
      2. Deposits received prior to a transaction pending settlement3 which are $5 million or greater for any single transaction or $10 million in aggregate can excluded as credits from the PAIB reserve computation if such balances are placed and maintained in a separate PAIB Reserve Account by 12 noon eastern time ("ET") on the following business day.4 Thereafter, the money representing any such deposits may be withdrawn to complete the related transactions without performing a new PAIB reserve computation.
      3. Clearing deposits required to be maintained at registered clearing agencies may be included as debits in the PAIB reserve computation to the extent the percentage of the deposit, which is based upon the clearing agency's aggregate deposit requirements (e.g., dollar trading volume), that relates to the proprietary business of introducing brokers can be identified.
      4. Any clearing broker that does not carry "customers" as defined by Rule 15c3-3 or conduct a proprietary trading business must still obtain the PAIB Agreement from its introducing brokers. But as long as such clearing broker does not have aPAIB deposit requirement, it may make its PAIB reserve computation monthly basis has, at the timeof any required computation, a PAIB deposit requirement, the clearing broker shall thereafter compute weekly until four successive weekly computations are made, none of which is made at a time when the clearing broker had a PAIB deposit requirement.
      5. A credit balance resulting from a PAIB reserve computation can be reduced by the amount that items representing such credits are swept into money market funds or mutualfunds of an investment company registered under the Investment Company Act of 1940 on or prior to 10 a.m. ET on the deposit date provided that the credits swept into any such fund are not subject to any right, charge, security interest, lien, or claim of any kind in favor of the investment company of the clearing broker. Any credits which have been swept into money market funds or mutual funds must be maintained in the name of a particular introducing broker or for the benefit of an introducing broker. This treatment of credit balances applies only to the PAIB reserve computation and does not apply to the customer reserve formula.
      6. Carrying brokers that clear the PAIB accounts of their correspondents through an affiliate or third party clearing broker must include these PAIB accounts balances and the omnibus PAIB account balance in their computation provided the clearing broker agrees in writing to (1) perform a computation for PAIB assets as described in IIA, and (2) include the omnibus PAIB account balance in its computation.

      You also propose that, on a case by case basis, the designated examining authority ("DEA") of a clearing broker may grant extensions of time regarding compliance with the terms of the PAIB Agreement as set forth in this letter if the DEA is satisfied the broker-dealer is acting in good faith and that exceptional circumstances warrant the extension. The DEA may confer with the staff of the Commission before granting an extension. The designated examining authority must maintain a summary of the justification for the extensions in a manner similar to the treatment of extensions granted under Rule 15c3-3(n).

      III. CONCLUSION

      Based on the foregoing, the Division will not recommended to the Commission that enforcement action be taken if an introducing broker includes PAIB assets as allowable assets in its net capital computation so long as the introducing broker and clearing broker adhere to the elective procedures regarding the PAIB Agreement and its attendant interpretations that are set forth in this letter. We understand that introducing and clearing brokers must make operational changes to comply with the terms of this letter; therefore, introducing firms continue their current practice of treating PAIB assets as allowable until June 1, 1999.

      You should be aware that this is a staff position with respect to enforcement only and does not purport to express any legal conclusions. This position is based solely on the foregoing description. Factual variations could warrant a different response, and any material change in the facts must be brought to the Division's attention. This position may be withdrawn or modified if the staff determines that such action is necessary for the protection of investors, in the public interest, or otherwise in furtherance of the purposes of the securities laws.

      Sincerely,

      Michael A. Macchiaroli
      Associate Director


      1 17 CFR 240.15c3-1.

      2 17 CFR 240.15c3-3(a)(1). Rule 15c3-3 reads, in pertinent part, that "[t]he term[customer] shall not include a broker or dealer or a registered municipal securities dealer."

      3 For example, large deposits could include moneys accumulated prior to underwritings, required at foreign clearing facilities, or for settlement of domestic transactions requiring federal funds in which next day funds were originally deposited.

      4 This account would be in addition to any other reserve account maintained by the clearing broker under this no-action letter or otherwise.

    • 98-98 SEC Approves Rule Change Relating To Mutual Fund Breakpoint Sales

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      SUGGESTED ROUTING

      Senior Management
      Advertising
      Legal & Compliance
      Mutual Fund
      Registered Representatives
      Training



      Executive Summary

      On November 10, 1998, the Securities and Exchange Commission (SEC) approved amendments to the National Association of Securities Dealers, Inc. (NASD®) Interpretive Memorandum 2830-1 (IM-2830-1) to clarify the application of the mutual fund breakpoint sales rule to modern portfolio investment strategies. The amendments are effective immediately.

      Questions regarding this Notice may be directed to Joseph E. Price, Director, Corporate Financing, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8877, or Robert J. Smith, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Discussion

      In the context of mutual fund sales, a "breakpoint" is that point at which the sales charge is reduced for quantity purchases of fund shares. NASD Rule IM-2830-1 prohibits sales of mutual fund shares in amounts below breakpoints, if such sales are made "so as to share in higher sales charges." The application of this standard depends on the purpose, or intent, of the member recommending the transaction. Accordingly, whether a breakpoint sales violation has occurred must depend on facts and circumstances that provide evidence of intent.

      Recently, NASD Regulation considered the application of IM-2830-1 to modern portfolio investment strategies that utilize many different mutual funds with varying investment objectives. The amendments specify moreprecisely those facts and circumstances the staff will consider when examining whether trades that miss breakpoints, but are made pursuant to bona fide asset allocation programs, may have violated NASD rules.

      NASD Regulation believes that, under most circumstances, sales under a breakpoint pursuant to a bona fide asset allocation program would not constitute a breakpoint violation. Because investors generally can benefit from asset-based investment strategies, such strategies should not be discouraged. The amendments provide that, for purposes of determining whether a sale was made in a dollar amount below a breakpoint in order to share in a higher commission, the NASD will consider the facts and circumstances of the sale, including whether the member has retained records that demonstrate that the trade was executed in accordance with a bona fide asset allocation program and that customers were informed that they may not receive breakpoint reductions that otherwise would be available.


      Text Of Amendments

      (Note: New text is underlined.)

      IM-2830-1 "Breakpoint" Sales

      The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions so as to share in the higher sales charges applicable on sales below the breakpoint is contrary to just and equitable principles of trade.

      Investment company underwriters and sponsors, as well as dealers, have a definite responsibility in such matters and failure to discourage and to discontinue such practices shall not be countenanced.

      For purposes of determining whether a sale in dollar amounts just below a breakpoint was made in order to share in a higher sales charge, the Association will consider the facts and circumstances, including, for example, whether a member has retained records that demonstrate that the trade was executed in accordance with a bona fide asset allocation program that the member offers to its customers:

      • which is designed to meet their diversification needs and investment goals; and


      • under which the member discloses to its customers that they may not qualify for breakpoint reductions that are otherwise available.

    • 98-97 Notice Of Increase In Advertising Review Fees

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      Senior Management
      Advertising
      Legal & Compliance



      Executive Summary

      On November 2, 1998, NASD Regulation, Inc. (NASD RegulationSM) filed amendments for immediate effectiveness with the Securities and Exchange Commission (SEC) that will amend Section 13 of Schedule A to the By-Laws of the National Association of Securities Dealers, Inc. (NASD®) to increase the review charge for advertisements, sales literature, and other such material filed or submitted to the NASD Advertising Regulation Department. The increase is effective on January 1, 1999.

      Questions regarding this Notice may be directed to Thomas A. Pappas, Director, Advertising Regulation Department, NASD Regulation, at (202) 728-8330, or Robert J. Smith, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Discussion

      The Advertising/Investment Companies Regulation Department (the Department) evaluates member firms' advertisements and sales literature for compliance with applicable rules of the NASD, SEC, Municipal Securities Rulemaking Board, and ecurities Investors Protection Corporation. These public communications include print, television, and radio advertisements, or electronic communications such as Web sites. They also include brochures, form letters, direct mail, and telemarketing scripts.

      Approximately 1,450 member firms submitted sales material last year, either voluntarily or pursuant to a rule requirement. Significant increases in filing volume and workload have made ever increasing demands on the Department's operations. For example, between 1994 (the last time advertising fees were amended) and 1997, the number of communications reviewed in the filings and spot check programs increased 43 percent, from 42,681 to 61,096. The Department expects filing volume to continue to increase in subsequent years.

      In order to enhance its operations and to continue to provide timely, high-quality reviews, NASD Regulation intends to dedicate additional staff and resources to the Department, as well as to other departments whose programs are related to the regulation of member communications with the public. The cost of the additional staff and resources will be covered by an increase in the basic charge for reviewing submitted material from $50 to $75.


      Text Of Amendments

      (Note: New text is underlined; deletions are bracketed.)

      Schedule A to the NASD By-Laws

      Section 13—[Service] Review Charge for Advertisement, Sales Literature, and Other Such Material Filed or Submitted

      There shall be a [service] review charge for each and every item of advertisement, sales literature, and other such material, whether in printed, video, electronic or other form, filed with or submitted to the Association, except for items that are filed or submitted in response to a written request from the Association's Advertising Regulation Department issued pursuant to the spot check procedures set forth in the Association's Rules as follows: (1) for printed material reviewed, [$50.00] $75.00, plus $10.00 for each page reviewed in excess of 10 pages; and (2) for video or audio media, [$50.00] $75.00, plus $10.00 per minute for each minute of tape reviewed in excess of 10 minutes.

      Where a member requests expedited review of material submitted to the Advertising Regulation department there shall be a [service] review charge of $500.00 per item plus $25 for each page reviewed in excess of 10 pages. Expedited review shall be completed within three business days, not including the date the item is received by the Advertising Regulation Department, unless a shorter or longer period is agreed to by the Advertising Regulation Department. The Advertising Regulation Department may, in its sole discretion, refuse requests for expedited review.

    • 98-96 NASD Elaborates On Member Firms' Supervision Responsibilities For Trade Reporting And Market-Making Activities

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      SUGGESTED ROUTING

      Senior Management
      Advertising
      Corporate Finance
      Government Securities
      Institutional
      Internal Audit
      Legal & Compliance
      Municipal
      Mutual Fund

      Operations
      Options
      Registered Representatives
      Registration
      Research
      Syndicate
      Systems
      Trading
      Training



      Executive Summary

      During the last two years, NASD Regulation, Inc. (NASD RegulationSM) has imposed numerous and significant disciplinary actions against member firms for supervisory deficiencies, particularly in the areas of trade reporting and market-making activities. Indeed, much of the recent focus in the area of written supervisory procedures has been in the context of NASD Regulation's Trading and Market Maker Surveillance (TMMS) examination process. Accordingly, the purpose of this Notice is to reiterate for members in the context of trading and marketmaking activities the requirements of National Association of Securities Dealers, Inc. (NASD®) Rule 3010, the supervision rule, concerning a member firm's obligation to establish, maintain, and enforce a supervisory system and written supervisory procedures which reflect that system.1

      Establishing, maintaining, and enforcing written supervisory procedures is a cornerstone of self-regulation within the securities industry. Supervisory procedures reasonably designed to achieve compliance with applicable rules, and to detect and deter rule violations by a member firm and its associated persons, enable the firm to identify and respond to regulatory concerns in a manner that can reduce the risk of disciplinary action by NASD Regulation. 2 Moreover, appropriately esigned and implemented supervisory systems and written supervisory procedures serve as a "frontline" defense to protect investors from fraudulent trading practices and help to ensure that members are complyingwith rules designed to promote the transparency and integrity of the market. As a result, effective supervisory systems within member firms enhance investor confidence and, in turn, promote the fairness, liquidity, and efficiency of the market for all market participants.

      As markets evolve and become more complex, it is essential that firms have in place effective supervisory systems and written supervisory procedures. At most member firms frontline supervisors have responsibilities for firm revenues in addition to their supervisory responsibilities with regard to applicable laws, rules, and regulations. Appreciating both the significance and the compatibility of these dual responsibilities, NASD Regulation believes that an effective supervisory system contemplated by Rule 3010 includes a strong overall commitment on the part of supervisors to establish and maintain clearly defined procedures for compliance with applicable laws, rules, and regulations, and a climate of intolerance for lax compliance by the persons they supervise.

      NASD Rule 3010 requires each member to establish, maintain, and enforce written supervisory procedures with respect to the types of business in which it engages, which "are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD Rules . . . ." 3 Because many of the failure to supervise charges recently imposed on members have been for inadequacies revealed in the TMMS examination process, in the trade reporting, market making, and equity order handling areas, this Notice focuses on elements of adequate supervisory procedures and systems in these areas. Given the differences among member firms in terms of their business mixes, and the fact that compliance with NASD Rule 3010 can be achieved through a variety of procedures and systems, this Notice only addresses some of the general elements that member firms should consider in assessing their supervisory systems and written procedures. NASD Regulation is not mandating any particular type or method of supervision. Nor is the Notice designed to provide a checklist of steps guaranteed to constitute adequate written supervisory procedures. NASD Regulation will continue to examine closely member firms' supervisory systems and written procedures and, where appropriate, initiate disciplinary action against both firms and their supervisory personnel for failure to adopt, implement, and enforce appropriate supervisory procedures.

      If you have any questions about this Notice, please call the Legal Section of the Market Regulation Department, NASD Regulation, at (301) 590-6410.

      Discussion

      Requirements Of NASD Rule 3010

      NASD Rule 3010 provides that each NASD member must "establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the rules of this Association."4 In addition to the creation of supervisory systems, Rule 3010 also requires member firms to establish, maintain, and enforce companion written supervisory procedures.5 Thus, a member and/or individual can violate NASD Rule 3010 in several different ways. Specifically, it is a violation if the member and/or individual fails to establish and maintain a supervisory system and/or fails to describe the operation of that system in written supervisory procedures. In addition, it is a violation if the member and/or individual fails to enforce a supervisory system and/or written supervisory procedures. Either type of violation can occur in the absence of an underlying rule violation.

      There is an important distinction between written guidelines for compliance and written supervisory procedures. Guidelines for compliance generally set forth the applicable rules and describe prohibited practices.6 While such compliance guidelines certainly serve a valuable regulatory purpose, and can represent an important element of an effective supervisory system, compliance guidelines in and of themselves do not constitute an adequate supervisory system or procedures. Beyond compliance guidelines, member firms must also adopt written supervisory procedures that describe the actual supervisory system established by the firm to achieve compliance with applicable rules and regulations. Specifically, the firm's written supervisory procedures should include a description of the controls and procedures used by the firm to deter and detect misconduct and improper activity. The written supervisory procedures should also identify the specific personnel who perform the various supervisory functions.

      A firm's supervisory system may include a range of techniques and controls in addition to formal reviews and examinations of exception reports, which always should be included. For example, an effective supervisory system can include the maintenance of a comprehensive training and continuing education program that promotes a thorough understanding by associated persons of the applicable laws, rules, and regulations. In addition, elements of an effective supervisory system can include internal and external audits, and periodic reviews by "audit committees" or similar bodies constituted to evaluate a firm's controls. It can also include less formal monitoring and oversight by a qualified supervisor, or designee, actively involved in the business. Ultimately, an effective supervisory system may be comprised of many different elements, both objective—such as regular reviews of specific areas of activity—and subjective, including placing competent, qualified, and experienced individuals in upervisory roles. In addition, a tone should be set from the top of the firm that lax compliance with - and deliberate violation of - laws, rules, and regulations will not be tolerated.

      The supervisory system should be designed to ensure that delegated responsibilities are diligently exercised. Policies and procedures are not sufficient if there are no auditing systems to determine whether they are being followed as described.

      Accordingly, written supervisory procedures should describe the following:

      a) specific identification of the individual(s) responsible for supervision - either by name or by title and position;
      b) the supervisory steps and reviews to be taken by the appropriate supervisor - this need not be a detailed description, but it should identify any exception reports and/or other documents being reviewed and the substantive area being reviewed ( e.g., Limit Order Protection, trade reporting, etc.). If a member firm employs automated systems as part of its supervisory system, those systems should also be generally described.
      c) the frequency of such reviews - this should be more specific than simply providing for "a review" or "a review from time to time." The frequency of reviews should be described, e.g., daily, weekly, monthly, quarterly, or annually (how frequently a firm conducts any such reviews will depend upon the nature, type, or level of firm activity in that particular area); and
      d) how such reviews shall be documented - the firm should describe how the review will be documented, for example, initialing order tickets, initialing blotters, or filling out review logs. The procedures should also provide for the documentation of steps taken as a result of supervisory reviews ( e.g., trades broken, restitution for best execution violations, etc.). The staff recognizes that there are a variety of ways, in addition to those noted, that reviews can be documented as having been conducted, particularly where the review is conducted online. Firms should document reviews in a manner sufficient to demonstrate to firm management and regulators that a review has been conducted.

      Subject Areas Typically Addressed In The Written Supervisory Procedures Of Firms Engaged In Market-Making Activity

      As the staff has pointed out during the course of TMMS examinations, the written supervisory procedures and supervisory systems of firms engaged in market-making activities must address, at a minimum, trading practice rules ( i.e., passive market making, best execution, firm quote rule compliance, limit order protection, short-sale rules, markups and markdowns, and the Securities and Exchange Commission's [SEC] Order Handling Rules), trading systems such as Small Order Execution SystemSM (SOESSM) and SelectNetSM, trade reporting, Automated Confirmation Transaction SystemSM (ACTSM) Rules compliance, and any other material aspect of the firm's market-making business.

      In August 1996, the SEC issued a Report of Investigation that detailed deficiencies in the NASD's performance of its duty to oversee The Nasdaq Stock Market® (Section 21(a) Report). As a result, NASD Regulation has been examining carefully member firm policies, practices, and procedures that encompass all of the areas referenced in the Section 21(a) Report. In particular, NASD Regulation has been looking closely at whether a firm's written supervisory procedures address the following subject areas:

      • pricing conventions;


      • size conventions;


      • coordination of quotations, trades, and trade reports;


      • exchange of proprietary and customer information;


      • improper collaboration and coordination of Market Maker activities;


      • failure to honor quotations;


      • harassment;


      • late and inaccurate trade reporting; and


      • other trading rules and regulations that relate to market-making activities.

      In addition, both the NASD and the SEC have recently emphasized the importance of a broker/dealer's best xecution obligations. Whether a firm has fulfilled these obligations depends upon the different facts and circumstances present at each member firm. Nevertheless, as the SEC has repeatedly stated, to comply with the supervisory obligations that flow from best execution, a supervisory system must provide a mechanism for regularly and rigorously comparing execution quality likely to be obtained from different markets or Market Makers, and for determining that such analyses are performed.

      Obligation To Update And Amend Written Supervisory Procedures And Supervisory Systems Upon The Implementation Of Rule Changes; Awareness Of Market Practices

      Members must keep abreast of changes in laws, rules and regulations, market practices, and indicated patterns of non-compliance and must modify their supervisory rocedures and systems as necessary. In this connection, NASD Rule 3010(b)(3) provides that "each member shall amend its written supervisory procedures as appropriate within a reasonable time after changes occur in applicable securities laws and regulations, including the Rules of this Association." What constitutes a "reasonable time" depends on, among other things, the complexity of the rule change and the changes (if any) required to be made in the supervisory system, the magnitude of any such changes, the extent to which the rule change imposes new requirements or modifies pre-existing requirements, and the amount of advance notice provided about the effective date of the rule change. In this connection, NASD Regulation believes that significant rule changes generally are promulgated and approved in a manner that affords members sufficient time to prepare for implementation of the rule change.

      When rule changes necessitate a modification of a member firm's supervisory system and written supervisory procedures, a firm can comply with NASD Rule 3010(b)(3) by preparing and distributing a supplemental memorandum or other similar document describing the modification or amendment being made and updating in some manner relevant supervisory materials.

      Supervisory Responsibilities Of Firms That Enter Into Give-up Or Other Arrangements

      Many member firms enter into giveup or other arrangements that allow another firm to report trades on their behalf. Although a firm may allow another firm to perform its trade reporting responsibilities, the firm has the ultimate obligation to report trades in compliance with the rules and to supervise its activities to detect and deter violations of the trade reporting and ACT rules. These obligations cannot be contracted away. Thus, any firm that agrees to allow another firm to report trades on its behalf must establish, maintain, and enforce supervisory procedures which allow it to determine that the other firm is reporting those transactions in compliance with the rules. In this connection, NASD Regulation notes that executing "Attachment 2" to the ACT agreement does not relieve a member firm of any of its obligations in this area.

      Use Of Automation As Part Of A Firm's Supervisory System

      Written supervisory procedures may incorporate the use of automated systems to assist in determining compliance with applicable rules. As part of its supervisory system, a firm must test and monitor such systems periodically to determine that they are operating properly. In addition, personnel using the systems should be trained so that they understand how the systems work. For example, programmers should be advised of the regulatory requirements the system is being designed to address. Supervisory and compliance personnel should understand the system's capabilities and limitations. These principles apply whether or not the system software is designed by the firm or purchased from an outside source. Additionally, when purchasing or designing a system, the firm should determine that such a system can reasonably assist the member firm in meeting its supervisory obligations. A system programming error or the failure of software need not result in a charge of failure to supervise if the firm has in place an effective supervisory procedure reasonably designed to detect such errors or failures. Indeed, the existence of an appropriate supervisory system that detects a particular error or failure and permits the firm to take appropriate remedial action may in certain instances be a mitigating factor in determining the necessity and severity of disciplinary action. Despite the means or procedures to detect system errors or failures, however, repeated system failures or errors without corrective action would weigh heavily against any mitigation that such procedures may provide.

      Automated Assistance From NASD Regulation And Nasdaq

      In a number of areas, resources are provided by NASD Regulation and Nasdaq to assist member firms in meeting their supervisory responsibilities. For example, NASD Regulation presently seeks to contact member firms engaged in underwriting activities on a real-time basis if it detects trading or quotation activity that may be inconsistent with the SEC's " passive market-making" rule, Rule 103 under Regulation M.

      Additionally, NASD Regulation and Nasdaq provide the membership with transaction and market data that may be accessed through the Nasdaq TraderSM Web Site (www.nasdaqtrader.com) on the Proprietary Trading Data Web page. Information currently available includes monthly "report cards" that compare a firm's level of late trade reporting to industry-wide averages and the member's direct peers. The "report card" also provides similar information with respect to the firm's compliance with the firm quote rule and the best execution rule. Through this Web Site, members also have access to daily share volume reports for a broker/dealer, daily share volume reports for a security, monthly summaries, and historical research reports such as Market Maker Price Movement Reports and Equity Trade Journals.

      The provision of such reports and trade information by NASD Regulation and Nasdaq do not obviate the need for member firm supervision. Nevertheless, member firms may appropriately incorporate such resources into the overall esign and implementation of their written supervisory procedures and systems.

      Common Supervisory Deficiencies Noted During TMMS Examinations

      To assist the membership in developing adequate written supervisory procedures, the following are examples of supervisory procedures most frequently found to be deficient by the staff during the course of TMMS examinations. Merely avoiding these bad practices in no way ensures that a firm's written procedures will be found to be adequate. Avoiding these particular practices, however, could assist member firms significantly in developing adequate written supervisory procedures.

      1. The Written Supervisory Procedures Merely Recite the Applicable Rules: The staff has observed many instances where the written supervisory procedures merely recite applicable NASD and SEC rules without any description of a procedure that will achieve compliance with those rules. While such documents can be an important component of a member firm's supervisory system, duplicating or restating the rules and identifying prohibited activities, without describing a procedure to determine whether there is compliance with those rules, is not sufficient to serve as the firm's written supervisory procedures.
      2. Failure to Designate Responsible Supervisory Personnel in the Procedures: The staff has observed instances where firms have failed to designate the person or persons responsible for conducting supervision in each type of business. The specific person charged with conducting a particular review or procedure should be identified - either by name or by title.7 Merely stating that the "Compliance Department," "Trading Department," or a "principal" will conduct the review is not sufficient. The procedures should state, for example, that "John Doe will review" or "the Head Trader will review." Additionally, the person designated to carry out the review should be adequately experienced and qualified to do so.
      3. Failure to Describe the Review Process Adequately: As stated above, the supervisory steps and reviews do not necessarily have to be set forth in a detailed description. Nevertheless, the staff has observed instances where the description of the supervisory procedure or review has been so vague that firm management, firm supervisory personnel, and regulators cannot determine what the review entails. For example, it is not sufficient to provide that "John Doe will review for compliance with all NASD trade reporting rules, limit order protection, etc."
      4. Failure to Document Reviews: The staff has observed instances where firms have failed to preserve and maintain the documentation that reflects the fact that particular supervisory reviews have been conducted.
      5. Failure to Denote Specifically the Frequency of Reviews: The staff has observed instances where firms have failed to designate the frequency with which particular supervisory reviews are conducted.8
      6. Failure to Monitor Adequately the Performance of Automated Compliance Systems: The staff has observed instances where firms have failed to test periodically the performance of automated trade execution, reporting, and other automated compliance systems that assist the firm in complying with applicable rules.
      7. Failure to Monitor Adequately the Performance of Service Bureaus and Other Members to Which the Firm has Delegated its Trade Reporting Responsibility: The staff has observed instances where firms have failed to implement procedures to review periodically the accuracy and timeliness of trade reporting conducted by another member or service bureau on the firm's behalf.
      8. Failure to Reflect Supervisory Systems in the Firm's Written Supervisory Procedures: The staff has observed instances where firms that in fact have effective supervisory systems in place fail to describe them in the firm's written supervisory procedures. It has also been the staff's experience that firms which conduct effective supervisory reviews sometimes fail to describe them in their written supervisory procedures. This is particularly true or firms that use automated systems to ensure compliance with applicable rules. Such systems should be generally described in the firm's written supervisory procedures.
      9. Failure to Describe the Steps the Firm Will Take when Potential Deficiencies are Identified: The staff has reviewed written supervisory procedures that fail to describe the steps a supervisor should take when deficiencies are found. Because each situation may have aggravating or mitigating factors, general procedures, versus specific steps to be taken, will be adequate for purposes of the written supervisory procedures. For example, the procedures may indicate that the supervisor will discuss the matter with the compliance, audit, or legal department and the supervisor and/or representatives from one or more of these other areas will follow up with the registered person or persons involved to determine the reason for a deficiency, the possible need for further training, etc.
      10. Failure to Update Procedures Within a Reasonable Period to Reflect New Regulatory Requirements or Firm Procedures: The staff has observed numerous instances where members have failed to establish and maintain written supervisory procedures by the effective date of a new rule.
      11. Failure to Preserve and Maintain Written Supervisory Procedures That Were in Effect During Past Time Periods in Accordance with SEC Rules 17a-3 and 17a-4: The staff has reviewed instances where members allege that written supervisory procedures were in effect for a specified business line during a specified time period, but were unable to document that the procedures actually existed at that time.

      Firms should review their existing supervisory systems and written supervisory procedures in light of the guidance provided in this Notice. Deficiencies in supervisory systems should be addressed immediately.


      Endnotes

      1 For additional guidance concerning NASD Rule 3010, see Notices to Members 88-84 and 89-34.

      2 Self-imposed disciplinary action at the firm level is an integral part of the self-regulatory process - one that often constitutes a mitigating factor with respect to sanctions. However, self-imposed disciplinary action does not necessarily preclude the imposition of appropriate sanctions by NASD Regulation where it is deemed warranted after review of the facts and circumstances regarding a particular matter.

      3 NASD Rule 3010(b)(1).

      4 NASD Rule 3010(a).

      5 See NASD Rule 3010(b) (1) and (2).

      6 See In Re Bryant, Securities Exchange Act Release No. 32357, 54 SEC Docket 345.

      7 It should be noted that NASD Rule 3010(b)(2) provides that a member firm shall maintain on an internal record the names of all persons who are designated as supervisory personnel and the dates for which such designation is or was effective.

      8 NASD Rule 3010 clearly does not require, however, that a member firm must review all of its trading activity for compliance with applicable rules. In these instances, the following have been found insufficient:

      a) reviews will be conducted as warranted or as needed;
      b) reviews will be conducted from time to time;
      c) reviews will be conducted regularly; and
      d) reviews will be conducted on a " spotcheck" basis.

    • For Your Information For December

      View PDF File

      Treasury Makes New Mailing Lists Available Via The Internet

      Recently, the U.S. Department of Treasury (Treasury) allowed interestedparties to sign up for the followingtwo new mailing list notificationpages via the Bureau of the PublicDebt's Web site:

      • One page contains three mailing lists related to government securities market regulation and allows individuals to receive e-mail notification of new regulatory issuances.


      • The second page contains three mailing lists related to the auction of Treasury marketable securities and allows individuals to receive e-mail notification of new press releases.

      Government Securities Market Regulation Area

      In the government securities market regulation area, anyone signing up for the Auction Rule (Uniform Offering Circular) Amendments and Interpretations mailing list will receive an e-mail notification when Treasury issues any rule amendments or interpretations specifically related to 31 CFR Part 356. Those signing up for the Government Securities Act Rule Amendments, Interpretations and Exemptions mailing list will receive an e-mail whenever there are any new issuances specifically related to 17 CFR Chapter IV.

      Anyone who signs up for the Notification of Calls for Large Position Reports mailing list will be notified by e-mailany time Treasury announces a call(test or actual) for large position reports. Large position notifications are for entities that may potentially have a reportable position of $2 billion or more in a particular Treasury security. Treasury advises market participants not to rely solely on their inclusion in this mailing list for notice of a call. As in the past, whenever Treasury announces a call, it will continue to issue a press release and a Federal Registernotice, post information on its Web site, and ask industry groups and regulators to notify their members.

      The sign-up page for these regulatory issuances can be found at: www.publicdebt.treas.gov/cgi-bin/cgi wrap/~www/signup.cgi?cat=gsrs

      Currently, you can also reach this page by going to the Public Debt's Web site (www.publicdebt.treas.gov), select the "Government Securities Market Regulation" image, then choose the "Sign up for our Government Securities Market Regulation mailing lists" option.

      Treasury Securities Auction Area

      Anyone who signs up for the Auction Announcement Press Releases, Auction Results Press Releases,and Inflation-Indexed Security CPI Press Release mailing lists will receive an e-mail whenever a new related press release is issued. The sign-up page for these auction-related press releases is located at: www.publicdebt.treas.gov/cgi-bin/cgiwrap/~www/signup.cgi?cat=of

      Currently, you can also reach this page by going to the Public Debt's Web site (www.publicdebt.treas.gov ), select "auction information" in the paragraph of text relating to "T-bills, Notes and Bonds," then choose the "Sign up for our Treasury Marketable Securities mailing lists" option.

      Questions regarding the government securities market regulation mailing lists can be directed to the U.S. Department of Treasury, Government Securities Regulations staff at (202) 219-3632. Questions regarding the auction information mailing lists can be directed to the U.S. Department of Treasury, Office of Financing at (202) 219-3350.

      Comment Period Extended

      The comment period for Notice to Members 98-81, originally scheduled to expire on November 30, 1998, was extended to January 15, 1999.

    • Year 2000 Update For December

      View PDF File

      December 1998

      SEC 1999 BD-Y2K Independent Public Accountant's Report

      As discussed in earlier issues of Notices to Members, and in other National Association of Securities Dealers, Inc. (NASD®) publications, the Securities and Exchange Commission (SEC) adopted an amendment to its Rule 17a-5 requiring that broker/dealers file Year 2000 readiness reports (BD-Y2K); the first report was due August 31, 1998, and a second report is due April 30, 1999. Broker/dealers with minimum net capital requirements of $100,000 or greater as of March 15, 1999, and broker/dealers that were required to file Part II of Form BD-Y2K on August 31, 1998, are required to file both Part I and Part II of Form BD-Y2K due April 30, 1999.

      As part of the amendments to SEC Rule 17a-5, Part II filers must also file a report prepared by an independent public accountant regarding the broker/ dealer's process for addressing Year 2000 problems. The independent accountant's report must be prepared in accordance with standards that have been reviewed by the SEC and that have been issued by a national organization that is responsible for promulgating authoritative accounting and auditing standards. Such standards do not have to involve an attestation engagement.

      In conjunction with adopting the independent public accountant reporting requirement, the SEC reviewed the procedures included in Statement of Position 98-8 (SOP 98-8), issued by the American Institute of Certified Public Accountant's Auditing Standards Board, and concluded that an independent public accountant's report prepared in accordance with SOP 98-8 would satisfy the independent public accountant reporting requirement. Details of the amendment to SEC Rule 17a-5 are available on the SEC WebSite (www.sec.gov). Details of SOP 98-8 are available on the AmericanInstitute of Certified Public Accountants' Web Site (www.aicpa.org).The independent public accountant's report becomes Part III of the FormBD-Y2K submission due to the SEC and the NASD by April 30, 1999.

      August 31, 1998 BD-Y2K Report Update

      After reviewing member firms' BD-Y2K reports that were due on August 31, 1998, the NASD Year 2000 Program Office has discovered a number of firms that have issues regarding their Part II submissions and will require NASD Regulation follow-up. A common example is inconsistencies in the information presented in Part I and Part II of their respective reports. NASD Year 2000 staff will contact these firms by phone to discuss problem areas and clarify the firms' Year 2000 readiness. The SEC has requested that the NASD provide a list of firms with issues that are still unresolved by January 25, 1999.

      Important Notes For Independent Accountant's Report (these notes supplement the instructions found on the Form BD-Y2K):

      • The broker/dealer must complete its Form BD-Y2K before the auditor's review.


      • The broker/dealer must engage a firm to do this based on the "as of March 15, 1999" reporting date. The auditor providing the independent public accountant's report does nothave to be the same as the financial auditor.


      • Submissions must include the name and address of the auditor.


      • The broker/dealer must submit the independent public accountant's report as Part III with Part I and Part II; Form BD-Y2K will not be considered "filed" unless all threeparts are received together with the signed cover sheet by the April 30th due date.


      • All Parts must contain the BD#, BD Name, and SEC 8-Number.


      • All Parts of Form BD-Y2K will be made available to the public.

      More Virtual Workshops

      Last month we highlighted the first in a series of Year 2000 Virtual Workshop—workshops in which NASD members may hear about important Year 2000 issues via conference call-in sessions. During the call-in sessions, members will hear a presentation, followed by a question and answer period. The following sessions will provide an opportunity for members to share ideas and learn from other firms'experiences. The phone number to register for all virtual workshopslisted here is (800) 839-9159.

      Virtual Workshops

      January 12 - Legal Issues

      Password: Legal

      Leader: Lyn Kelly

      Conf: # 2519205

      Call-in phone number: (888) 282-9568

      Issues to be covered:

      • due diligence efforts for brokers/dealers


      • litigation helpful hints


      • recent developments in disclosure

      January 14 - Mandatory Testing (also offered January 28, see last column)

      Password: Mandatory Testing

      Leader: Lyn Kelly

      Conf: # 3402274

      Call-in phone number: (888) 455-5419

      Issues to be covered:

      • internal testing


      • SIA-sponsored industry-wide testing


      • testing with the NASD

      January 20 - BD-Y2K for Small Firms

      Password: BD-Y2K

      Leader: Lyn Kelly

      Conf: # 3402355

      Call-in phone number: (888) 455-5419

      Issues to be covered:

      • upcoming BD-Y2K Report and a small firm approach


      • 1999 Report vs. 1998 Report

      January 27 - SOP; Part III of BD-Y2K

      Password: SOP

      Leader: Lyn Kelly

      Conf: # 3402391

      Call-in phone number: (888) 455-5419

      Issues to be covered:

      • how completing Part III of your BD-Y2K Form affects you


      • what does the SOP cover


      • helpful hints in the completion of Part III

      January 28 - Mandatory Testing

      Password: Mandatory Testing

      Leader: Lyn Kelly

      Conf: # 3402436

      Call-in phone number: (888) 455-5419

      Issues to be covered:

      • internal testing


      • SIA-sponsored industry-wide testing


      • testing with the NASD

      To participate in the Virtual Workshops, the NASD strongly encourages registration, but it is not required. Call MCI at (800) 839-9159, listen to the greeting, and provide the following information when prompted: firm name, Broker/Dealer #, and workshop date. On the day of thesession, call the phone number listed above with the associated workshop, and indicate the password and conference leader provided for the workshop.

      Workshops In Districts To Discuss Mandatory Testing

      The NASD Year 2000 Program Office is holding mandatory testing workshops in selected NASD Regulation District Offices in January. To register for on-site training, call the Program Office at (888) 227-1330. Once you are registered, you will be sent a confirmation letter. You must bring your confirmation letter to the seminar. Unfortunately, because of limited space, we will not be able to accommodate on-site registrants.

      January 20, Dallas District Office, 8:00 a.m. - 5:00 p.m.

      January 25, Denver District Office, 8:00 a.m. - 5:00 p.m.

      January 26, Los Angeles District Office, 8:00 a.m. - 5:00 p.m.

      Voluntary Testing

      NASD Test Centers are open with scheduling opportunities available to test NASD, NASD Regulation, and Nasdaq applications. Enclosed are updated NASDR and Nasdaq Year 2000 Service and Product flyers that indicate the status of each major system/application as it relates to Year 2000 readiness and ability to test. The NASD encourages firms to participate in voluntary testing with the NASD. To schedule testing or obtain information about NASD, NASD Regulation, or Nasdaq applications please contact:

      Nasdaq Customer Test System—(800) 288-3783

      NASD, NASD Regulation Testing—(888) 227-1330

      Mandatory Testing

      The SEC approved a new NASD rule that would mandate Year 2000 testing for clearing firms, market makers, and government securities firms. Members should check the NASD Regulation Web Site (www.nasdr.com) and watch for the January Notices to Membersfor details. Clearing firms should already have registered for Securities Industry Association (SIA)-sponsored industry testing and have performed all prerequisite testing such as point-to-point testing. To schedule industry-wide testing with the SIA call (888) Y2K-4SIA (888-925-4742).

      More Information/Questions

      NASD Year 2000 Program Office

      e-mail: y2k@nasd.com

      phone: (888) 227-1330

      Upcoming NASD Education And Events

      Topic Date Location
      Legal Issues January 12 Virtual
      Mandatory Testing January 14 Virtual
      BD-Y2K for Small Firms January 20 Virtual
      Mandatory Testing January 20 Dallas District
      Mandatory Testing January 25 Denver District
      Mandatory Testing January 26 Los Angeles District
      SOP; Part III of BD-Y2K January 27 Virtual
      Mandatory Testing January 28 Virtual

      SIA Events

      Year 2000 Industry Testing Seminar; February 2-3; New York City

      • Visit SIA Web Site (www.sia.com) to register and for more information.

      Important Publishing Note

      Beginning January 1999, the primary method of publishing Notices to Membersand NASD Regulation's other major member publication— the Regulatory & Compliance Alert— will be via the Internet. To continue to read these newsletters, and find out timely information about the NASD's Year 2000 efforts, please visit the NASDR or NASD Web Sites (www.nasdr.com and www.nasd.com, respectively) on a regular basis.

      To place your name on an e-mail list that will alert you to new issues of these publications, go to the NASDR Web Site and click on the button on the Home Page that says "Subscribe To Our E-Mail Notifications." Each Executive Representative will be eligible for one subscription to a hard-copy version of Notices to Membersat cost, $15 per year. Each branch office will be eligible for one subscription to the hard-copy version of the Regulatory & Compliance Alertat cost, also $15 per year. Hard-copy versions of these publications canbe purchased by calling NASDMediaSourceSM at (301) 590-6142.

    • 98-95 Fixed Income Pricing System Additions, Changes, And Deletions As Of September 23, 1998

      View PDF File

      SUGGESTED ROUTING

       

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      Corporate Finance
      Institutional
      Legal & Compliance

      Municipal
      Operations
      Systems
      Trading



      As of September 23, 1998, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      AMZN.GA Amazon Com Inc. 10.000 05/01/08
      ATCV.GA ATC Group Services Inc. 12.000 01/15/08
      AXTO.GB Abraxas Petro Corp. 11.500 11/01/04
      BDGM.GD Building Materials Corp. 7.750 07/15/05
      BUS.GC Greyhound Lines Inc. 11.500 04/15/07
      CBEA.GA Cobb Theatres LLC/Cobb Fin Corp. 10.625 03/01/03
      CEAW.GA Caesars World Inc. 8.875 08/15/02
      DIGO.GB DiGiorgio Corp. 10.000 06/15/07
      DOSE.GA PharMerica Inc. 8.375 04/01/08
      GI.GB Giant Industries Inc. 9.000 09/01/07
      GMRK.GA Gulfmark Offshore Inc. 8.750 06/01/08
      HAY.GD Hayes Wheels Intl Inc. 9.125 07/15/07
      HWG.GB Hallwood Group Inc. 10.000 07/31/05
      ICIX.GE Intermedia Communications Corp. 8.875 11/01/07
      ICIX.GF Intermedia Comm Inc. 8.600 06/01/08
      ICN.GA ICN Pharmaceuticals Inc. 9.250 08/15/05
      IKNF.GA Int'l Knife & Saw Inc. 11.375 11/15/06
      IMTI.GA Imagyn Medical Tech 12.500 04/01/04
      INSL.GA Insilco Corp. 10.25 08/15/07
      ISLP.GA Isle of Capri/Cap Corp. 13.000 08/31/04
      ITTD.GA ITT Industry Inc. 6.750 11/15/03
      ITTO.GA ITT Corp. (New) 6.250 11/15/00
      ITTO.GB ITT Corp. (New) 6.750 11/15/05
      ITTO.GC ITT Corp. (New) 7.375 11/15/15
      ITTO.GD ITT Corp. (New) 7.750 11/15/25
      IV.GD Mark IV Industries Inc. 7.500 09/01/07
      KBLR.GA Keebler Foods Corp. 10.750 07/01/06
      KNTC.GA Kinetic Concepts Inc. 9.625 11/01/07
      KRYS.GA Krystal Co. 10.250 10/01/07
      KSLG.GA KSL Recreation Group Inc. 10.250 05/01/07
      LENF.GB Lenfest Communications Inc. 10.500 06/15/06
      LPMT.GA Leslie's Poolmart Inc. 10.375 07/15/04
      MECU.GA Mediacom LLC/Cap Corp. 8.500 04/15/08
      NBCQ.GA NBC Acquisition Corp. 10.750 02/15/09
      NBKA.GA Nebraska Book Co. 8.750 02/15/08
      NTK.GE Nortek Inc. 9.125 09/01/07
      NWCG.GA NWCG Holdings Corp. 13.500 06/15/99
      OBTI.GA Orbital Imaging Corp. 11.625 03/01/05
      PCKI.GB PrintPack Inc. 10.625 08/15/06
      PGCU.GA Pegasus Media & Comm Inc. 12.500 07/01/05
      PGI.GB Polymer Group Inc. 8.750 03/01/08
      PGTV.GA Pegasus Communications Corp. 9.625 10/15/05
      PKED.GA Package Ice 9.750 02/01/05
      PRGC.GA Paragon Corp. Holdings 9.625 04/01/08
      PRTL.GB Primus Telecomm Group Inc. 9.875 05/15/08
      PSHF.GA Petro Shopping Ctrs/Fin Corp. 10.500 02/01/07
      PSTC.GA Prestolite Electric Inc. 9.625 02/01/08
      PUML.GA Purina Mills Inc. 9.000 03/15/10
      RCCC.GA Rural Cellular 9.625 05/15/08
      RCNC.GC RCN Corp. 10.000 10/15/07
      RSLU.GB RSL Communications Plc 10.125 03/01/08
      RSTS.GA Raintree Resorts Intl. Inc. 13.000 12/01/04
      RSUR.GA Resort at Summerlin 13.00 12/15/07
      SHLR.GA Schuler Homes Inc. 9.00 04/15/08
      SIND.GB Synthetic Industries Inc. 9.250 02/15/07
      SLYM.GA Sealy Mattress 9.875 12/15/07
      SLYM.GB Sealy Mattress 10.875 12/15/07
      SMLA.GA Simcala Inc. 9.625 04/15/06
      SUTG.GA South'n Foods/SFG Cap Corp. 9.875 09/01/07
      SVIS.GA Spectra Vision Inc. 11.500 10/01/01
      TCEN.GA 21st Century Telecom Gr Inc. 12.250 02/15/08
      TGNT.GB Teligant Inc. 11.500 03/01/08
      TRNR.GB Trans-Resources Inc. 10.750 03/15/08
      TRUA.GA Trump Atlantic City Assoc Inc. 11.250 05/01/06
      TRUG.GA Trump Atlantic City Assoc Inc. 11.250 05/01/06
      UIHI.GC United Int'l Holdings Inc. 10.750 02/15/08
      USMR.GB United Stationers Supply Co. 8.375 04/15/08
      VCRO.GA Vencor Operating Inc. 9.875 05/01/05
      VNCA.GA Venetian Casino/LV Sands Inc. 10.000 11/15/05
      VNCA.GB Venetian Casino/LV Sands Inc. 10.250 11/15/04
      VRIO.GA Verio Inc. 10.375 04/01/05
      VRIO.GB Verio Inc. 13.500 06/15/04
      VSYS.GB Viasystems Inc. 9.750 06/01/07
      WMNT.GA Wam Net Inc. 13.250 03/01/05
      WRNH.GA Werner Holdings Co. 10.000 11/15/07
      WXMN.GA Waxman USA Inc. 11.125 09/01/01
      ZLOG.GA Zilog Inc. 9.500 03/01/05

      As of September 23, 1998, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      ASCM.GA Associated Materials Inc. 11.500 08/15/03
      BBY.GB Best Buy Inc. 8.625 10/01/00
      BEPT.GA Brooks Fiber Properties Inc. 11.875 11/01/06
      BRDO.GA Bridge Oil USA Inc. 9.500 08/15/00
      BYLP.GA Bryland LP/Brylane Cap Corp. 10.000 09/01/03
      CGGI.GA Carbide/Graphite Group Inc. 11.500 09/01/03
      CLNG.GA Cole National Group Inc. 11.250 10/01/01
      CONG.GA Congoleum Corp. 9.000 02/01/01
      CTF.GA Cort Furniture Rental Corp. 12.000 09/01/00
      DELL.GA Dell Computer Corp. 11.000 08/15/00
      FLIA.GA Florida Steel Corp. 11.500 12/15/00
      FNPH.GA First Nationwide Parent Holdings Inc 12.500 04/15/03
      GLCM.GB General Chem Corp. 9.250 08/15/03
      JORD.GC Jordan Ind Inc. 10.375 08/01/03
      LFI.GC Levitz Furniture Corp. 13.375 10/15/98
      MLTI.GA Multicare Cos Inc. 12.500 07/01/02
      MXMG.GA Maxxam Group Inc. 12.250 08/01/03
      MXMG.GB Maxxam Group Inc. 11.250 08/01/03
      PLUM.GA Pacific Lumber Co. 10.500 03/01/03
      RGRO.GE Ralphs Grocery Co. New 13.750 06/15/05
      SIDE.GA Assoc Materials Inc. 11.500 08/15/03
      SVIS.GA Spectra Vision Inc. 11.500 10/01/01
      TEP.GA Tuscon Electric Power Co. 8.500 11/01/99
      TOWV.GA Stratosphere Corp. 14.25 05/15/02

      As of September 23, 1998, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      PGI.GA PGH.GA Polymer Group Inc. 9.00 07/01/07

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, Market Regulation, NASD Regulation, Inc. (NASD RegulationSM), at (301) 590-6451.

      Any questions regarding the FIPS master file should be directed to Cheryl Glowacki, Nasdaq® Market Operations, at (203) 385-6310.

    • 98-94 Christmas Day And New Year's Day: Trade Date — Settlement Date Schedule

      View PDF File

      SUGGESTED ROUTING

       

      Internal Audit
      Legal & Compliance
      Municipal
      Operations

      Syndicate
      Systems
      Trading



      Christmas Day And New Year's Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market® and the securities exchanges will be closed on Friday, December 25, 1998, in observance of Christmas Day, and Friday, January 1, 1999, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Dec. 17 Dec. 22 Dec. 24
      18 23 28
      21 24 29
      22 28 30
      23 29 31
      24 30 Jan. 4, 1999
      25 Markets Closed
      28 31 5
      29 Jan. 4, 1999 6
      30 5 7
      31 6 8
      Jan. 1, 1999 Markets Closed
      4 7 11
      * 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 five 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 titled "Reg. T Date."

    • 98-93 NASD Informs Members Of District Committee Members And District Nominating Committee Members

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      Senior Management
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      Legal & Compliance
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      Executive Summary

      Through this Notice, the National Association of Securities Dealers, Inc. (NASD®) is informing NASD members of the 1999 District Committee members and the District Nominating Committee members.

      Questions concerning this Notice may be directed to the District Director noted or to Joan Conley, Corporate Secretary, NASD, at (202) 728-8381.

      District Committee Members And District Nominating Committee Members

      Members of the 1999 District Committees and District Nominating Committees are as follows:


      DISTRICT 1

      District Committee
      To Serve Until January 2000
      Glenn M. Colacurci Salomon Smith Barney, Inc., San Francisco, CA
      Jerry D. Phillips Sutro & Co., San Francisco, CA
      William A. Svoboda Morgan Stanley Dean Witter, San Francisco, CA
      To Serve Until January 2001
      Steven R. Aaron Hambrecht & Quist LLC, San Francisco, CA
      Janet W. Campbell Protected Investors of America, San Francisco, CA
      Douglas C. Heske Piper Jaffray, Inc., San Francisco, CA
      To Serve Until January 2002
      John H. Chung Van Kasper & Company, Inc., San Francisco, CA
      Steven D. Piper Volpe Brown Whelan & Company LLC, San Francisco, CA
      Nominating Committee
      Deborah R. Gatzek Franklin/Templeton Distributors, San Mateo, CA
      John C. Helmer Caldwell Securities, Danville, CA
      Lawrence R. McKulla Prudential Securities, San Francisco, CA
      John J. Sanders BancBoston Robertson Stephens, Inc., San Francisco, CA
      John E. Schmidt Credit Suisse First Boston, San Francisco, CA

      District Director
      Elisabeth P. Owens
      525 Market Street, Suite 300
      San Francisco, CA 94105
      (415) 882-1200



      DISTRICT 2

      District Committee
      To Serve Until January 2000
      Terry L. Chase EVEREN Securities, Inc., Pasadena, CA
      Rodney D. Hagenbuch Merrill Lynch, Pierce Fenner & Smith, Inc., Los Angeles, CA
      William J. Porter, III The Seidler Companies, Inc., Los Angeles, CA
      Joan B. Seidel Morton Seidel & Company, Inc., Beverly Hills, CA
      To Serve Until January 2001
      James B. Guillou, Sr. Sutro & Co., Incorporated, LaJolla, CA
      Andrew E. Haas Bear Stearns & Co., Inc., Los Angeles, CA
      Richard E. Wiseley CIBC Oppenheimer & Co., Los Angeles, CA
      Richard P. Woltman Spelman & Co., Inc., San Diego, CA
      To Serve Until January 2002
      Margaret M. Black Morgan Stanley Dean Witter, Beverly Hills, CA
      Diane P. Blakeslee Blakeslee & Blakeslee, Inc., San Luis Obispo, CA
      Jack R. Handy, Jr. Financial Network Investment Corporation, Torrance, CA
      Dean A. Holmes Gateway Investment Services, Inc., Glendale, CA
      Nominating Committee
      George H. Casey Crowell Weedon & Co., Los Angeles, CA
      William A. Hawkins Griffin Financial Services, City of Industry, CA
      Carl E. Lindros Santa Barbara Securities, Inc., Santa Barbara, CA
      Fredric M. Roberts F. M. Roberts & Company, Los Angeles, CA
      Robert L. Winston American Funds Distributors, Inc., Los Angeles, CA

      District Director
      Lani M. Sen Woltmann
      300 South Grand Avenue, Suite 1600
      Los Angeles, CA 90071
      (213) 627-2122



      DISTRICT 3

      District Committee
      To Serve Until January 2000
      Timothy H. Ganahl Ragen MacKenzie, Inc., Seattle, WA
      Thomas A. Petrie Petrie Parkman & Co., Inc., Denver, CO
      Patrick C. Rile EVEREN Securities, Inc., Phoenix, AZ
      Douglas E. Strand Strand, Atkinson, Williams & York, Inc., Portland, OR
      To Serve Until January 2001
      Thomas R. Hislop Peacock, Hislop, Staley & Given, Inc., Phoenix, AZ
      Gerald Meyer D. A. Davidson & Co., Great Falls, MT
      John Morton Morton Clarke Fu & Metcalf, Inc., Seattle, WA
      Terry Lee Richards PaineWebber, Inc., Salt Lake City, UT
      To Serve Until January 2002
      James Barnyak Salomon Smith Barney, Inc., Seattle, WA
      David Griswold Frank Russell Securities, Inc., Tacoma, WA
      James E. Stark Charles Schwab & Co., Phoenix, AZ
      Thomas Williams TIAA/CREF, Denver, CO
      Nominating Committee
      Vincent Asaro SunAmerica Securities, Inc., Phoenix, AZ
      James Kerr Dain Rauscher Incorporated, Seattle, WA
      William Papes WM Funds Distributor, Inc., Spokane, WA
      Anthony Petrelli Neidiger Tucker Bruner, Inc., Denver, CO
      Richard Royse Salomon Smith Barney, Inc., Portland, OR

      District Director
      Frank J. Birgfeld
      Republic Plaza Building
      370 17th Street, Suite 2900
      Denver, CO 80202-5629
      (303) 446-3100

      James G. Dawson, Associate Director
      Two Union Square
      601 Union Street, Suite 1616
      Seattle, WA 98101-2327
      (206) 624-0790



      DISTRICT 4

      District Committee
      To Serve Until January 2000
      Colleen Curran American Express Financial Advisors, Inc., Minneapolis, MN
      Arthur J. Kearney John G. Kinnard & Company Inc., Minneapolis, MN
      John R. Kuddes Merrill Lynch, Pierce, Smith Incorporated, Overland Park, KS
      Wayne H. Peterson Washington Square Securities, Inc., Minneapolis, MN
      To Serve Until January 2001
      Antonio J. Cecin Piper Jaffray Inc., Minneapolis, MN
      Cheryl Cook-Schneider Edward Jones, St. Louis, MO
      Robert J. Goodmanson Robert W. Baird & Co., Inc., St. Paul, MN
      Brent M. Weisenborn Security Investment Company of Kansas City, Kansas City, MO
      To Serve Until January 2002
      Robert M. Chambers Chambers Martin & Co., Des Moines, IA
      John R. Lepley Princor Financial Services Corp., Des Moines, IA
      William M. Lyons American Century Investment Services, Inc., Kansas City, MO
      Nancy E. Varner Mercantile Investment Services, Inc., St. Louis, MO
      Nominating Committee
      Patricia S. Bartholomew Craig-Hallum Capital Group, Inc., Minneapolis, MN
      Edward J. Berkson Locust Street Securities, Inc., Des Moines, IA
      Norman Frager Walnut Street Securities, St. Louis, MO
      Albert W. Lauth First St. Louis Securities, Inc., St. Louis, MO
      Todd W. Miller Miller, Johnson & Kuehn, Inc., Minneapolis, MN

      District Director
      Jack Rosenfield
      120 W. 12th Street, Suite 900
      Kansas City, MO 64105
      (816) 421-5700



      DISTRICT 5

      District Committee
      To Serve Until January 2000
      R. Neal Culver Culver Financial Management, Inc., Knoxville, TN
      J. French Hill First Commercial Investments, Inc., Little Rock, AR
      Walter H. Johnson Leo Oppenheim & Co., Inc., Oklahoma City, OK
      To Serve Until January 2001
      Benjamin D. Capshaw, III Morgan Stanley Dean Witter, New Orleans, LA
      James S. Jones Crews & Associates, Inc., Little Rock, AR
      Dene R. Shipp SunTrust Equitable Securities, Nashville, TN
      John C. West Prudential Securities, Inc., Memphis, TN
      To Serve Until January 2002
      James D. Hudgins SouthTrust Securities, Inc., Birmingham, AL
      Leroy H. Paris, II Mississippi Securities Company, Jackson, MS
      Duncan F. Williams Duncan-Williams, Inc., Memphis, TN
      Nominating Committee
      H. Kenneth Bennett Stephens, Inc., Little Rock, AR
      James C. Bradford, Jr. J.C. Bradford & Co., Nashville, TN
      Bill Carty Carty & Company, Inc., Memphis, TN
      William T. Patterson Morgan Keegan & Company, Inc., Jackson, MS
      Kenneth L. Wagner J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, KY

      District Director
      Warren A. Butler, Jr.
      1100 Poydras Street
      Energy Centre, Suite 850
      New Orleans, LA 70163-0802
      (504) 522-6527



      DISTRICT 6

      District Committee
      To Serve Until January 2000
      William D. Connally Greenman Parker Connally Greenman, Inc., Ft. Worth, TX
      Titus H. Harris Harris Webb & Garrison, Inc., Houston, TX
      Edward M. Milkie Milkie Ferguson Investments, Inc., Dallas, TX
      To Serve Until January 2001
      Daniel C. Dooley May Financial, Inc., Dallas, TX
      Ronald J. Gard Salomon Smith Barney, Inc., Dallas, TX
      Jim G. Rhodes Rhodes Securities, Inc., Ft. Worth, TX
      To Serve Until January 2002
      Fred McGinnis PaineWebber, Houston, TX
      Sue Peden Brokers Transaction Services, Inc., Dallas, TX
      Joseph Storthz Transamerica Financial Resources, Houston, TX
      Nominating Committee
      John W. Ferguson May Financial Corp., Dallas, TX
      Robert Gunn, III Gunn & Company Incorporated, San Antonio, TX
      Bill Madden Madden Securities Corporation, Dallas, TX
      Gary Murray Murray Traff Securities, Inc., Tyler, TX
      George Stark Burnham Securities, Inc., Houston, TX

      District Director

      Bernerd Young, Associate Director
      12801 N. Central Expressway, Suite 1050
      Dallas, TX 75243
      (972) 701-8554



      DISTRICT 7

      District Committee
      To Serve Until January 2000
      Robert J. Brietz Marion Bass Securities Corporation, Charlotte, NC
      William H. Carter J.C. Bradford & Co., Raleigh, NC
      Dan B. Franks Scott & Stringfellow, Inc., Richmond, VA
      George K. Jennison Wheat First Union, Richmond, VA
      David G. Pittinos Morgan Stanley Dean Witter, Tallahassee, FL
      R. Charles Shufeldt SunTrust Equitable Securities Corporation, Atlanta, GA
      To Serve Until January 2001
      Mary Jae Abbitt Anderson & Strudwick, Incorporated, Richmond, VA
      Robert M. Balentine Balentine & Company, Atlanta, GA
      James J. Buddle Capital Brokerage Corporation, Richmond, VA
      M. Anthony Greene Investment Management & Research, Inc., Atlanta, GA
      J. Lee Keiger III Davenport & Company LLC, Richmond, VA
      Raymond W. Snow BT Alex. Brown Incorporated, Palm Beach, FL
      To Serve Until January 2002
      Perrin Q. Dargan, Jr. A.G. Edwards & Sons, Inc., Pawleys Island, SC
      James W. Hamilton, Jr. Prudential Securities Incorporated, Atlanta, GA
      Edward R. Hipp, III Centura Securities, Inc., Rocky Mount, NC
      Roark A. Young Young, Stovall and Company, Miami, FL
      Nominating Committee
      John L. Dixom Mutual Service Corporation, West Palm Beach, FL
      Franklin C. Golden James M. Myers and Co., Charlotte, NC
      W. Robb Hough, Jr. William R. Hough & Co., St. Petersburg, FL
      Stuart J. Knobel Edgar M. Norris & Co., Inc., Anderson, SC
      Richard V. McGalliard Interstate/Johnson Lane Corporation, Atlanta, GA

      District Director
      Marilyn B. Davis
      One Securities Centre, Suite 500
      3490 Piedmont Road, NE
      Atlanta, GA 30305
      (404) 239-6100



      DISTRICT 8

      District Committee
      To Serve Until January 2000
      James A. Bowen Nike Securities, Inc., Lisle, IL
      William L. Faulkner Continental Capital Securities, Inc., Sylvania, OH
      Peter C. McCabe, Jr. Securities Corporation of Iowa, Chicago, IL
      Anthony M. Sanfilippo Trimark Securities, L.P., Chicago, IL
      John L. Schlifer McDonald Investments, Inc., Cleveland, OH
      To Serve Until January 2001
      William C. Alsover Centennial Securities Company, Inc., Grand Rapids, MI
      Wallen L. Crane Salomon Smith Barney, Inc., Farmington Hills, MI
      Kenneth R. Ehinger Lincoln Financial Advisors Corp., Fort Wayne, IN
      Alan H. Newman J.J.B. Hilliard, W.L. Lyons, Inc., Evansville, IN
      Bruce J. Young Mesirow Financial, Inc., Chicago, IL
      To Serve Until January 2002
      R. Jack Conley VESTAX Securities Corporation, Hudson, OH
      Mary D. Esser Cressman Esser Securities, Inc., Naperville, IL
      Glen Hackmann Robert W. Baird & Co., Inc., Milwaukee, WI
      Robert A. Perrier Butler, Wick & Co., Inc., Cleveland, OH
      Kathleen A. Wieland William Blair & Company, L.L.C., Chicago, IL
      Nominating Committee
      Kathy J. Birk Morgan Stanley Dean Witter, Carmel, IN
      Lewis H. Echlin Roney & Co., L.L.C., Detroit, MI
      Paul Murin David A. Noyes & Co., Chicago, IL
      Earl Clifford Oberlin, III MFI Investments Corp., Bryan, OH
      William H. Richardson Trubee, Collins & Co., Inc., Buffalo, NY

      District Director
      Carlotta A. Romano
      10 South LaSalle, 20th Floor
      Chicago, IL 60603-1002
      (312) 899-4400

      William H. Jackson, Jr.
      Renaissance on Playhouse Square
      1350 Euclid Avenue, Suite 650
      Cleveland, OH 44115
      (216) 694-4545



      DISTRICT 9

      District Committee
      To Serve Until January 2000
      Irving A. Faigen Prudential Securities Incorporated, Pittsburgh, PA
      Allen S. Jacobson Gibraltar Securities Co., Florham Park, NJ
      James Malespina Herzog, Heine, Geduld, Inc., Jersey City, NJ
      William F. Rienhoff IV BT Alex. Brown Incorporated, Baltimore, MD
      To Serve Until January 2001
      Victor M. Frye The Advisors Group, Inc., Bethesda, MD
      Phillip C. Graham Legg Mason Wood Walker, Incorporated, Philadelphia, PA
      Jerome J. Murphy Janney Montgomery Scott Inc., Philadelphia, PA
      To Serve Until January 2002
      A. Louis Denton Philadelphia Corporation for Investment Services, Philadelphia, PA
      Thomas W. Neumann Sherwood Securities Corp., Jersey City, NJ
      Joseph S. Rizzello Vanguard Marketing Corporation, Valley Forge, PA
      Gregory R. Zappala RRZ Public Markets, Inc., Cranberry Township, PA
      Nominating Committee
      Mark W. Cresap Cresap, Inc., Radnor, PA
      John J. Gray Janney Montgomery Scott Inc., Philadelphia, PA
      Dennis V. Marino Sherwood Securities Corp., Jersey City, NJ
      Eric H. Pookrum Innova Securities, Inc., Suitland, MD
      Robert A. Woeber Arthurs, Lestrange & Company Incorporated, Pittsburgh, PA

      District Director
      John P. Nocella
      11 Penn Center
      1835 Market Street, Suite 1900
      Philadelphia, PA 19103
      (215) 665-1180



      DISTRICT 10

      District Committee
      To Serve Until January 2000
      Joan Caridi Salomon Smith Barney, Inc., New York, NY
      Harold G. Ognelodh M. R. Beal & Company, New York, NY
      Brian T. Shea Pershing, Division of Donaldson, Lufkin & Jenrette Securities Corporation, Jersey City, NJ
      To Serve Until January 2001
      Herbert Ackerman Neuberger & Berman, LLC, New York, NY
      Arthur S. Ainsberg Brahman Securities Inc., New York, NY
      Williams P. Behrens Ernst & Co., New York, NY
      Laurence H. Bertan Sanford C. Bernstein & Co., Inc., New York, NY
      Mark D. Madoff Bernard L. Madoff Investment Securities, New York, NY
      Stuart L. Sindell Dillon, Read & Co., Inc., New York, NY
      To Serve Until January 2002
      John Iachello Ing Baring Furman Selz, New York, NY
      Philip V. Oppenheimer Oppenheimer & Close Inc., New York, NY
      Gary Salamone Schroder & Co. Inc., New York, NY
      Eugene A. Schlanger Nomura Securities International, Inc., New York, NY
      Lawrence F. Sherman Mony Securities Corp., New York, NY
      Tom M. Wirtshafter Nathan & Lewis Securities Inc., New York, NY
      Nominating Committee
      Michael F. Dura Schroder & Co., Inc., New York, NY
      Joseph A. Gottlieb Bear, Stearns & Co. Inc., New York, NY
      Joan S. Green BT Brokerage Corporation, New York, NY
      Norman H. Pessin Neuberger & Berman, LLC, New York, NY
      Stuart J. Voisin Stuart, Coleman & Co., Inc., New York, NY

      District Director
      Barbara Cody, Deputy Director
      Gary Liebowitz, Deputy Director
      NASD Financial Center
      33 Whitehall Street
      New York, NY 10004
      (212) 858-4000



      DISTRICT 11

      District Committee
      To Serve Until January 2000
      Harry H. Branning Advest, Inc., Hartford, CT
      Stephanie Brown Linsco/Private Ledger Corp., Boston, MA
      David C. Gowell Gowell Securities Corp., Boston, MA
      William N. Shiebler Putnam Mutual Funds Corp., Boston, MA
      To Serve Until January 2001
      Michael J. Dell'Olio Investment Management and Research, Inc., South Portland, ME
      Frank V. Knox, Jr. Fidelity Distributors Corporation, Boston, MA
      Laurie Lennox SunLife of Canada (U.S.) Distributors, Inc., Boston, MA
      Kenneth Unger Boston Capital Services, Inc., Boston, MA
      To Serve Until January 2002
      Stephen O. Buff BancBoston Robertson Stephens, Inc., Boston, MA
      Gerard A. Rocchi W.S. Griffith & Co., Inc., Hartford, CT
      James P. Rybeck The RYBECK, Division of Fechtor, Detwiler & Co., Inc., Meriden, CT
      Dennis R. Surprenant Cantella & Co., Inc., Boston, MA
      Nominating Committee
      John A. Goc Boston Institutional Services, Boston, MA
      Grant Kurtz Advest, Inc., Hartford, CT
      Wilson G. Saville Barrett & Company, Providence, RI
      Edward L. Sherr Carl P. Sherr & Company, Worcester, MA
      Mary Toumpas American Skandia Marketing, Inc., Shelton, CT

      District Director
      Willis H. Riccio
      260 Franklin Street, 16th Floor
      Boston, MA 02110
      (617) 261-0800

    • 98-92 NASD Regulation Articulates Position On The Application Of NASD Rule 2680 To U.S. Broker/Dealers That Intermediate Transactions Pursuant To Exchange Act Rule 15a-6(a)(3)

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      SUGGESTED ROUTING

      Senior Management
      Institutional
      Legal & Compliance
      Options
      Trading



      Executive Summary

      Through this Notice, NASD Regulation, Inc. (NASD RegulationSM) is establishing an interpretation that National Association of Securities Dealers, Inc. (NASD®) Rule 2860(b)(3) options position limits apply with respect to options transactions that are intermediated by member firms pursuant to Exchange Act Rule 15a-6(a)(3). Members are also reminded of the reporting obligations under Rule 2860(b)(5) with respect to such Rule 15a-6(a)(3) transactions.

      Questions concerning this Notice may be directed to Gary L. Goldsholle, Assistant General Counsel, NASD Regulation, at (202) 728-8104.

      Discussion

      NASD Rule 2860(b)(3) imposes a ceiling or position limit on the number of conventional and standardized equity options contracts in each class on the same side of the market (i.e., aggregating long calls and short puts or long puts and short calls) that can be held or written by a member, a person associated with a member, a customer, or a group of customers acting in concert. Specifically, Rule 2860(b)(3) provides that "no member shall effect for any account in which such member has an interest,... or for the account of any customer, an opening transaction through... the over-the-counter market or on any exchange in a stock option contract of any class of stock options if the member... or customer would... hold or control or be obligated in respect of an aggregate equity options position in excess of [certain prescribed limits]."

      Exchange Act Rule 15a-6(a)(3) permits a foreign broker/dealer, without registering as a broker/dealer in the United States, to induce or attempt to induce the purchase or sale of any security by a U.S. institutional investor or major U.S. institutional investor if the resulting transactions are effected through a registered broker/dealer as specified in Rule 15a-6(a)(3). Among the requirements of Rule 15a-6(a)(3) are that the U.S. broker/dealer issues all required confirmations and statements to the institutional investors and maintains the required books and records relating to the transaction.

      Member firms have expressed uncertainty as to the application of Rule 2860(b)(3) to Rule 15a-6(a)(3) transactions. Some members have taken the position that options transactions that are intermediated by U.S. member firms pursuant to Rule 15a-6(a)(3), but are not carried on their books for capital purposes, are not subject to the limits of Rule 2860(b)(3). Other members have taken the position that Rule 2860(b)(3) would apply to such transactions.

      Through this Notice, NASD Regulation is issuing an interpretation to establish consistent application of Rule 2860(b)(3). NASD Regulation staff believes that NASD member firms that intermediate transactions under Rule 15a-6(a)(3) are "effecting" such transactions within the meaning of Rule 2860(b)(3) and that position limits should apply. We believe that the use of the term "effect" in this context, given its ordinary meaning, would apply to the functions that U.S. registered broker/dealers are required to perform under Rule 15a-6(a)(3). In this regard, subparagraph (iii)(A) of Rule 15a-6(a)(3) provides that the registered broker/dealer must be responsible for "effecting the transactions conducted under paragraph (a)(3)...." We note that this interpretation is consistent with the overall purpose of Rule 2860(b)(3), which is to prevent the establishment of options positions that can, or may provide incentive to, manipulate or disrupt the underlying market. These concerns exist with respect to options positions that are maintained at both NASD member firms and their foreign affiliates. Further, because the NASD member firm is required to record each options transaction that is effected under Rule 15a-6(a)(3), the member has the practical ability to enforce compliance with limits for positions that are maintained on its books.

      NASD Regulation expects that member firms that are parties to transactions under Rule 15a-6(a)(3) that would cause them to exceed the position limits of Rule 2860(b)(3) should restructure their positions as soon as practicable to meet the applicable limits. In restructuring options positions, members should be mindful of the exercise limits imposed by Rule 2860(b)(4).

      Finally, members are reminded of their reporting obligations under Rule 2860(b)(5), which apply to "each account in which the member has an interest... and each customer account, which has established an aggregate position of 200 or more option contracts (whether long or short) of the put class and the call class on the same side of the market covering the same underlying security or index...." Consistent with the interpretation described above, this requirement applies to intermediated transactions pursuant to 15a-6(a)(3).

    • 98-91 NASD Alerts Members To Their Obligations Concerning Cold Calling And Advertising To Persons In The United Kingdom

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      SUGGESTED ROUTING

      Senior Management
      Advertising
      Internal Audit
      Legal & Compliance
      Training



      Executive Summary

      The Financial Services Authority (FSA) in the United Kingdom (U.K.) has detected an increase in the frequency with which National Association of Securities Dealers, Inc. (NASD®) member firms have been soliciting U.K. citizens. In response to this activity, the FSA has asked NASD Regulation, Inc. (NASD RegulationSM) to alert its members to the standards governing the solicitation of U.K. citizens generally and implications of cold calling and advertising to persons in the U.K. in particular. This Notice briefly summarizes the legal and regulatory framework in the U.K. regarding cold calling and advertising. NASD Regulation reminds members proposing to cold call or advertise into the U.K., or any foreign country, to ensure that any such activities comply with all applicable laws.

      Questions concerning this Notice should be directed to Gary L. Goldsholle, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8104, or The Authorization Enquiries Department, Financial Services Authority, at (011) 44-171-676-4704.

      Conduct Of Investment Business In The U.K.

      Any person who carries on investment business in the U.K. must be authorized or exempt under the Financial Services Act of 1986 (the Act). Investment business includes dealing and arranging deals in investments and giving investment advice. "Investments" include stocks, shares, and derivatives. Persons who operate from outside the U.K. are "overseas persons" under the Act and enjoy the benefit of an exclusion from the need for authorization but only if they carry on their business in such a way that they do not breach the provisions of Section 56 (unsolicited or cold calls) and Section 57 (investment advertisements) of the Act.

      Unsolicited Or Cold Calls

      Section 56 of the Act generally prohibits cold calling by providing that no person shall make an unsolicited call (i.e., any call without an express invitation) in an attempt to make an investment agreement with a person in the U.K. Members should be aware that this general prohibition in the U.K. applies to U.S. member firms and their associated persons notwithstanding the fact that such persons may be permitted to make cold calls under the NASD rules.

      The FSA's Common Unsolicited Calls Regulations (CUC Regulations) provide exemptions from the general prohibition against cold calling. Under the CUC Regulations, an "overseas person" may make unsolicited calls only to:

      (1) "existing customers," defined as persons with whom the overseas person has an existing customer relationship that was established while the customer was resident outside the U.K.; and
      (2) "non-private customers," or business investors, such as government or public authorities, corporations, or partnerships with substantial assets and trustees of trusts holding substantial assets.

      Investment Advertisements

      Section 57 of the Act generally prohibits an overseas person, as defined above, from issuing or causing the issue of an investment advertisement in the U.K. unless its contents have been approved by an authorized person under the Act. An investment advertisement includes any advertisement containing information calculated to lead directly or indirectly to a person entering into an investment agreement. Foreign advertisements are treated as issued in the U.K. if they are directed to persons in the U.K. or made available to them other than through a newspaper or other journal that is published and circulates mainly outside of the U.K.

      Consequences Of Breaching U.K. Legislation

      Any person who conducts investment business in the U.K. without authorization under the Act, or any person who issues an investment advertisement without approval may be committing a criminal offense and be liable to prosecution. Also, any agreement made by or through an unauthorized person may be unenforceable against the other party.

      The information provided in this Notice does not describe in detail the laws applicable to solicitation in the U.K. NASD Regulation urges members considering soliciting U.K. citizens to review the U.K. laws specifically to ensure that their conduct complies with all applicable laws.

    • 98-90 New Arbitrator List Selection Rules And Monetary Thresholds For Simplified And Single Arbitration Cases Take Effect

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      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance



      Executive Summary

      On October 14, 1998, the Securities and Exchange Commission (SEC) approved rule changes proposed by the National Association of Securities Dealers, Inc. (NASD®) relating to the selection of arbitrators.1 The arbitrator list selection rules and related amendments to the Code of Arbitration Procedure will be effective on November 17, 1998. The list selection rules will allow the parties to an arbitration to have a significant role in selecting the arbitrators that will hear their dispute.

      The NASD is also declaring effective previously approved increases in the ceilings for simplified arbitration cases and for cases eligible for resolution by a single arbitrator from $10,000 to $25,000, and from $30,000 to $50,000, respectively.2

      Questions concerning this Notice should be directed to Sharon Zackula, Assistant General Counsel, NASD Regulation, Inc. (NASD RegulationSM), (202) 728-8985 (customer disputes) or Jean I. Feeney, Assistant General Counsel, NASD Regulation, (202) 728-6959 (intra-industry disputes).

      New Arbitration Procedures For The Selection Of Arbitrators In Customer Disputes And Intra-Industry Disputes

      The list selection rules will allow the parties to an arbitration to have a significant role in selecting the arbitrators who will hear their dispute. The new procedures will incorporate newly developed software, the Neutral List Selection System (NLSS), which can generate lists of arbitrators in a neutral fashion. Using the lists, the parties may state preferences among the listed arbitrators by numerically ranking them. After parties rank the listed arbitrators, NLSS will consolidate the parties' rankings of the listed arbitrators, and the arbitration panel will be selected in accordance with the rankings. NLSS will also perform many other administrative functions in the arbitrator selection process.

      The text of these rules and other related amendments that go into effect on November 17, 1998, is set forth at the end of this Notice.

      New Thresholds For Simplified Arbitration

      The new thresholds for simplified and single arbitration cases will also take effect simultaneously with the effectiveness of the list selection procedures announced in this Notice. Cases involving claims of no more than $25,000 (up from $10,000) will be eligible for resolution under the procedures specified in Rules 10203 and 10302, which provide for the resolution of such cases on the paper record (or after a hearing if demanded by the claimant) by a single arbitrator. Cases involving claims of no more than $50,000 (up from $30,000) may be resolved after a hearing by a single arbitrator. In both instances, the single arbitrator will be selected in accordance with the new list selection rules.

      Effectiveness Of The New Procedures

      The NASD intends to make the rule change effective on November 17, 1998.

      A case will be subject to revised Rules 10202, 10203, and 10308 if, as of November 17, 1998, NASD Regulation has not mailed or otherwise transmitted a letter or other written communication to the parties notifying the parties of the names of the arbitrators appointed to hear the arbitration. In addition, as of November 17, 1998, the newly adopted changes to Rule 10104, Rules 10309 through 10313, and Rule 10315 will apply to this group of cases.

      A case will be subject to current Rules 10202, 10203, and 10308 for the purpose of selecting an arbitration panel, if, before the effective date of the rule change, NASD Regulation identifies the arbitrator (in a case having one arbitrator) or the three-arbitrator panel (in a case having three arbitrators) and mails or otherwise transmits a letter or other written communication to the parties notifying the parties of the names of the arbitrators. However, as of November 17, 1998, such cases also will be subject to all provisions of amended Rule 10308, except those relating to the initial process of selecting an arbitration panel. In addition, the newly adopted changes to Rule 10104, Rules 10309 through 10313, and Rule 10315 will apply to this group of cases. Below are four examples of how the old rules and the amended rules intersect and will be applied to the group of cases for which a panel is appointed initially under current Rule 10308.

      • Peremptory Challenge - In such cases, a party retains the right provided under current Rule 10311 to one peremptory challenge of an appointed arbitrator, because the party has not been able to exercise the parallel right of striking an undesirable arbitrator in the pre-appointment phase that is provided under amended Rule 10308. The party choosing to exercise this right should follow the procedure set forth in Rule 10311.


      • Chairperson - The provisions of amended Rule 10308 will apply to such cases if the Director of Arbitration has not already selected the chairperson. Amended Rule 10308 (c)(5) grants the parties the right to select a chairperson. If the parties fail to act within the specified time, the Director must select a chairperson. The Director's authority to act is specifically stated in amended Rule 10308(c)(5) and generally stated in paragraph (e). Under paragraph (c)(5), the Director must appoint a chairperson subject to three limitations, one of which is how the parties ranked the arbitrators. Since the Director will not have party rankings of arbitrators, the Director will appoint a chairperson subject to the two other limitations set forth in amended Rule 10308(c)(5), pursuant to the general authority in paragraph (e).


      • Right to Receive Arbitrator Information and Request Additional Information - A party will retain the right under current Rule 10310 to receive employment information and information disclosed pursuant to Rule 10312 about the arbitrators that have been appointed for his or her case and to make additional inquiries about an arbitrator. A party's right to receive such information is included in amended Rule 10308; the NASD is simply clarifying that such information about arbitrators shall be provided to a party either pursuant to current Rule 10310 in cases where the arbitrators are appointed under current Rule 10308 or pursuant to amended Rule 10308(b)(6) in cases where arbitrators are appointed under amended Rule 10308.


      • Right to Challenge a Replacement Arbitrator - A party will not retain the right in Rule 10310 to challenge a replacement arbitrator for cases where the arbitrators are appointed under current Rule 10308. Instead, a party may exercise the right to object to a replacement arbitrator under amended Rule 10308(d).

      NASD Regulation believes that this is the most appropriate approach to provide the benefits of list selection to the greatest number of parties as quickly as possible. List selection provides the parties additional input into the arbitration proceeding, and applying the new process for the appointment of arbitrators to certain cases filed shortly before the date of effectiveness will provide the benefits to such parties. NASD Regulation does not believe that any party will suffer an unfair surprise if the list selection rule and the other rule changes are applied to an arbitration case filed prior to November 17, 1998. Finally, in order to implement the proposed rule change, NASD Regulation must make a number of operational changes. The administrative burdens of fully implementing the list selection process nationwide are many, and NASD Regulation believes that the benefits of implementing the new procedures rapidly and system-wide outweigh the benefits, if any, obtainable from continued use of the old system.


      Endnotes

      1 Securities Exchange Act Rel. No. 40555 (October 14, 1998) (File No. SR-NASD-98- 48) and Securities Exchange Act Rel. No. 40556 (October 14, 1998) (File No. SRNASD-98-64).

      2 Securities Exchange Act Rel. No. 38635 (May 14, 1997) (File No. SR-NASD-97-22).


      Text Of Amendments

      (Note: New text is underlined; deletions are bracketed.)

      Rule 10104. Composition and Appointment of Panels

      Except as otherwise specifically provided in Rule 10308, t[T]he Director [of Arbitration] shall compose and appoint panels of arbitrators from the existing pool of arbitrators of the Association to conduct the arbitration of any matter which shall be eligible for submission under this Code. [The Director of Arbitration may request that the Executive Committee of the National Arbitration Committee undertake the composition and appointment of a panel or undertake consultation with the Executive Committee regarding the composition and appointment of a panel in any circumstance where he determines such action to be appropriate.]

      Rule 10202. Composition of Panels

      (a) In disputes subject to arbitration that arise out of the employment or termination of employment of an associated person, and that relate exclusively to disputes involving employment contracts, promissory notes or receipt of commissions, the panel of arbitrators shall be appointed as provided by paragraph (b)(1) or (2) or Rule 10203, whichever is applicable. In all other disputes arising out of the employment or termination of employment of an associated person, the panel of arbitrators shall be appointed as provided by Rule 10302 or Rule 10308, whichever is applicable.
      (b) [(1) Except as otherwise provided in paragraph (a) or Rule 10203, in all arbitration matters between or among members and/or persons associated with members, and where the amount in controversy does not exceed $30,000, the Director of Arbitration shall appoint a single arbitrator to decide the matter in controversy. The arbitrator chosen shall be from the securities industry. Upon the request of a party in its initial filing or the arbitrator, the Director of Arbitration shall appoint a panel of three (3) arbitrators, all of whom shall be from the securities industry.]
      (1) Composition of Arbitration Panel
      (A) Claims of $50,000 or Less

      If the amount of a claim is $50,000 or less, the Director shall appoint an arbitration panel composed of one non-public arbitrator, unless the parties agree to the appointment of a public arbitrator.
      (i) If the amount of a claim is $25,000 or less and an arbitrator appointed to the case requests that a panel of three arbitrators be appointed, the Director shall appoint an arbitration panel composed of three non-public arbitrators, unless the parties agree to a different panel composition.
      (ii) If the amount of a claim is greater than $25,000 and not more than $50,000 and a party in its initial filing or an arbitrator appointed to the case requests that a panel of three arbitrators be appointed, the Director shall appoint an arbitration panel composed of three non-public arbitrators, unless the parties agree to a different panel composition.
      (B) Claims of More than $50,000

      If the amount of a claim is more than $50,000, the Director shall appoint an arbitration panel composed of three non-public arbitrators, unless the parties agree to a different panel composition.
      (2) Except as otherwise provided in paragraph (a), in all arbitration matters between or among members and/or persons associated with members and where the amount in controversy exceeds [$30,000] $50,000, exclusive of attendant costs and interest, a panel shall consist of three arbitrators, all of whom shall be [from the securities industry] non-public arbitrators.
      (c) In proceedings relating to injunctions under Rule 10335, the provisions of Rule 10335 shall supersede the provisions of this Rule.
      (d) Except as otherwise provided in this Rule or Rule 10203, the provisions of Rule 10308 shall apply to intra-industry disputes.

      Rule 10203. Simplified Industry Arbitration

      (a) Any dispute, claim, or controversy arising between or among members or associated persons submitted to arbitration under this Code involving a dollar amount not exceeding [$10,000] $25,000, exclusive of attendant costs and interest, shall be resolved by an arbitration panel constituted pursuant to the provisions of subparagraph (1) hereof solely upon the pleadings and documentary evidence filed by the parties, unless one of the parties to the proceeding files with the Office of the Director of Arbitration within ten (10) business days following the filing of the last pleading a request for a hearing of the matter.
      (1) In any proceeding pursuant to this Rule, an arbitration panel shall consist of [no fewer than one (1) but no more than three (3) arbitrators, all of whom shall be from the securities industry] a single non-public arbitrator.
      (2) No Change
      (b) No Change

      Rule 10302. Simplified Arbitration

      (a) Any dispute, claim, or controversy arising between a public customer(s) and an associated person or a member subject to arbitration under this Code involving a dollar amount not exceeding [$10,000] $25,000, exclusive of attendant costs and interest, shall be arbitrated as hereinafter provided.
      (b) No Change
      (c) The Claimant shall pay a nonrefundable filing fee and shall remit a hearing session deposit as specified in Rule 10332 of this Code upon the filing of the Submission Agreement. The final disposition of the fee or deposit shall be determined by the arbitrator.
      (d) The Director of Arbitration shall endeavor to serve promptly by mail or otherwise on the Respondent(s) one (1) copy of the Submission Agreement and one (1) copy of the Statement of Claim. Within twenty (20) calendar days from receipt of the Statement of Claim, Respondent(s) shall serve each party with an executed Submission Agreement and a copy of Respondent's Answer. Respondent's executed Submission Agreement and Answer shall also be filed with the Director of Arbitration with sufficient additional copies for the arbitrator(s) along with any deposit required under the schedule of fees for customer disputes. The Answer shall designate all available defenses to the Claim and may set forth any related Counterclaim and/or related Third-Party Claim the Respondent(s) may have against the Claimant or any other person. If the Respondent(s) has interposed a Third-Party Claim, the Respondent(s) shall serve the Third-Party Respondent with an executed Submission Agreement, a copy of the Respondent's Answer containing the Third-Party Claim, and a copy of the original Claim filed by the Claimant. The Third-Party Respondent shall respond in the manner herein provided for response to the Claim. If the Respondent(s) files a related Counterclaim exceeding [$10,000] $25,000 exclusive of attendant costs and interest, the arbitrator may refer the Claim, Counterclaim and/or Third-Party Claim, if any, to a panel of three (3) [or five (5)] arbitrators in accordance with Rule 10308 or, he may dismiss the Counterclaim and/or Third-Party Claim without prejudice to the Counterclaimant(s) and/or Third Party Claimant(s) pursuing the Counterclaim and/or Third Party Claim in a separate proceeding. The costs to the Claimant under either proceeding shall in no event exceed the total amount specified in Rule 10332.
      (e) No Change
      (f) The dispute, claim or controversy shall be submitted to a single public arbitrator knowledgeable in the securities industry [selected] appointed by the Director of Arbitration. Unless the public customer demands or consents to a hearing, or the arbitrator calls a hearing, the arbitrator shall decide the dispute, claim or controversy solely upon the pleadings and evidence filed by the parties. If a hearing is necessary, such hearing shall be held as soon as practicable at a locale selected by the Director of Arbitration.
      (g) No Change
      (h)
      (1) The arbitrator shall be authorized to require the submission of further documentary evidence as he, in his sole discretion, deems advisable.
      (2) If a hearing is demanded or consented to in accordance with paragraph (f), the General Provisions Governing Pre-Hearing Proceedings under Rule 10321 shall apply.
      (3) If no hearing is demanded or consented to, all requests for document production shall be submitted in writing to the Director of Arbitration within ten (10) business days of notification of the identity of the arbitrator selected to decide the case. The requesting party shall serve simultaneously its request for document production on all parties. Any response or objections to the requested document production shall be served on all parties and filed with the Director of Arbitration within five (5) business days of receipt of the requests for production. The [selected] appointed arbitrator shall resolve all requests under this Rule on the papers submitted.
      (i) - (l) No Change

      Rule 10308. [Designation of Number of Arbitrators]Selection of Arbitrators

      This Rule specifies how parties may select or reject arbitrators, and who can be a public arbitrator.

      [Rule text replaced in its entirety.]

      (a) Definitions
      (1) "day"

      For purposes of this Rule, the term "day" means calendar day.
      (2) "claimant"

      For purposes of this Rule, the term "claimant" means one or more persons who file a single claim.
      (3) "Neutral List Selection System"

      The term "Neutral List Selection System" means the software that maintains the roster of arbitrators and performs various functions relating to the selection of arbitrators.
      (4) "non-public arbitrator"

      The term "non-public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and:
      (A) is, or within the past three years, was:
      (i) associated with a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer);
      (ii) registered under the Commodity Exchange Act;
      (iii) a member of a commodities exchange or a registered futures association; or
      (iv) associated with a person or firm registered under the Commodity Exchange Act;
      (B) is retired from engaging in any of the business activities listed in subparagraph (4)(A);
      (C) is an attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities listed in subparagraph (4)(A); or
      (D) is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.
      (5) "public arbitrator"
      (A) The term "public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and is not:
      (i) engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D); or
      (ii) the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D).
      (B) For the purpose of this Rule, the term "immediate family member" means:
      (i) a family member who shares a home with a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D);
      (ii) a person who receives financial support of more than 50 percent of his or her annual income from a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D); or
      (iii) a person who is claimed as a dependent for federal income tax purposes by a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D).
      (6) "respondent"

      For purposes of this Rule, the term "respondent" means one or more persons who individually or jointly file an answer to a complaint.
      (7) "send"

      For purposes of this Rule, the term "send" means to send by first class mail, facsimile, or any other method available and convenient to the parties and the Director.
      (b) Composition of Arbitration Panel; Preparation of Lists for Mailing to Parties
      (1) Composition of Arbitration Panel
      (A) Claims of $50,000 or Less

      If the amount of a claim is $50,000 or less, the Director shall appoint an arbitration panel composed of one public arbitrator, unless the parties agree to the appointment of a nonpublic arbitrator.
      (i) If the amount of a claim is $25,000 or less and an arbitrator appointed to the case requests that a panel of three arbitrators be appointed, the Director shall appoint an arbitration panel composed of one non-public arbitrator and two public arbitrators, unless the parties agree to a different panel composition.
      (ii) If the amount of a claim is greater than $25,000 and not more than $50,000 and a party in its initial filing or an arbitrator appointed to the case requests that a panel of three arbitrators be appointed, the Director shall appoint an arbitration panel composed of one non-public arbitrator and two public arbitrators, unless the parties agree to a different panel composition.
      (B) Claims of More Than $50,000

      If the amount of a claim is more than $50,000, the Director shall appoint an arbitration panel composed of one non-public arbitrator and two public arbitrators, unless the parties agree to a different panel composition.
      (2) One List for Panel of One Arbitrator

      If one arbitrator will serve as the arbitration panel, the Director shall send to the parties one list of public arbitrators, unless the parties agree otherwise.
      (3) Two Lists for Panel of Three Arbitrators

      If three arbitrators will serve as the arbitration panel, the Director shall send two lists to the parties, one with the names of public arbitrators and one with the names of non-public arbitrators. The lists shall contain numbers of public and non-public arbitrators, in a ratio of approximately two to one, respectively, to the extent possible, based on the roster of available arbitrators.
      (4) Preparation of Lists
      (A) Except as provided in subparagraph (B) below, the Neutral List Selection System shall generate the lists of public and non-public arbitrators on a rotating basis within a designated geographic hearing site and shall exclude arbitrators based upon conflicts of interest identified within the Neutral List Selection System database.
      (B) If a party requests that the lists include arbitrators with expertise classified in the Neutral List Selection System, the lists may include some arbitrators having the designated expertise.
      (5) Sending of Lists to Parties

      The Director shall send the lists of arbitrators to all parties at the same time approximately 30 days after the last answer is due.
      (6) Information About Arbitrators

      The Director shall send to the parties employment history for each listed arbitrator for the past 10 years and other background information. If a party requests additional information about an arbitrator, the Director shall send such request to the arbitrator, and shall send the arbitrator's response to all parties at the same time. When a party requests additional information, the Director may, but is not required to, toll the time for the parties to return the ranked lists under paragraph (c)(2).
      (c) Striking, Ranking, and Appointing Arbitrators on Lists
      (1) Striking and Ranking Arbitrators
      (A) Striking An Arbitrator

      A party may strike one or more of the arbitrators from each list for any reason.
      (B) Ranking - Panel of One Arbitrator

      Each party shall rank all of the arbitrators remaining on the list by assigning each arbitrator a different, sequential, numerical ranking, with a "1" rank indicating the party's first choice, a "2" indicating the party's second choice, and so on.
      (C) Ranking - Panel of Three Arbitrators

      Each party shall rank all of the public arbitrators remaining on the list by assigning each arbitrator a different, sequential, numerical ranking, with a "1" rank indicating the party's first choice, a "2" indicating the party's second choice, and so on. Each party separately shall rank all of the non-public arbitrators remaining on the list, using the same procedure.
      (2) Period for Ranking Arbitrators; Failure to Timely Strike and Rank

      A party must return to the Director the list or lists with the rankings not later than 20 days after the Director sent the lists to the parties, unless the Director has extended the period. If a party does not timely return the list or lists, the Director shall treat the party as having retained all the arbitrators on the list or lists and as having no preferences.
      (3) Process of Consolidating Parties' Rankings

      The Director shall prepare one or two consolidated lists of arbitrators, as appropriate under paragraph (b)(2) or (b)(3), based upon the parties' numerical rankings. The arbitrators shall be ranked by adding the rankings of all claimants together and all respondents together, including thirdparty respondents, to produce separate consolidated rankings of the claimants and the respondents. The Director shall then rank the arbitrators by adding the consolidated rankings of the claimants, the respondents, including third- party respondents, and any other party together, to produce a single consolidated ranking number, excluding arbitrators who were stricken by any party.
      (4) Appointment of Arbitrators
      (A) Appointment of Listed Arbitrators

      The Director shall appoint arbitrators to serve on the arbitration panel based on the order of rankings on the consolidated list or lists, subject to availability and disqualification.
      (B) Discretion to Appoint Arbitrators Not on List

      If the number of arbitrators available to serve from the consolidated list is not sufficient to fill a panel, the Director shall appoint one or more Arbitrators to complete the arbitration panel. Unless the parties agree otherwise, the Director may not appoint a nonpublic arbitrator under paragraphs (a)(4)(B) or (a)(4)(C). The Director shall provide the parties information about the arbitrator as provided in paragraph (b)(6), and the parties shall have the right to object to the arbitrator as provided in paragraph (d)(1).
      (5) Selecting a Chairperson for the Panel

      The parties shall have 15 days from the date the Director sends notice of the names of the arbitrators to select a chairperson. If the parties cannot agree, the Director shall appoint a chairperson from the panel as follows:
      (A) The Director shall appoint as the chairperson the public arbitrator who is the most highly ranked by the parties as long as the person is not an attorney, accountant, or other professional who has devoted 50% or more of his or her professional or business activities, within the last two years, to representing or advising public customers in matters relating to disputed securities or commodities transactions or similar matters.
      (B) If the most highly ranked public arbitrator is subject to the exclusion set forth in subparagraph (A), the Director shall appoint as the chairperson the other public arbitrator, as long as the person also is not subject to the exclusion set forth in subparagraph (A).
      (C) If both public arbitrators are subject to the exclusion set forth in subparagraph (A), the Director shall appoint as the chairperson the public arbitrator who is the most highly ranked by the parties.
      (6) Additional Parties

      If a party is added to an arbitration proceeding before the Director has consolidated the other parties' rankings, the Director shall send to that party the list or lists of arbitrators and permit the party to strike and rank the arbitrators. The party must return to the Director the list or lists with numerical rankings not later than 20 days after the Director sent the lists to the party. The Director shall then consolidate the rankings as specified in this paragraph (c).
      (d) Disqualification and Removal of Arbitrator Due to Conflict of Interest or Bias
      (1) Disqualification By Director

      After the appointment of an arbitrator and prior to the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, if the Director or a party objects to the continued service of the arbitrator, the Director shall determine if the arbitrator should be disqualified. If the Director sends a notice to the parties that the arbitrator shall be disqualified, the arbitrator will be disqualified unless the parties unanimously agree otherwise in writing and notify the Director not later than 15 days after the Director sent the notice.
      (2) Authority of Director to Disqualify Ceases

      After the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, the Director's authority to remove an arbitrator from an arbitration panel ceases.
      (3) Vacancies Created by Disqualification or Resignation

      Prior to the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, if an arbitrator appointed to an arbitration panel is disqualified or is otherwise unable or unwilling to serve, the Director shall appoint from the consolidated list of arbitrators the arbitrator who is the most highly ranked available arbitrator of the proper classification remaining on the list. If there are no available arbitrators of the proper classification on the consolidated list, the Director shall appoint an arbitrator of the proper classification subject to the limitation set forth in paragraph (c)(4)(B). The Director shall provide the parties information about the arbitrator as provided in paragraph (b)(6), and the parties shall have the right to object to the arbitrator as provided in paragraph (d)(1).
      (e) Discretionary Authority

      The Director may exercise discretionary authority and make any decision that is consistent with the purposes of this Rule and the Rule 10000 Series to facilitate the appointment of arbitration panels and the resolution of arbitration disputes.

      Rule 10309. Composition of Panels

      Except as otherwise specifically provided in Rule 10308, t[T]he individuals who shall serve on a particular arbitration panel shall be determined by the Director [of Arbitration]. Except as otherwise specifically provided in Rule 10308, t[T]he Director [of Arbitration] may name the chairman of the panel.

      Rule 10310. Notice of Selection of Arbitrators

      (a) The Director shall inform the parties of the arbitrators' names and employment histories for the past 10 years, as well as information disclosed pursuant to Rule 10312, at least 15 business days prior to the date fixed for the first hearing session. A party may make further inquiry of the Director [of Arbitration] concerning an arbitrator's background. In the event that, prior to the first hearing session, any arbitrator should become disqualified, resign, die, refuse or otherwise be unable to perform as an arbitrator, the Director shall appoint a replacement arbitrator to fill the vacancy on the panel. The Director shall inform the parties as soon as possible of the name and employment history of the replacement arbitrator for the past 10 years, as well as information disclosed pursuant to Rule 10312. A party may make further inquiry of the Director [of Arbitration] concerning the replacement arbitrator's background and within the time remaining prior to the first hearing session or the 10 day period provided under Rule 10311, whichever is shorter, may exercise its right to challenge the replacement arbitrator as provided in Rule 10311.
      (b) This Rule shall not apply to arbitration proceedings that are subject to Rule 10308.

      Rule 10311. Peremptory Challenge

      (a) In an[y] arbitration proceeding, each party shall have the right to one [(1)] peremptory challenge. In arbitrations where there are multiple Claimants, Respondents, and/or Third-Party Respondents, the Claimants shall have one [(1)] peremptory challenge, the Respondents shall have one [(1)] peremptory challenge, and the Third-Party Respondents shall have one [(1)] peremptory challenge. The Director [of Arbitration] may in the interests of justice award additional peremptory challenges to any party to an arbitration proceeding. Unless extended by the Director [of Arbitration], a party wishing to exercise a peremptory challenge must do so by notifying the Director [of Arbitration] in writing within 10 business days of notification of the identity of the person(s) named under Rule 10310 or Rule 10321(d) or (e), whichever comes first. There shall be unlimited challenges for cause.
      (b) This Rule shall not apply to arbitration proceedings that are subject to Rule 10308.

      Rule 10312. Disclosures Required of Arbitrators and Director's Authority To Disqualify

      (a) - (c) No Change
      (d) Prior to the commencement of the earlier of (1) the first pre-hearing conference or (2) the first hearing, the Director may remove an arbitrator based on information disclosed pursuant to this Rule.
      ([d]e) Prior to the commencement of the [first hearing session,] earlier of (1) the first pre-hearing conference or (2) the first hearing, [the Director of Arbitration may remove an arbitrator based on information disclosed pursuant to this Rule.] t[T]he Director [of Arbitration] shall [also] inform the parties to an arbitration proceeding of any information disclosed to the Director under this Rule unless either the arbitrator who disclosed the information withdraws voluntarily as soon as the arbitrator learns of any interest or relationship described in paragraph (a) that might preclude the arbitrator from rendering an objective and impartial determination in the proceeding, or the Director removes the arbitrator [pursuant to this Rule if the arbitrator is not removed].
      (f) After the commencement of the earlier of (1) the first pre-hearing conference or (2) the first hearing, the Director's authority to remove an arbitrator from an arbitration panel ceases. During this period, the Director shall inform the parties of any information disclosed by an arbitrator under this Rule.

      Rule 10313. Disqualification or Other Disability of Arbitrators

      In the event that any arbitrator, after the commencement of the earlier of (a) the first pre-hearing conference or (b) the first hearing but prior to the rendition of the award, should become disqualified, resign, die, refuse or otherwise be unable to perform as an arbitrator, the remaining arbitrator(s) shall continue with the hearing and determination of the controversy, unless such continuation is objected to by any party within 5 days of notification of the vacancy on the panel. Upon objection, the Director [of Arbitration] shall appoint a replacement arbitrator to fill the vacancy and the hearing shall continue. The Director [of Arbitration] shall inform the parties as soon as possible of the name and employment history of the replacement arbitrator for the past 10 years, as well as information disclosed pursuant to Rule 10312. A party may make further inquiry of the Director [of Arbitration] concerning the replacement arbitrator's background. If the arbitration proceeding is subject to Rule 10308, the party may exercise his or her right to challenge the replacement arbitrator within the time remaining prior to the next scheduled hearing session by notifying the Director in writing of the name of the arbitrator challenged and the basis for such challenge. If the arbitration proceeding is not subject to Rule 10308, [and] within the time remaining prior to the next scheduled hearing session or the 5 day period provided under Rule 10311, whichever is shorter, a party may exercise the party's [its] right to challenge the replacement arbitrator as provided in Rule 10311.

      Rule 10315. Designation of Time and Place of First Meeting [Hearing]

      The Director shall determine t[T]he time and place of the first meeting of the arbitration panel and the parties, whether the first meeting is a prehearing conference or a hearing, [initial hearing shall be determined by the Director of Arbitration and each hearing thereafter by the arbitrators.] and shall give n[N]otice of the time and place [for the initial hearing shall be given] at least [eight (8)] 15 business days prior to the date fixed for the first meeting [hearing] by personal service, registered or certified mail to each of the parties unless the parties shall, by their mutual consent, waive the notice provisions under this Rule. The arbitrators shall determine the time and place for all subsequent meetings, whether the meetings are pre-hearing conferences, hearings, or any other type of meetings, and shall give n[N]otice [for each hearing thereafter shall be given] as the arbitrators may determine. Attendance at a meeting [hearing] waives notice thereof.

    • NASD Notice Of Meeting Proxy For November

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      National Association of Securities Dealers, Inc.

      Notice Of Meeting And Proxy

      The Annual Meeting of members of the National Association of Securities Dealers, Inc. ( NASD®) will be held on December 21, 1998, at 9:30 a.m., at the Carlton Hotel, 16th & K Sts. N.W., Washington, D. C.

      The items of business to be considered at the Annual Meeting are:

      1. Election of persons to serve on the Board of Gove rnors for a term of no more than three years or until their successors are duly elected and qualified . Exhibit I lists the persons nominated by the NASD National Nominating Committee and those persons who, pursuant to Section 10 of Article VII of the By-Laws of the NASD: i) presented the requisite number of petitions in support of nomination; and ii) have been certified by the Secret a ry of the NASD as satisfying the classification of gove rnorship to be filled.1 Exhibit II and Exhibit III list the biographies of all candidates.
      2. Such other matters as may properly come before the Annual Meeting, including any continuation of the Annual Meeting caused by any adjournment or any postponement of the Annual Meeting.

      The record date for the Annual Meeting is the close of business on November 18, 1998.

      Pursuant to Sections 1 and 3(b) of Article XXI of the NASD By-Law s, in order for an NASD member to properly bring any other business before the Annual Meeting, the member must give timely notice in writing to the Secretary of the NASD, the member must be an NASD member at the time of the delivery of such notice, and the other business must be a proper matter for member action . To be timely, a member's notice must be delivered to the Secretary at the NASD's principal executive offices (the address is listed below) within 25 days of the date hereof. The member's notice must offer a brief description of the other business desired to be brought before the Annual Meeting, any material interest of the member in such business, and the reasons for conducting such business at the Annual Meeting.

      Since this proxy mailing coincides with the year-end holiday season, it is anticipated that a second proxy document will be mailed, followed by telephone reminders from a representative of the NASD, during the period between December 1, 1998 and December 20, 1998.This should ensure that sufficient proxies or votes are received to constitute the Annual Meeting quorum required by the By-Laws.

      It is important that all members be represented at the Annual Meeting. An RSVP card is enclosed with this package ; please return this card as soon as possible. If attending the meeting is not possible, members are urged to sign and promptly return the enclosed proxy in the accompanying envelope, which requires no postage if mailed in the United States.

      RSVP:

      Joan C. Conley, Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C.20006-1500

      Exhibit I

      The following persons have been nominated by the National Nominating Committee, or are candidates by virtue of h aving obtained the requisite number of member signatures (Nominees by Petition), to serve on the Board of Gove rnors of the NASD for a term of no more than three years or until their successor are duly elected and qualified.1 Terms run from January to January.

      INDUSTRY

      For the Industry candidates specified below, members are asked on the Proxy to choose three and only three of the six candidates listed. In the event that a member casts a vote for more nominees than there are vacancies on the Board, such Proxy will not be counted and will be deemed to be invalid .Please note that one of the Industry Gove rnors elected must be one of the candidates indicated with an asterisk (*).2 The asterisk (*) indicates a firm not having more than 150 registered persons.

      Name Term
      National Nominating Committee Nominees
      E.David Coolidge, III 1999-2002
      Chief Executive Officer William Blair & Company, L.L.C.  
      James Dimon 1999-2002
      Former President of Citigroup Inc. after the combination of Travelers Group and Citigroup Former Chairman and Co-Chief Executive Officer of Salomon Smith Barney  
      Richard C. Romano* 1999-2002
      President Romano Brothers &  
      Company Nominees by Petition
      M.LaRae Bake rink* 1999-2002
      Director of Compliance SK International Securities Corporation  
      Alan L. Davidson* 1999-2002
      President Zeus Securities, Inc.  
      Bill Singer 1999-2002
      Regulatory Partner Singer Frumento, LLP  

      NON-INDUSTRY

      For the Non-Industry candidates specified below, members are asked on the Proxy to choose four and only four of the five candidates listed. In the event that a member casts a vote for more nominees than there are vacancies on the Board, such Proxy will not be counted and will be deemed to be invalid.

      Name Term
      National Nominating Committee Nominees
      H.Furlong Baldwin 1999-2002
      Chairman Mercantile Bankshares Corporation  
      Eugene M. Isenberg 1999-2002
      Chairman and Chief Executive Officer Nabors Industries, Inc.  
      Arthur Rock 1999-2002
      Principal Arthur Rock & Co.  
      James F. Rothenberg 1999-2002
      President Capital Research and Management Company  
      Nominee by Petition
      Dan Jamieson 1999-2002
      Editor in Chief Registered Representative Magazine  

      PUBLIC

      For the Public candidates specified below, members are asked on the Proxy to choose five of the candidates listed.

      Name Term
      National Nominating Committee Nominees
      Gerald R. Ford 1999-2000
      38th President of the United States  
      Elaine L. Chao 1999-2002
      Distinguished Fellow The Heritage Foundation  
      Kenneth M. Duberstein 1999-2002
      Chairman and Chief Executive Officer The Duberstein Group  
      Donald J. Kirk 1999-2002
      Executive-in-Residence Columbia University  
      John D. Markese 1999-2002
      President American Assoc. of Individual Investors  

      Endnote

      1 Pursuant to Section 10 of Article VII of the By-Laws of the NASD, additional candidates have been included on the ballot for the election of Gove rnors because (a) within 45 days of the date of this notice such persons presented to the Secretary of the NASD petitions in support of such nomination duly executed by at least three percent of the members of the NASD, and (b) the Secretary certified that such petitions were duly executed by the Exe c u t i ve Representatives of the requisite number of members of the NASD and the person being nominated satisfied the classification of the gove rnorship to be filled based on the info rmation provided by the person as was reasonably necessary for the Secretary to make the certification.

      2 Pursuant to Section 4 of Article VII of the By-Laws of the NASD, the Board shall include a representative of an NASD member firm having not more than 150 registered persons.

      Exhibit II

      National Association of Securities Dealers, Inc.

      Profiles Of National Nominating Committee Board Nominees

      Nominees For Industry Governors

      E. David Coolidge, III is Chief Executive Officer of William Blair & Company, L.L.C. M r.Coolidge joined William Blair & Company in 1969 and was elected Chief Executive Officer of the firm in 1995. M r. Coolidge currently serves on the Board of the Pittway Corporation, the Kellogg Graduate School of Management at Northwestern University, the University of Chicago, the Rush-Presbyterian-St.Luke 's Medical Center, the Rush North Shore Medical Center, and the Better Gove rnment Association. Mr. Coolidge holds a B.A. from Williams College and an M.B.A. from the Harvard Graduate School of Business. Mr. Coolidge currently serves on the NASD Board of Governors (1996 to present) and is a member of the NASD Audit Committee.

      James (Jamie) Dimon is the fo rmer President of Citigroup Inc., after the combination of Travelers Group and Citicorp in October 1998, and the former Chairman and Co-Chief Executive Officer of Salomon Smith Barney. Mr. Dimon joined Travelers Group in 1986. He was appointed President of Travelers Group in 1991 and became Chief Operating Officer in 1993. He was named Chairman and Chief Executive Officer of Smith Barney in 1996. Mr. Dimon is on the Board of Trustees of Mount Sinai-NYU Medical & Health System, the Board of Directors of the Center on Addiction and Substance Abu s e, the Board of Directors of Tricon Global Restaurants, Inc., and the Board of Directors of the Welfare to Work Partnership. Mr. Dimon holds a B.A. from Tufts University and an M.B.A. from Harvard University Graduate School of Business. He currently serves on the NASD Board of Gove rnors (1996 to present) and is Chairman of the NASD Management Compensation Committee.

      Richard C. Romano is President, Romano Brothers & Company, having joined the firm in 1964. Mr.Romano hasserved on the Industry/Regulatory Council for Continuing Education, the NASD District Committee and the NASD Board of Gove rnors (1985 to 1988). Mr. Romano currently serves on the NASD National Nominating Committee and is Vice Chairman of the NASD Small Firm Advisory Board. He holds a B.S. from the University of Illinois and an M.S. and Ph.D. from the University of Delaware.

      Nominees For Non-Industry Governors

      H. Furlong Baldwin is Chairman of the Mercantile Bankshares Corporation; he was elected as Chairman in 1984. Mr. Baldwin joined Mercantile-Safe Deposit & Trust Company in 1956 and was elected President in 1970 of Mercant ile-Safe Deposit & Trust Company and Mercantile Bankshares Corporation. Mr. Baldwin serves on the Boards of Baltimore Gas & Electric Company, Constellation Holdings, Inc., GRC International, Inc., Offitbank, Wills Group, and The St. Paul Companies. Mr. Baldwin graduated from Princeton University and served on active duty with the U.S. Marine Corps. Mr. Baldwin currently serves on the NASD National Nominating Committee (1998 to present).

      Eugene M. Isenberg is Chairman and Chief Executive Officer of Nabors Industries, Inc., a position he has held since 1987. He serves as a Director of the American Stock Exchange and also Danielson Holding Corporation, an insurance holding company. From 1969 to 1982, Mr. Isenberg was Chairman of the Board and principal shareholder of Genimar, Inc., a steel trading and building products manufacturing company, which was sold in 1982. From 1955 to 1968, Mr. Isenberg was employed in va rious management capacities with the Exxon Corporation. Mr. Isenberg is the founder and principal sponsor of the Pa rkside School for children with learning disabilities and has established the Eugene M. Isenberg Scholarships at the University of Massachusetts where the School of Management is named after him.He was an instructor at Princeton University from 1951 to 1952 and served as an officer in the U.S. Navy from 1952 to 1955. Mr. Isenberg holds a B.A. from the University of Massachusetts and an M.A. from Princeton University in 1952. Mr. Isenberg completed the program for Senior Executives at M.I.T.

      Arthur Rock is Principal of Arthur Rock & Co., a venture capital firm in San Francisco, California. Mr. Rock founded the firm in 1969. P rior to that time, he spent seven years as a general partner at Davis & Rock. He served as Chairman of the Board of Directors of Scientific Data Systems, Inc. from 1962 to 1969 (when they merged with Xerox Corporation); he was a Director of Xerox Corp o ration from 1969 to 1972; a member of the Executive Committee and Director of Teledyne, Inc. from 1961 to 1994; a Director of Apple Computer, Inc. from 1980 to 1993; and he is Founder, Past Chairman of the Board of Directors, Chairman of the Executive Committee and Lead Director of Intel Corporation. Mr. Rock serves on the Boards for Echelon and Air Touch Communications. He has been a member of the visiting committee at Harvard Business School and is a member of the Board of Trustees of the Califo rnia Institute of Technology. Mr. Rock is invo l ved in many cultural and civic organizations in the San Francisco area. He holds a B.S. from Syracuse University and an M.B.A . from Harvard University. Mr. Rock currently serves on the NASD Board of Governors (1998 to present).

      James F. Rothenberg is President of Capital Research and Management Company. Mr.Rothenberg assumed the position of President and Director of Capital Research and Management Company in 1994, having joined the company in 1970. Mr. Rothenberg serves on the Boards of the Huntington Memorial Hospital, KCET (Public Television for Southern and Central California), and the Westridge School. Mr. Rothenberg holds a B.A. in English from Harvard College and an M.B.A. from Harvard Graduate School of Business. He currently serves on the NASD Board of Governors (1996 to present), The Nasdaq Stock Marke t® Board of Directors, the Nasdaq Listing Subcommittee, and the NASD Management Compensation and Finance Committees.

      Nominees For Public Governors

      Gerald R. Ford served as 38th President of the United States. Before entering the Presidency in 1974, President Ford served as Vice President for nine months under President Richard Nixon. Prior to this, President Ford served in the U.S. House of Representatives for 25 and one-half years.Since leaving the White House in 1977, President Ford has lectured at many colleges and universities and participated in public policy forums and conferences. President Ford serves as an Advisor to the Board of the American Express Company and is a member of the Board of The Travelers Group. President Ford holds a B.A. from the University of Michigan and an LL.B. from Yale University Law School.

      Elaine L. Chao was appointed a Distinguished Fellow at The Heritage Foundation in 1996. Prior to this, she was President and Chief Executive Officer of the United Way of America, Director of the Peace Corps, and Deputy Secret ary of the U.S. Department of Transportation. She was also Vice President, Syndications, at Bank America Capital Markets Group. M s. Chao is currently a Director of Dole Food Company, Inc., Vencor, Inc., and Protective Life Corpora tion. Ms. Chao holds an A.B. from Mt. Holyoke College and an M.B.A. from Harvard University Business School. Ms. Chao currently serves on the NASD Board of Gove rnors (1996 to present) and the NASD Audit Committee.

      Kenneth M. Duberstein is Chairman and Chief Executive Officer of The Duberstein Group. Prior to this, Mr. Duberstein served as Chief of Staff to President Ronald Reagan from 1988 to 1989. During President Reagan's two terms in office, Mr. Duberstein also served in the White House as Deputy Chief of Staff (1987), as well as both the Assistant and the Deputy Assistant to the President for Legislative Affairs (1981 to 1983). Mr. Duberstein currently serves on the Board of Governors of the American Stock Exchange and on the Board of Directors at the Boeing Company, Cinergy Corporation, Federal National Mortgage Association, and The St. Paul Companies, Inc. He is Vice Chairman of the Kennedy Center for the Performing Arts. Mr. Duberstein holds an A.B. from Franklin and Marshall College and an M.A. from American University.

      Donald J. Kirk is Executive-in-Residence at Columbia University, Graduate School of Business. Mr. Kirk became a Professor of Accounting at Columbia University in 1987 and served in that capacity until 1995 when he became an Executive-in-Residence at the school. Mr. Kirk served as a member of the Financial Accounting Standards Board from 1973 to 1987, serving as Chairman from 1978 to 1987. Mr. Kirk currently serves as a Director of General Re Corporation, as a Trustee of the Fidelity Group of Mutual Funds, and is a member of the Public Oversight Board of the American Institute of CPA s. Mr. Kirk is Chairman of the Board of Trustees of Greenwich Hospital and a Director of Yale-New Haven Health Services Corp. Mr. Kirk holds a B.A. from Yale University and an M.B.A. from New York University. Mr. Kirk currently serves on the NASD Board of Gove rnors (1996 to present) and is the Chairman of the NASD Audit Committee.

      John D. Markese is President of the American Association of Individual Investors. Mr. Markese holds a doctorate in Finance from the University of Illinois. Mr. Markese currently serves on the NASD Board of Governors (1996 to present), The Nasdaq Stock Market Board of Directors, and the Nasdaq Listing Subcommittee.

      Exhibit III

      National Association of Securities Dealers, Inc.

      Profiles Of Board Nominees By Petition

      Nominees For Industry Governors

      M. LaRae Bakerink is Executive Vice President and Director of Compliance for SK International Securities Corporation, having joined the firm in 1992. Ms. Bakerink currently serves on the Board of Directors and serves as Executive Vice President for the California Association of Independent Broker/Dealers. Ms. Bakerink is a member of the NASD Board of Arbitrators. Ms. Bakerink holds a B.S. and an M.B.A. from San Diego State University.

      Alan L. Davidson is President and founder, Zeus Securities, Inc., a small business NASD member since 1988. Mr. Davidson is also President and founder of the Independent Broker-Dealer Association, Inc. with 120 members in 17 states. A former member of the NASD District 10 Business Conduct Committee, he suggested creation of the District 10 News, a publication designed to educate and alert NASD members to potential compliance problems. Mr. Davidson testified before the Securities and Exchange Commission and the NASD's Rudman Commission for constructive reforms. The Rudman Commission and NASD adopted his suggestion to create an NASD Ombudsman. Mr. Davidson is a graduate of C.W. Post College where he served as President of the Alumni Association.

      Bill Singer is the Regulatory Partner at the securities industry law firm of Singer Frumento LLP and is General Counsel to the Independent Broker-Dealer Association, Inc. Mr. Singer was formerly employed at Smith Barney, Harris Upham & Co., the American Stock Exchange, the NASD, and Integrated Resources Asset Management, Inc. He holds a B.A. from New York University and a J.D. from New York Law School, and has held Series 7 and 63 registrations.

      Nominees For Non-Industry Governors

      Dan Jamieson is Editor in Chief of Registered Representative magazine. He has also served as a staff writer and managing editor over his 13-year career with the magazine. Mr. Jamieson currently serves on the board of the National Association of Investment Professionals. In 1994, he was named as a trustee to the Securities Industry Association's (SIA) Securities Industry Institute, a professional development program held yearly at the Wharton School of Business, and has served on the SIA's Investor Education Committee. Mr. Jamieson has been an instructor at several California community colleges where he has taught investing basics to hundreds of adult students. He was formerly a broker with Dean Witter Reynolds, and is a graduate of the University of Wisconsin-Madison.

    • Year 2000 Update For November

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      November 1998

      Mandatory Testing

      On October 5, 1998, the National Association of Securities Dealers, Inc. (NASD®) filed a proposed rule change with the Securities and Exchange Commission (SEC) that would mandate Year 2000 testing for clearing firms, market makers, and government securities firms. The proposed rule also would strongly encourage testing between correspondent clearing firms and introducing firms with a proposed requirement for clearing firms to report test results. Members required to test may be able to satisfy the requirement by participating in all or a combination of the following types of tests: connectivity, point-to-point, Securities Industry Association (SIA)-sponsored extended point-to-point, and SIA-sponsored industry testing.1 All firms would be required to report test results to the NASD. It is expected that the SEC will publish the proposal of comment in the next few weeks. Firms should register for industry testing with the SIA. The phone number is (888) Y2K-4SIA.

      New Education Workshops That Require No Travel!

      The NASD Year 2000 Program Office expanded its education and awareness activities to include Virtual Workshops. Virtual Workshops will be delivered through an MCI conference call-in session. These sessions-targeted to smaller firms and introducing firms—are intended to make educational workshops more accessible to members. Workshop outlines can be viewed on the NASD Regulation Web Site (www.nasdr.com). During the call-in sessions, members will hear a presentation, followed by a question and answer period. These sessions will provide an opportunity for members to share ideas and learn from other firms' experiences.

      To participate in the Virtual Workshops, the NASD strongly encourages registration, but it is not required. Call MCI at (800) 839-8316, listen to the greeting, and provide the following information when prompted: firm name, Broker/Dealer #, and workshop date. For more information see the workshop schedule in the next column.

      Virtual Workshop Schedule

      Contingency Planning

      Password: Contingency Plan98

      Conference Leader: Lyn Kelly

      • Introducing Firms:
        December 1 and December 10 @ 11:00 a.m.


      • Clearing Firms:
        December 3 and December 8 @ 11:00 a.m.

      End User Plans & Best Practices

      Password: EndUser98

      Conference Leader: Lyn Kelly

      December 15 @ 1:00 p.m.

      On the day of the session, call (888) 282-9568 and indicate the password and conference leader provided for the workshop.

      1 Definitions:

      Connectivity/Point-to-Point—Point-to-Point is a one-day test in a Year 2000 environment between firms, a firm and an exchange, or a firm and a utility. This test, which covers the communication links/external interfaces, can be initiated between any facilities with an electronic connection to each other.

      Extended Point-to-Point—This mimics the Point-to-Point test, but is sponsored by the SIA, with testing dates available between Nov. 14, 1998 and Feb. 13, 1999. Extended Point-to-Point also is a one-day test, but includes all participating exchanges/utilities acting together.

      Industry Testing—Industry testing is sponsored by the SIA, and is a four-date test, allowing for rollover of trade dates/settlements. Participants must have completed either Point-to-Point or Extended Point-to-Point testing as a pre-requisite for registration, which closes Nov. 30, 1998.

      Year 2000 Activity Countdown

      What are firms doing today? Are you ...

      • Continuing to monitor mission-critical, third-party, and service provider Year 2000 progress, including clearing organizations, banks, and utilities?


      • Adding Year 2000 warranty language to new contracts?


      • Registering for SIA-sponsored industry testing?


      • Revalidating inventory of mission-critical business systems to identify any missed or newly added systems due to business changes?


      • Completing remediation of mission-critical business systems, facilities, and equipment?


      • Continuing to test mission-critical business systems, facilities, and equipment, including testing with external parties?


      • Developing plans to keep mission-critical business systems, facilities, and equipment Year 2000 compliant over the next 15 months?


      • Verifying all desktop applications are Year 2000 compliant?


      • Conducting legal reviews of Year 2000 plans and progress?


      • Developing first draft of contingency plans for mission-critical business functions and service providers?


      • Attending SIA workshops on industry testing?


      • Registering for NASD Fall and Winter workshop series?


      • Lining up auditors to perform required review of 1999 BD-Y2K reports?

      Test With The NASD

      To schedule testing or obtain information about NASD, NASD Regulation, or Nasdaq applications please contact:

      Nasdaq Customer Test System (800) 288-3783

      NASD, NASD Regulation Testing (888) 227-1330 (select Option 3)

      Year 2000

      Disciplinary Actions

      NASD Regulation brought disciplinary actions against 59 brokerage firms for late filing of required BD-Y2K Forms; 37 of the firms entered into settlements agreeing to be censured and pay fines ranging from $2,300 to $3,200. Complaints have been issued against the remaining 22 firms.

      NASD Regulation's actions were coordinated with 37 separate disciplinary proceedings instituted by the SEC against firms that failed to file the required reports.

      Upcoming Education and Events

      NASD Workshops (See previous page for details)

      Topic Date Location
      Contingency Planning December Virtual
      End User & Best Practices December Virtual
      Legal Issues January Virtual
      Mandatory Testing January District Offices

      SIA Events

      Operations Update December 3 NYC

      For more information, visit the SIA Web Site (www.sia.com).

      NASD & SEC Rules In The Works

      Mandatory Testing  NASD

      Amendment to 17a-5  SEC

      Reports & Other Filing Requirements

      BD-Y2K Report #1  August 31,1998

      BD-Y2K Report #2  April 30,1999

      Test Results Report  Third Quarter 1999

      More Information/Questions

      NASD Year 2000 Program Office
      e-mail: y2k@nasd.com
      phone: (888) 227-1330

    • 98-89 NASD Announces Changes In CRD Filing Fees

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      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) Board of Governors has approved changes to Schedule A of the NASD By-Laws affecting the Central Registration Depository (CRDSM) fee structure. The changes set registration fees at a level that will recover the costs of the CRD and Public Disclosure Programs, and more closely align the fees charged for specific transactions to the costs of the activities related to processing those transactions. For a detailed list of the fee changes and their respective effective dates, please refer to the NASD Regulation Web Site, www.nasdr.com.

      Questions about this Notice may be directed to the NASD Call Center at (301) 869-6699.

      Summary

      On October 8, 1998, the NASD Board of Governors approved changes to Schedule A of the NASD By-Laws affecting the CRD fee structure. The changes set registration fees at a level that will recover the costs of the CRD and Public Disclosure Programs, and more closely align the fees charged for specific transactions to the costs of the activities related to processing those transactions. The changes involve:

      • Implementing an annual renewal processing fee ($15.00 per registered representative or principal) and a fee for amendments ($20.00 per amendment filing). (Note: The renewal processing fee for 1999 will be collected as part of the overall registration renewal process that begins in November1998.)


      • Applying the existing fee for disclosure review ($95.00) to all new or amended disclosures of reportable events; increasing the fee for processingfingerprint cards (to $10.00 plus the FBI fee); and eliminating a reduced fee for registrations with more than one member firm that arenot filed simultaneously.


      • Eliminating the Firm Access Query System (FAQS) charges and CRD license and maintenance fees (effectiveupon deployment of the modernized CRD system).

      Appropriate amendments to Schedule A of the By-Laws have been filed with the Securities and Exchange Commission (SEC). Pursuant to Section 19(b)(3)(A)(ii) of the Securities Exchange Act of 1934, the fee changes became effective upon filing.

      Most member firms will pay more for registration and other filing activity under the new fee structure. The benefits to the industry of the modernized CRD system, scheduled for deployment in the third quarter of 1999, will outweigh these additional costs.

      The modernized CRD will significantly streamline the "one-stop" filing system for broker/dealers and their associated persons, and will deliver the following substantial financial, operational, and technological bene- fits to member firms:

      • Expedited processing of initial registrations and transfers, which will reduce the number of days associated persons are restricted from conducting business (e.g., registration filings that have no new disclosurewill be processed by the NASD in 24 hours or less);


      • Reduced registration processing costs by replacing paper filing with electronic form filing through the Web; and


      • Improved member firm access to registration information by providing each member firm with a compre- hensive, on-line registration processing and information system available directly through the Web.

      As discussed above, upon deployment of the modernized CRD system, the NASD will eliminate FAQS charges (see Section 9 of Schedule A) incurred by subscribing members because the information and services provided today by FAQS will be available through the Internet without a usage charge in the modernized CRD system. The date of the elimination of FAQS charges will be announced 45 days in advance in a Notice to Members.

      For a detailed list of the fee changes and their respective effective dates, please refer to the NASD Regulation Web Site, www.nasdr.com, or telephone the NASD Call Center at (301) 869-6699.

    • 98-88 Underwriting Compensation In Public Offerings

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      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) is issuing this Notice to Members to remind members that compensation received by members in public offerings of securities is to be determined through negotiation with the issuer offering the securities. Consistent with long-standing policy, it is conduct inconsistent with just and equitable principles of trade for any member or person associated with a member to engage, directly or indirectly, in any conduct that discourages the competitive activities of other member firms. This includes, but is not limited to, directly or indirectly engaging in any conduct that inhibits competition in the pricing of services offered by members including conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence, constrain, or inhibit the freedom of a member or person associated with a member to price its services competitively.

      Questions regarding this Noticemay be directed to Gary Goldsholle, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8104.

      Discussion

      The National Association of Securities Dealers, Inc. (NASD®) Rule 2710(c) prohibits a member or person associated with a member from receiving compensation or participating in a public offering of securities if the underwriting compensation in connection with the public offering is unfair or unreasonable. NASD Regulation's Corporate Financing Department (Department) has direct responsibility for the review of underwriting compensation. The Department reviews public offerings before their effective dates and aggregates all items of value proposed to be received by underwriters and related persons. Total compensation is then reviewed and a determination is made as to whether the compensation is fair and reasonable.

      The pricing of underwriting compensation, including the gross spread on offerings, is determined by the issuer and the underwriter through negotiation, subject to NASD Regulation's review to ensure that it is fair and reasonable. NASD Regulation has noted a high degree of price uniformity in gross spreads charged by underwriters in initial public offerings of corporate equity securities. NASD Regulation considers it important to remind members that there is no standard level of underwriting compensation. Prices should be determined through competition and the level of underwriter compensation on a given transaction should be the product of negotiation between the issuer and the underwriter. The exchange of current price information among competitors in this context may raise serious anti-competitive concerns. Any attempt improperly to influence another member in its pricing is a violation of NASD Rule 2110.

      As set forth in IM-2110-5, it is NASD Regulation's long-standing policy that it is conduct inconsistent with just and equitable principles of trade for any member or person associated with a member to coordinate the prices of such member with any other member or associated person; to direct or request another member to alter a price; or to engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member or person associated with a member. This includes, but is not limited to, any attempt to influence another member or person associated with a member to adjust or maintain a price or other conduct that retaliates against or discourages the competitive activities of another market participant. While IM-2110- 5(5) specifically permits member firms to engage in any underwriting (or any syndicate for the underwriting) of securities to the extent permitted by the federal securities laws, this exclusion does not permit member firms to engage in conduct that discourages the competitive activities of other firms.

      Member firms should review their practices and procedures regarding the pricing of their services in public offerings to ensure that such pricing results from appropriate negotiation with the issuer, and that conduct of the type noted above is prohibited. A finding of such conduct will result in disciplinary action. Member firms should also review their supervisory procedures regarding underwriting compensation to ensure that the requirement for free negotiation of fees is emphasized to all relevant employees and that procedures exist to identify any questionable activity.

    • 98-87 Fixed Income Pricing System Additions, Changes, And Deletions As Of August 24, 1998

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      As of August 24, 1998, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      ABLC.GA American Builders & Contractors Inc 10.625 05/15/07
      AFGH.GA Affinity Group Holding Inc. 11.000 04/01/07
      ALAI.GA Aladdin Gaming/Cap Corp. 13.500 03/01/10
      APFC.GA American Pacific Corp. 9.250 03/01/05
      APFC.GA American Pacific Corp. 9.250 03/01/05
      APLO.GA AP Holdings Inc. 11.250 03/15/08
      APLO.GA AP Holdings Inc. 11.250 03/15/08
      ARGI.GD American Restaurant Group Inc. 11.500 02/15/03
      ARSL.GA Ameristeel Corp. 8.750 04/15/08
      ARUC.GA Accuride Corp. 9.250 02/01/08
      AVS.GA Avistion Sales Co. 8.125 02/15/08
      BCC.GA Boise Cascade Corp. 9.875 02/15/01
      BCC.GB Boise Cascade Corp. 9.450 11/01/09
      BCC.GC Boise Cascade Corp. 9.900 03/15/00
      BCC.GD Boise Cascade Corp. 9.850 06/15/02
      BCC.GE Boise Cascade Corp. 7.350 02/01/16
      BOP.GA Boise Cascade Office Products Corp. 7.050 05/15/05
      CE.GE CalEnergy Co. 6.960 09/15/03
      CE.GF CalEnergy Co. 7.230 09/15/05
      CHK.GG Chesapeake Energy Corp. 9.625 05/01/05
      CIOF.GA Chiles Offshore LLC/Fin Corp. 10.000 05/01/08
      CMCO.GA Columbus McKinnon Corp. 8.500 04/01/08
      CR.GG CalEnergy Co. 7.520 09/15/08
      CR.GH CalEnergy Co. 8.480 09/15/28
      EGHI.GA Elgar Holdings Inc. 9.875 02/01/08
      ENGL.GD Engle Homes Inc. 9.250 02/01/08
      FKNC.GA Frank's Nursery & Crafts Inc. 10.250 03/01/08
      FOHO.GA Fort Howard Corp. 9.000 02/01/06
      FTZH.GA Fitzgerald Gaming 12.250 12/15/04
      GBND.GA General Binding Corp. 9.375 06/01/08
      GTAR.GD Globalstar LP/Cap Corp. 11.500 06/01/05
      GW.GA Grey Wolf Inc. 8.875 07/01/07
      HPII.GA Home Products Intl Inc. 9.625 05/15/08
      HTHR.GA Hawthorne Financial Corp. 12.50 12/31/04
      ICGS.GA ICG Services 10.000 02/15/08
      ICIX.GD Intermedia Communications Inc. 8.500 01/15/08
      IHK.GB Imperial Holly Corp. 9.750 12/15/07
      IIXC.GB IXC Communications Inc. 9.000 04/15/08
      KMCT.GA KMC Telecom Holdings Inc. 12.500 02/15/08
      LIEV.GA LIN Television Corp. 8.375 03/01/08
      LNGS.GA LIN Holdings Corp. 10.000 03/01/08
      LNR.GA LNR Property Corp. 9.375 03/15/08
      LNR.GA LNR Property Corp. 9.375 03/15/08
      LO.GA Local Financial Corp. 11.000 09/08/04
      LWN.GC Loewen Group Intl. Inc. 7.500 04/15/01
      MEAL.GB Metallurg Inc. 11.000 12/01/07
      MEDA.GA Medaphis Corp. 9.500 02/15/05
      MKHU.GA Market Hub Partners Inc. 8.250 03/01/08
      MPN.GB Mariner Post-Acute Network Inc. 9.500 04/01/06
      MRNR.GA Mariner Health Group 9.500 04/01/06
      MTUM.GA Mentus Media Corp. 12.000 02/01/03
      MUI.GA Metals USA 8.625 02/15/08
      NTHC.GA Northland Cable Television Inc. 10.250 11/15/07
      NXLK.GB Nextlink Communications Inc. 9.000 03/15/08
      NXTL.GG Nextel Communications Inc. 11.500 09/01/03
      PMSI.GA Prime Medical Services Inc. 8.750 04/01/08
      PMWI.GB Pagemart Wireless Inc. 11.250 02/01/08
      PRRJ.GA Perry-Judds Inc. 10.625 12/15/07
      PSAI.GA Pediatric Services of America Inc. 10.00 04/15/08
      PSIX.GA PSINet Inc. 10.00 02/15/05
      QWST.GC Qwest Communications Intl. Inc. 8.290 02/01/08
      RSLU.GA RSL Communications PLC 9.125 03/01/08
      SFXE.GA SFX Entertainment Inc. 9.125 02/01/08
      SILA.GA Silver Cinemas Intl. Inc. 10.500 04/15/05
      SPF.GC Standard Pacific Corp. 8.000 02/15/08
      SPVI.GA Spectra Vision Inc. 11.500 10/01/01
      SYAU.GA Stanadyne Automotive Corp. 10.250 12/15/07
      SYPT.GA Syratech Corp. 11.000 04/15/07
      TSO.GA Tesoro Petroleum Corp. 9.000 07/01/08
      TWA.GD Trans World Airlines Inc. 11.375 03/01/06
      TWA.GE Trans World Airlines Inc. 10.250 06/15/03
      UNTA.GA United Artists Theaters Co. 9.750 04/15/08
      UNTA.GB United Artists Theaters Co. 10.062 10/15/07
      WPSN.GC Westpoint Stevens Inc. 7.875 06/15/08

      As of August 24, 1998, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      ACCP.GA American Cap Corp. 8.400 06/15/93
      AMIC.GC Americold Corp. 11.500 03/01/05
      ARGI.GA American Restaurant Group Inc. 12.000 09/15/98
      ARGI.GB American Restaurant Group Inc. 13.000 09/15/98
      ARGI.GC American Restaurant Group Inc. 13.000 09/15/98
      CHK.GF Chesapeake Energy Corp. 10.500 06/01/02
      FERL.GC Ferrellgas LP/Finance Corp. 10.000 08/01/01
      JORE.GA Jorgensen Earle M Co. Del New 10.750 03/01/00
      LIEV.GA LIN Television Corp. 8.375 03/01/08
      LNGS.GA Lin Holdings Corp. 10.000 03/01/08
      LPET.GA La Petite Holdings Corp. 9.625 08/01/01
      LQI.GA La Quinta Inns Inc. 9.250 05/15/03
      MRNR.GA Mariner Health Group 9.500 04/01/06
      NXTL.GG Nextel Communications Inc. 11.500 09/01/03
      OEH.GA Orient Express Hotels Inc. 10.250 09/01/98
      RYL.GA Ryland Group Inc. 10.500 07/15/02
      SPVI.GA Spectra Vision Inc. 11.500 10/01/01
      SPVI.GA Spectra Vision Inc. 11.500 10/01/01
      TEP.GB Tucson Electric Power Co. 8.125 09/01/01
      TEP.GC Tucson Electric Power Co. 7.550 03/01/02
      TEP.GC Tucson Electric Power Co. 7.550 03/01/02
      TEP.GD Tucson Electric Power Co. 7.650 05/01/03
      TEP.GD Tucson Electric Power Co. 7.650 05/01/03
      TRIP.GA Trangle Pacific Corp. Del 10.500 08/01/03
      VNCI.GA Vencor Inc. 10.125 09/01/01
      VNCI.GA Vencor Inc. 10.125 09/01/01
      WYDM.GA Wyndam Banking Inc. 13.625 09/15/98

      As of August 24, 1998, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      CHCA.GD CRBR.GA Chancellor Radio Broadcasting Co. 9.375 10/01/04
      VNCI.GA HIL.GA Hill Haven Corp. New 10.125 09/01/08

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, Market Regulation, NASD Regulation (NASD RegulationSM), at (301) 590-6451.

      Any questions regarding the FIPS master file should be directed to Cheryl Glowacki, Nasdaq® Market Operations, at (203) 385-6310.

    • 98-86 Columbus Day, Veterans Day, And Thanksgiving Day: Trade Date — Settlement Date Schedule

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      Columbus Day: Trade Date — Settlement Date Schedule

      The schedule of trade dates – settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 12, 1998. On this day, The Nasdaq Stock Market® and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date Settlement Date Reg. T Date*
      Oct. 2 Oct. 7 Oct. 9
      5 8 12
      6 9 13
      7 13 14
      8 14 15
      9 15 16
      12 15 19
      13 16 20

      Note: October 12, 1998, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 12, will be combined with transactions made on the previous business day, October 9, for settlement on October 15. 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.

      Veterans Day And Thanksgiving Day: Trade Date — Settlement Date Schedule

      The schedule of trade dates – settlement dates below reflects the observance by the financial community of Veterans Day, Wednesday, November 11, 1998, and Thanksgiving Day, Thursday, November 26, 1998. On Wednesday, November 11, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veterans Day. All securities markets will be closed on Thursday, November 26, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 4 Nov. 9 Nov. 11
      5 10 12
      6 12 13
      9 13 16
      10 16 17
      11 16 18
      12 17 19
      19 24 27
      20 25 30
      23 27 Dec. 1
      24 30 2
      25 Dec. 1 3
      26 Markets Closed
      27 2 4

      Note: November 11, 1998, 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 16. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.


      * 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 five 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 titled "Reg. T Date."

    • 98-85 SEC Approves Rule Changes Regarding Electronic Communication Networks, Locked And Crossed Markets, And Members' Obligation To Provide Nasdaq With Certain Information

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      Executive Summary

      On September 22, 1998, the Securities and Exchange Commission (SEC) approved amendments to the National Association of Securities Dealers, Inc. (NASD® or Association) rules regarding Electronic Communications Networks (ECNs) and locked and crossed markets. The SEC also approved a new rule regarding information requests made by Nasdaq® to NASD members. Specifically, the rule changes: (1) amend NASD Rule 4623 to specify the manner in which ECN orders that have a reserved size must interact with incoming SelectNetSM messages; (2) amend Rule 4613(e) to specify the manner in which quotations that are entered into Nasdaq at or after 9:25 a.m. and that lock or cross the market on the opening, must be resolved at the market's opening; and (3) add Rule 4625, which will require members that participate in The Nasdaq Stock Market® to provide information to Nasdaq departments and staff when information is so requested. The rule changes are effective November 1, 1998.

      Questions concerning this Noticemay be directed to John Malitzis,Senior Attorney, Office of General Counsel, The Nasdaq Stock Market,Inc., at (202) 728-8245.

      Background

      With the implementation of the SEC's Order Handling Rules in early 1997, a number of ECNs have been integrated into the Nasdaq market. Under SEC Rule 11Ac1-1(c)(5) (the ECN Rule) which was adopted as part of the SEC's Order Handling Rules, a Nasdaq Market Maker mustreflect in its public quotes any superior prices that the Market Maker privately quotes in an ECN. The ECN Rule provides an alternative to this public quote display requirement, under which a Market Maker may comply with the ECN Rule if the ECN in which the Market Maker is privately quoting has:

      • established a link to Nasdaq by displaying the best ECN prices in Nasdaq's quote montage; and


      • provided access through Nasdaq to such publicly displayed prices.

      To accommodate this alternative, Nasdaq created the "SelectNet Linkage" that allows: 1) ECNs to display their best prices from Market Makers and other ECN subscribers in the Nasdaq quote montage, including the inside market display; and 2) market participants to access those prices by sending orders to an ECN through SelectNet. The NASD is adopting the following rule changes in light of Nasdaq's experience with the integration of ECNs into the market.

      Reserved Size

      The NASD is adopting amendments to NASD Rule 4623 to establish the manner in which orders that have a reserved size and that are entered into an ECN must interact with SelectNet orders that are sent to an ECN.

      Subsequent to the inclusion of ECNs into the market, Nasdaq has observed locked and crossed markets1 occurring in connection with the use of "reserved" size orders in ECNs. Specifically, an ECN may display a portion of a customer order (e.g., 1,000 shares) while maintaining a significantly larger portion of the order in reserve (e.g., 10,000 shares). It is Nasdaq's experience that often a Market Maker will send a large SelectNet order (e.g., 20,000 shares) to the ECN to take out the displayed and reserved portion of the ECN order so that the Market Maker may move its quote without locking/crossing the market. TheECN's system may be programmed, however, so that the incoming SelectNet order interacts only with the displayed portion of the ECN order, not the reserved and displayed portions of such order (i.e., the 20,000 share SelectNet message will execute against the displayed 1,000 shares only, not the full 11,000 shares). Thus, a Market Maker often is unable to take out the entire ECN order — except in pieces and through multiple executions. After using reasonable means to avoid locking/crossing the market by—for example—sending SelectNet messages to the ECN to take out the quotation, the Market Maker often will enter a quotation that locks/crosses the market. These locked/crossed markets may last for a significant period and disrupt the marketplace.

      The NASD is amending NASD Rule 4623 to address this issue. Under the amendment, if an ECN displays in Nasdaq a customer order having a reserved size and a market participant attempts to access the ECN's Nasdaq-displayed order by sending (via a Nasdaq-provided means) an order that is larger than the ECN's Nasdaq-displayed size, the ECN must execute the Nasdaq-delivered order: 1) up to the size of the Nasdaq-delivered order, if the ECN order (including the reserved size and displayed portions) is the same size or larger than the Nasdaq-delivered order; or 2) up to the size of the ECN order (including the reserved size and displayed portions), if the Nasdaq-delivered order is the same size or larger than the ECN order (including the reserved size and displayed portions). Thus, in the above example where the ECN is displaying 1,000 shares and holding 10,000 shares in reserve and the Market Maker sends the ECN a SelectNet order for 20,000 shares, the ECN would be required to execute 11,000 shares-the full size of the order in the ECN.

      Locked/Crossed Markets

      Nasdaq has observed instances of Market Makers and ECNs entering orders at 9:29 a.m. (when quotations are not firm) that lock/cross the market and then leaving these orders in place at 9:30 a.m. when the quotations become firm and the market opens. Often times the Market Maker or ECN will not take action to attempt to resolve the lock/cross when the market opens. This effectively locks/crosses the market on the opening and disrupts the opening process.

      In light of this situation, the NASD is amending Rule 4613(e). Amended Rule 4613(e) provides that if a Market Maker or ECN enters a quotation at or after 9:25:00 a.m. Eastern Time and the quotation locks or crosses the market on the opening, it is the obligation of that Market Maker or ECN to take action immediately when the market opens to avoid the lock or cross. The rule specifies that the Market Maker or ECN must take such take action (e.g., by sending a SelectNet order to the quotation it will lock/cross, or by taking down its quotation, if appropriate) when the market opens at 9:30:00 a.m., but in no case later than 30 seconds thereafter (i.e., 9:30:30 a.m.). The 30-second period is intended to give a Market Maker or ECN an opportunity to send a SelectNet message to the party that it will lock/cross at a point in time when quotations are firm (i.e., at or after 9:30:00 a.m.).

      For example, at 9:28:35 a.m., the market in Stock QRST is 20 x 20 3/16, and MMAB is displaying an offer of 20 3/16. At 9:29:45 a.m., MMCD enters a bid of 20 3/16 thereby locking the market. MMCD is obligated to attempt to resolve the lock as soon as the market opens (but no later than by 9:30:30 a.m.) by, for example, sending a SelectNet message to MMAB.

      Although market participants should always monitor their pre-opening quotations to ensure that they do not lock/cross the market on the opening, the amended rule: (1) provides a benchmark of 9:25:00 a.m., at which time market participants must start monitoring their quotations to determine whether they are entering locking/crossing quotations; (2) delineates which party must take action to resolve the lock/cross when the market opens; and (3) provides a benchmark of 9:30:30 a.m., by which time the market participant must take action to resolve the locked/crossed market situation.

      Nasdaq Information Requests

      Finally, the NASD is adopting Rule 4625 regarding members' obligation to supply Nasdaq with certain information when so requested. Nasdaq's MarketWatch and Market Operations departments have day-to-day responsibilities for administering various NASD and SEC rules, as well as carrying out duties delegated to them by the Association. For example, Nasdaq's MarketWatch Department is responsible for initiating trading halts and monitoring locked and crossed market situations, while Nasdaq's Market Operations Department is responsible for reviewing ITS trade-through complaints, clearly erroneous transactions, and requests for excused withdrawals or reinstatements from unexcused withdrawals. In order to properly administer a particular rule or to carry out a departmental function, Nasdaq staff often must obtain information on a real-time basis from market participants. For example, when monitoring for locked and crossed markets, Nasdaq MarketWatch routinely will contact the parties to the lock or cross (e.g., a Market Maker and/or ECN) to request relevant information.2 Staff then will review this information on a real-time basis and assist in resolving the locked or crossed market situation.3

      Currently there is no explicit authority in the NASD's rules that allow Nasdaq staff to request information from members, although members generally have voluntarily complied with such requests in the past. Thus, the NASD is adopting Rule 4625, which authorizes Nasdaq staff to request information in specific circumstances and obligates members to comply with such requests. Under Rule 4625, Nasdaq staff may request from a member information directly related to: a SEC or NASD rule that the Nasdaq department is responsible for administering; or to other duties/responsibilities imposed on the Nasdaq department by the "Plan of Allocation and Delegation of Function by the NASD to Subsidiaries" or otherwise delegated by the Association to such department. Members should note that, under Rule 4625, a failure to provide information in a timely, truthful, and/or complete manner, could subject the member to disciplinary action.


      Endnotes

      1 A locked market occurs when the quoted bid price is the same as the quoted ask price. A crossed market occurs when the quoted bid price is greater than the quoted ask price.

      2 Staff may request information on the identity of the customers, trade information, the reason for the lock or cross (e.g., system error), and other information related to the locked or crossed market situation.

      3 In addition to the locks and crosses, there are other instances when staff must gather information from Market Makers and ECNs on a real-time basis. For example, Nasdaq MarketWatch may need to contact a Market Maker or ECN to determine quickly if a trade, quotation, or series of trades appearing to be aberrations, were caused by a malfunction of a computer system (which could pose a threat to the integrity of Nasdaq from a technological perspective) or by some other source.


      Text Of Amendments

      (Note: New text is underlined; deletions are bracketed.)

      Rule 4623. Electronic Communications Networks

      (a) The Association may provide a means to permit electronic communications networks ("ECN"), as such term is defined in SEC Rule 11Ac1-1(a)(8), to meet the terms of the [electronic communications network] ECN display alternative provided for in SEC Rule 11Ac1-1(c)(5)(ii)(A) and (B) ("ECN display alternative"). In providing any such means, the Association shall establish a mechanism that permits the [electronic communications network] ECN to display the best prices and sizes of orders entered by Nasdaq market makers (and other entities, if the [electronic communications network] ECN so chooses) into the [electronic communications network] ECN, and allows any NASD member the electronic ability to effect a transaction with such priced orders that is equivalent to the ability to effect a transaction with a Nasdaq market maker quotation in Nasdaq operated systems.
      (b) An [electronic communications network] ECN that seeks to utilize the Nasdaq-provided means to comply with the [electronic communications network] ECN display alternative shall:
      (1) demonstrate to the Association that it qualifies as an [electronic communications network] ECN meeting the definition in the SEC Rule;
      (2) be registered as a[n] NASD member;
      (3) enter into and comply with the terms of a Nasdaq WorkStation Subscriber Agreement, as amended for ECNs;
      (4) agree to provide for Nasdaq's dissemination in the quotation data made available to quotation vendors the prices and sizes of Nasdaq market maker orders (and other entities, if the [electronic communications network] ECN so chooses) at the highest buy price and the lowest sell price for each Nasdaq security entered in and widely disseminated by the [electronic communications network] ECN, and prior to entering such prices and sizes, register with Nasdaq Market Operations as an ECN; and
      (5) provide an automated execution, or if the price is no longer available, an automated rejection of any order routed to the [electronic communications network] ECN through the Nasdaq-provided display alternative.
      (c) When a NASD member attempts to electronically access through a Nasdaq-provided system an ECN-displayed order by sending an order that is larger than the ECN's Nasdaq-displayed size and the ECN is displaying the order in Nasdaq on a reserved size basis, the NASD member that operates the ECN shall execute such Nasdaq-delivered order:
      (1) up to the size of the Nasdaq-delivered order, if the ECN order (including the reserved size and displayed portions) is the same size or larger than the Nasdaq-delivered order; or
      (2) up to the size of the ECN order (including the reserved size and displayed portions), if the Nasdaq-delivered order is the same size or larger than the ECN order (including the reserved size and displayed portions).

      No ECN operating in Nasdaq pursuant to this rule is permitted to provide a reserved-size function unless the size of the order displayed in Nasdaq is 100 shares or greater. For purposes of this rule, the term "reserved size" shall mean that a customer entering an order into an ECN has authorized the ECN to display publicly part of the full size of the customer's order with the remainder held in reserve on an undisplayed basis to be displayed in whole or in part as the displayed part is executed.

      Rule 4613. Character of Quotations

      (a) - (d) No Change
      (e) Locked and Crossed Markets
      (1) A market maker shall not, except under extraordinary circumstances, enter or maintain quotations in Nasdaq during normal business hours if:
      (A) the bid quotation entered is equal to or greater than the asked quotation of another market maker entering quotations in the same security; or
      (B) the asked quotation is equal to or less than the bid quotation of another market maker entering quotations in the same security.

      The prohibitions of this rule include the entry of a locking or crossing quotation at or after 9:25:00 a.m. Eastern Time if such quotation continues to lock or cross the market at the market's opening, and requires a market maker or ECN that enters a locking or crossing quotation at or after 9:25:00 a.m. Eastern Time to take action to avoid the lock or cross at the market's open or immediately thereafter, but in no case more than 30 seconds after 9:30:00 a.m.
      (2) A market maker shall, prior to entering a quotation that locks or crosses another quotation, make reasonable efforts to avoid such locked or crossed market by executing transactions with all market makers whose quotations would be locked or crossed. Pursuant to the provisions of paragraph (b) of this Rule 4613, a market maker whose quotations are causing a locked or crossed market is required to execute transactions at its quotations as displayed through Nasdaq at the time of receipt of any order.
      (3) For purposes of this [paragraph] rule, the term "market maker" shall include:
      (i) any NASD member that enters into an [electronic communications network] ECN, as defined in SEC Rule 11Ac1-1(a)(8), a priced order that is displayed in The Nasdaq Stock Market; and
      (ii) [Such term also shall include] any NASD member that operates the [electronic communication network] ECN when the priced order being displayed has been entered by a person or entity that is not a[n] NASD member.

      Rule 4625. Obligation to Provide Information

      (1) A NASD member operating in or participating in the third market, The Nasdaq Stock Market, or other Nasdaq-operated system, shall provide information orally, in writing, or electronically (if such information is, or is required to be, maintained in electronic form) to the staff of Nasdaq when:
      (a) Nasdaq MarketWatch staff makes an oral, written, or electronically communicated request for information relating to a specific NASD rule, SEC rule, or provision of a joint industry plan (e.g., ITS, UTP, CTA, and CQA) (as promulgated and amended from time-to-time) that Nasdaq MarketWatch is responsible for administering or to other duties and/or obligations imposed on Nasdaq MarketWatch by the Association under the Plan of Allocation and Delegation of Function by the NASD to Subsidiaries or otherwise; this shall include, but not be limited to, information relating to:
      (i) a locked or crossed market;
      (ii) a trade reported by a member or ECN to the Automated Transaction Confirmation Service ("ACT"); or
      (iii) trading activity, rumors, or information that a member may possess that may assist in determining whether there is a basis to initiate a trading halt, pursuant to NASD Rule 4120 and IM-4120-1; or
      (iv) a quotation that appears not to be reasonably related to the prevailing market.
      (b) Nasdaq Market Operations staff makes an oral, written, or electronically communicated request for information relating to a specific NASD rule, SEC rule, provision of a joint industry plan (e.g., ITS, UTP, CTA, and CQA) (as promulgated and amended from time-to-time) that Nasdaq Market Operations is responsible for administering or to other duties and/or obligations imposed on Nasdaq Market Operations by the Association under the Plan of Allocation and Delegation of Function by the NASD to Subsidiaries or otherwise; this shall include, but not be limited to, information relating to:
      (i) a clearly erroneous transaction, pursuant to NASD Rule 11890;
      (ii) a request to reconsider a determination to withhold a primary market maker designation, pursuant to NASD Rule 4612;
      (iii) a request for an excused withdrawal or reinstatement, pursuant to NASD Rules 4619, 4620, 4730, 5106 and 6350;
      (iv) the resolution of a trade-through complaint, pursuant to NASD Rules 5262, 5265, and 11890;
      (v) an ACT input error;
      (vi) an equipment failure; or
      (vii) a request to submit a stabilizing bid, pursuant to NASD Rules 4614 and 5106, or a request to have a quotation identified as a penalty bid on Nasdaq, pursuant to NASD Rule 4624.
      (2) A failure to comply in a timely, truthful, and/or complete manner with a request for information made pursuantto this rule may be deemed conduct inconsistent with just and equitable principles of trade.

    • 98-84 Broker/Dealer And Agent Renewals For 1999

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      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Registration



      Executive Summary

      The 1999 National Association of Securities Dealers, Inc. (NASD®) broker/dealer and agent registration renewal cycle begins in early November. This program simplifies the registration renewal process through the payment of one invoiced amount that will include fees for NASD personnel assessments, NASD branch offices, New York Stock Exchange (NYSE), American Stock Exchange (Amex), Chicago Board Options Exchange (CBOE), Pacific Exchange (PSE), and Philadelphia Stock Exchange (PHLX) maintenance fees. The invoice also includes state agent renewal fees and state broker/dealer renewal fees. Members should read this Notice and the instruction materials to be sent with the November invoice package to ensure continued eligibility to do business in the states effective January 1, 1999. Any renewal processing changes subsequent to the publishing of this Notice to Members will be provided to you in a Special Notice to Members.

      Questions concerning this Notice may be directed to the CRD/PD Gateway Call Center at (301) 869-6699.

      Initial Renewal Invoices

      On or around November 9, 1998, initial renewal invoices will be mailed to all member firms. The invoices will include fees for NASD personnel assessments, NASD branch-office fees, NYSE, Amex, CBOE, PSE, and PHLX 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 11, 1998.

      NASD personnel assessments for 1999 will be based on the number of registered personnel with an approved or conditional NASD license on or before December 31, 1998. That personnel assessment is currently $10.00 per person. The NASD branch office assessment fee is $75.00 per branch based on the number of active branches as of December 31, 1998.

      Agent renewal fees for NYSE, Amex, CBOE, PSE, PHLX, and state affiliations are listed in a matrix enclosed with each invoice. The matrix includes a list of broker/dealer renewal fees for states that participate in the broker/dealer renewal program. NYSE, Amex, CBOE, PSE, and PHLX maintenance fees—collected by the NASD for firms that are registered with those exchanges as well as the NASD—are based on the number of NYSE-, Amex-, CBOE-, PSE-, and PHLX-registered personnel employed by the member.

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

      Payment of the initial invoice should be either in the form of a check made payable to NASD Regulation, Inc. (NASD RegulationSM) or by bank wire transfer. The check should be drawn on the member firm's account, with the firm's Central Registration Depository (CRDSM) number included on the check. Submit the check, along with the top portion of the invoice, and mail in the return envelope to:

      NASD Regulation, Inc.
      Finance Department - Renewals
      15201 Diamondback Drive
      Rockville, MD 20850

      To ensure prompt processing, the renewal invoice payment should not be included with other forms or fee submissions. Members are advised that failure to return full payment to the NASD by the December 11, 1998, deadline could cause a member to immediately become ineligible to do business in the states effective January 1, 1999.

      Filing Forms U-5

      Members may avoid paying unnecessary renewal fees by filing Forms U-5 for agents terminating in one or more jurisdiction affiliations. Due to the positive feedback received by the NASD by its member firms that used post-dated Forms U-5 for renewals, the NASD will again accept post-dated agent termination notices on the Forms U-5. From November 2 to December 11, the NASD will accept and process Forms U-5 (both partial and full terminations) with post-dated dates of termination. Under this procedure, if the Form U-5 indicates a termination date of December 31, 1998, 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 11, 1998. Also, post-dated Forms U-5 cannot be processed if the date of termination is after December 31, 1998.

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

      The NASD encourages members having access to the Firm Access Query System (FAQS) to use electronic filings for the submission of all Forms U-5 and Page 1s of Form U-4. FAQS offers several advantages to firms in this regard, including the ability to immediately process terminations, ensure in-house control over agent registrations, and reduce normal and express mailing costs, as well as long-distance telephone charges. FAQS 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 1998. The system will be operational from 7 a.m. to 11 p.m., Eastern Time (ET), Monday through Friday, and will also be available on Saturdays from 9 a.m. to 5 p.m., ET, during these months.

      Filing Forms BDW

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

      • Michigan


      • Puerto Rico


      • American Stock Exchange


      • Chicago Board Options Exchange


      • New York Stock Exchange


      • Pacific 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 1998 is December 11, 1998. This same date applies to the filing of Forms BDW with the jurisdictions that are not participating in Phase II. Post-dated Forms BDW filed with the CRD will be accepted and processed in the same manner as post-dated Forms U-5.

      Removing Open Registrations

      The initial invoice package will include 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 an approved registration with a state. 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 Forms U-5 or reinstate the NASD licenses through the filing of Page 1s of Forms U-4. No roster will be included if a firm does not have agents within this category.

      Final Adjusted Invoices

      On or about January 11, 1999, the NASD will mail final adjusted invoices to its members. These invoices will reflect the final status of firm and agent registrations as of December 31, 1998. 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 and/or branch offices registered at year's end than it did on the November invoice date, additional fees will be assessed. If a member has fewer agents and/or branch offices registered at year's end than it did in November, a credit/refund will be issued.

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

      This year's final invoice package will also include a breakdown of fees 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.

      Firms then will have approximately two months in which to reconcile any discrepancies on the renewal rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final adjusted invoice package will appear in the January 1999 issue of Notices to Members, as well as on the inside cover of the renewal roster. Firms may also refer to their renewal edition of the CRD/PD Bulletin for details concerning the renewal process.

    • 98-83 SEC Approves Rule Change Relating To Standards For Individual Correspondence

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      Effective: November 16, 1998

      SUGGESTED ROUTING

      Senior Management
      Advertising
      Legal & Compliance
      Registered Representatives
      Training



      Executive Summary

      On August 26, 1998, the Securities and Exchange Commission (SEC) approved amendments to the National Association of Securities Dealers, Inc. (NASD®) Rule 2210 to require that written or electronic communications prepared for a single customer be subject to the general standards and those specific standards of NASD Rule 2210 that prohibit misleading statements, but not to the specific standards of the rule that prescribe specific disclosure nor the filing and review requirements. The amendments will take effect on November 16, 1998.

      Questions concerning this Notice may be directed to Thomas A. Pappas, Director, Advertising Regulation, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8330, and Robert J. Smith, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Background

      NASD Rule 2210 imposes various requirements on member communications with the public, designed to ensure that those communications are fair, balanced, and not misleading. Rule 2210 does not expressly apply to the content of correspondence (i.e., a communication to only one person). In addition, there is no definition of correspondence in the NASD rules, even though members are required to supervise the use of correspondence by their associated persons under Rule 3010.

      NASD Regulation has taken the position that a document prepared for use with a single customer, and not for dissemination to the general public, is not "sales literature" as that term is defined in NASD Rule 2210. However, NASD Regulation believes that applying particular standards in Rule 2210 to correspondence is appropriate and would enable the staff to bring enforcement actions on the basis of clear violations of certain proscribed behavior.

      Discussion

      NASD Regulation believes that certain statements pose similar dangers regardless of whether they are communicated to one person or many persons. NASD Regulation recognizes that correspondence is highly individualized in nature and that much correspondence (unlike advertising and sales literature) is directed by registered representatives (RRs) to customers with whom RRs already have an established relationship. At the same time, NASD Regulation believes that clarifying how Rule 2210 applies to correspondence would provide better guidance to the membership and help to assure that investors are adequately protected with respect to the communications they receive individually. The amendments therefore subject correspondence to the general standards and those specific standards of Rule 2210 that prohibit misleading statements, but not to the standards of the rule that prescribe specific disclosure. Members will not have to file correspondence with the NASD for review.

      The amendments create a category defined as "communications with the public" to include the current definitions of "advertisement" and "sales literature," and a new definition of "correspondence." "Correspondence" is defined as "...any written or electronic communication prepared for delivery to a single current or prospective customer, and not for dissemination to multiple customers or the general public." In determining when a written or electronic communication is prepared for delivery to a single current or prospective customer, members should consider, and the staff of NASD Regulation will examine, among other things, the form and content of the communication. Thus, a written or electronic communication addressed to a single current or prospective customer, the content of which is substantially identical to that of written or electronic communications sent to one or more other current or prospective customers, is a form letter, not "correspondence." Because form letters are considered "sales literature" under Rule 2210, they would be subject to all of the general and specific standards of Rule 2210.

      The amendments subject individual correspondence to the general standards under subparagraph (d)(1) and the following specific standards under subparagraph (d)(2) of Rule 2210:

      • subparagraph (d)(2)(C), which prohibits exaggerated, unwarranted, or certain other specific claims or opinions;


      • subparagraph (d)(2)(E), which prohibits certain offers of free services;


      • subparagraph (d)(2)(F), which prohibits certain claims for research services;


      • subparagraph (d)(2)(G), which prohibits certain hedge clauses;


      • subparagraph (d)(2)(J), which prohibits the implication of endorsement or approval by regulatory organizations;


      • the provision of subparagraph (d)(2)(L) that prohibits the characterization of income or investment returns as tax exempt or tax free in certain circumstances; and


      • subparagraph (d)(2)(N), which prohibits predictions and projections of investment results. All of these specific provisions derive from members' general obligations not to make statements that are misleading or without a reasonable basis in fact.

      Individual correspondence will not be subject to the following specific standards of Rule 2210:

      • subparagraph (d)(2)(A), which requires the inclusion of certain information regarding members' names;


      • subparagraph (d)(2)(B), which requires that a member disclose specified information to the customer when making a recommendation;


      • subparagraph (d)(2)(D), which requires the inclusion of certain statements regarding testimonials;


      • subparagraph (d)(2)(H), which applies to advertisements for the recruitment of sales personnel;


      • subparagraph (d)(2)(I), which requires certain disclosures regarding periodic investment plans;


      • subparagraph (d)(2)(K), which requires the identification and disclosure of sources other than the member for certain statistical tables, charts, graphs, or other illustrations;


      • the provisions of subparagraph (d)(2)(L) that require the inclusion of clarifying information regarding claims of tax free or tax exempt returns; and


      • subparagraph (d)(2)(M), which requires the inclusion of certain information when making comparisons of investment alternatives.

      The amendments do not change the current application of Rule IM-2210-1. Therefore paragraph (a) of that rule (interpretation regarding collateralized mortgage obligations) has been amended to clarify that only advertisements and sales literature are covered by the interpretation. Finally, the amendments also incorporate several minor technical changes that are non-substantive in nature.


      Text Of Amendments

      (Note: New text is underlined; deletions are bracketed.)

      Rule 2210. Communications with the Public

      (a) Definitions - Communications with the public shall include:
      (1) Advertisement—For purposes of this Rule and any interpretation thereof, "advertisement" means material published, or designed for use in, a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, telephone directories (other than routine listings), electronic or other public media.
      (2) Sales Literature—For purposes of this Rule and any interpretation thereof, "sales literature" means any written or electronic communication distributed or made generally available to customers or the public, which communication does not meet the foregoing definition of "advertisement." Sales literature includes, but is not limited to, circulars, research reports, market letters, performance reports or summaries, form letters, telemarketing scripts, seminar texts, and reprints or excerpts of any other advertisement, sales literature or published article.
      (3) Correspondence—For purposes of this Rule and any interpretation thereof, "correspondence" means any written or electronic communication prepared for delivery to a single current or prospective customer, and not for dissemination to multiple customers or the general public.

      Cross Reference - Rules Concerning Review and Endorsement of Correspondence are Found in paragraph (d) to Conduct Rule 3010.
      (b) Approval and Recordkeeping
      (1) Each item of advertising and sales literature shall be approved by signature or initial, prior to use or filing with the Association, by a registered principal of the member.
      (2) A separate file of all advertisements and sales literature, including the name(s) of the person(s) who prepared them and/or approved their use, shall be maintained for a period of three years from the date of each use.
      (c) Filing Requirements and Review Procedures
      (1) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) not included within the requirements of paragraph (c)(2), and public direct participation programs (as defined in Rule 2810) shall be filed with the Association's Advertising/Investment Companies Regulation Department (Department) within 10 days of first use or publication by any member. The member must provide with each filing the actual or anticipated date of first use. Filing in advance of use is recommended. Members are not required to file advertising and sales literature which have previously been filed and which are used without change. Any member filing any investment company advertisement or sales literature pursuant to this paragraph (c) that includes or incorporates rankings or comparisons of the investment company with other investment companies shall include a copy of the ranking or comparison used in the advertisement or sales literature.
      (2) Advertisements concerning collateralized mortgage obligations registered under the Securities Act of 1933, and advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) that include or incorporate rankings or comparisons of the investment company with other investment companies where the ranking or comparison category is not generally published or is the creation, either directly or indirectly, of the investment company, its underwriter or an affiliate, shall be filed with the 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 by the Association, shall be withheld from publication or circulation until any changes specified by the Association have been made or, if expressly disapproved, until the advertisement has been refiled for, and has received, Association approval. The member must provide with each filing the actual or anticipated date of first use. Any member filing any investment company advertisement or sales literature pursuant to this paragraph shall include a copy of the data, ranking or comparison on which the ranking or comparison is based.
      (3)(A) Each member of the Association which has not previously filed advertisements with the Association (or with a registered securities exchange having standards comparable to those contained in this Rule) shall file its initial advertisement with the Department at least ten days prior to use and shall continue to file its advertisements at least ten days prior to use for a period of one year. The member must provide with each filing the actual or anticipated date of first use.
      (B) Except for advertisements related to exempted securities (as defined in Section 3(a)(12) of the Act), municipal securities, direct participation programs or investment company securities, members subject to the requirements of paragraph (c)(3)(A) [or (B)] of this Rule may, in lieu of filing with the Association, file advertisements on the same basis, and for the same time periods specified in [those] that subparagraph[s], with any registered securities exchange having standards comparable to those contained in this Rule.
      (4)(A) Notwithstanding the foregoing provisions, any District Business Conduct Committee of the Association, upon review of a member's advertising and/or sales literature, and after determining that the member has departed and there is a reasonable likelihood that the member will again depart from the standards of this Rule, may require that such member file all advertising and/or sales literature, or the portion of such member's material which is related to any specific types or classes of securities or services, with the Department and/or the District Committee, at least ten days prior to use. The member must provide with each filing the actual or anticipated date of first use.
      (B) The Committee shall notify the member in writing of the types of material to be filed and the length of time such requirement is to be in effect. The requirement shall not exceed one year, however, and shall not take effect until 30 days after the member receives the written notice, during which time the member may request a hearing before the District Business Conduct Committee, and any such hearing shall be held in reasonable conformity with the hearing and appeal procedures of the Code of Procedure as contained in the Rule 9000 Series.
      (5) In addition to the foregoing requirements, every member's [advertising] advertisements and sales literature shall be subject to a routine spot-check procedure. Upon written request from the Department, each member shall promptly submit the material requested. Members will not be required to submit material under this procedure which has been previously submitted pursuant to one of the foregoing requirements and, except for material related to exempted securities (as defined in Section 3(a)(12) of the Act), municipal securities, direct participation programs or investment company securities, the procedure will not be applied to members who have been, within the Association's current examination cycle subjected to a spot-check by a registered securities exchange or other self-regulatory organization using procedures comparable to those used by the Association.
      (6) The following types of material are excluded from the foregoing filing requirements and spot-check procedures:
      (A) Advertisements or sales literature solely related to changes in a member's name, personnel, location, ownership, offices, business structure, officers or partners, telephone or teletype numbers, or concerning a merger with, or acquisition by, another member;
      (B) Advertisements or sales literature which do no more than identify the Nasdaq symbol of the member and/or of a security in which the member is a Nasdaq registered market maker;
      (C) Advertisements or sales literature which do no more than identify the member and/or offer a specific security at a stated price;
      (D) Material sent to branch offices or other internal material that is not distributed to the public;
      (E) Prospectuses, preliminary prospectuses, offering circulars and similar documents used in connection with an offering of securities which has been registered or filed with the Commission or any state, or which is exempt from such registration, except that an investment company prospectus published pursuant to SEC Rule 482 under the Securities Act of 1933 shall not be considered a prospectus for purposes of this exclusion;
      (F) Advertisements prepared in accordance with Section 2(10)(b) of the Securities Act of 1933, as amended, or any rule thereunder, such as SEC Rule 134, unless such advertisements are related to direct participation programs or securities issued by registered investment companies.
      (7) Material which refers to investment company securities or direct participation programs, or exempted securities (as defined in Section 3(a)(12) of the Act) solely as part of a listing of products and/or services offered by the member, is excluded from the requirements of subparagraphs (1) and (2).
      (d) Standards Applicable to Communications with the Public
      (1) General Standards
      (A) All member communications with the public shall be based on principles of fair dealing and good faith and should provide a sound basis for evaluating the facts in regard to any particular security or securities or type of security, industry discussed, or service offered. No material fact or qualification may be omitted if the omission, in the light of the context of the material presented, would cause the [advertising or sales literature] communication to be misleading.
      (B) Exaggerated, unwarranted or misleading statements or claims are prohibited in all public communications of members. In preparing such [literature] communications, members must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield, and no member shall, directly or indirectly, publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
      (C) When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities which may not constitute advertisements, members and persons associated with members shall nevertheless follow the standards of paragraphs (d) and (f) of this Rule.
      (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 always 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] more confusing 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:
      (A) Necessary Data. Advertisements and sales literature shall contain the name of the member, unless such advertisements and sales literature comply with paragraph (f). Sales literature shall contain the name of the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated or distributed. If the information in the material is not current, this fact should be stated.
      (B) Recommendations.
      (i) In making a recommendation in advertisements and sales literature, whether or not labeled as such, a member must have a reasonable basis for the recommendation and must disclose any of the following situations which are applicable:
      a. that the member usually makes a market in the securities being recommended, or in the underlying security if the recommended security is an option, [and/]or that the member or associated persons will sell to or buy from customers on a principal basis;
      b. that the member and/or its officers or partners own options, rights or warrants to purchase any of the securities of the issuer whose securities are recommended, unless the extent of such ownership is nominal;
      c. that the member was manager or co-manager of a public offering of any securities of the recommended issuer within the last three years.
      (ii) The member shall also provide, or offer to furnish upon request, available investment information supporting the recommendation. Recommendations on behalf of corporate equities must provide the price at the time the recommendation is made.
      (iii) A member may use material referring to past recommendations if it sets forth all recommendations as to the same type, kind, grade or classification of securities made by a member within the last year. Longer periods of years may be covered if they are consecutive and include the most recent year. Such material must also name each security recommended and give the date and nature of each recommendation (e.g., whether to buy or sell), the price at the time of the recommendation, the price at which or the price range within which the recommendation was to be acted upon, and indicate the general market conditions during the period covered.
      (iv) Also permitted is material which does not make any specific recommendation but which offers to furnish a list of all recommendations made by a member within the past year or over longer periods of consecutive years, including the most recent year, if this list contains all the information specified in subparagraph (iii). Neither the list of recommendations, nor material offering such list, shall imply comparable future performance. Reference to the results of a previous specific recommendation, including such a reference in a follow-up research report or market letter, is prohibited if the intent or the effect is to show the success of a past recommendation, unless all of the foregoing requirements with respect to past recommendations are met.
      (C) Claims and Opinions. Communications with the public must not contain promises of specific results, exaggerated or unwarranted claims or unwarranted superlatives, opinions for which there is no reasonable basis, or forecasts of future events which are unwarranted, or which are not clearly labeled as forecasts.
      (D) Testimonials. In testimonials concerning the quality of a firm's investment advice, the following points must be clearly stated in [the] advertisements or sales literature [communication]:
      (i) The testimonial may not be representative of the experience of other clients.
      (ii) The testimonial is not indicative of future performance or success.
      (iii) If more than a nominal sum is paid, the fact that it is a paid testimonial must be indicated.
      (iv) If the testimonial concerns a technical aspect of investing, the person making the testimonial must have knowledge and experience to form a valid opinion.
      (E) Offers of Free Service. Any statement in communications with the public to the effect that any report, analysis, or other service will be furnished free or without any charge must not be made unless such report, analysis or other service actually is or will be furnished entirely free and without condition or obligation.
      (F) Claims for Research Facilities. No claim or implication in communications with the public may be made for research or other facilities beyond those which the member actually possesses or has reasonable capacity to provide.
      (G) Hedge Clauses. No cautionary statements or caveats, often called hedge clauses, may be used in communications with the public if they are misleading or are inconsistent with the content of the material.
      (H) Recruiting Advertising. Advertisements in connection with the recruitment of sales personnel must not contain exaggerated or unwarranted claims or statements about opportunities in the investment banking or securities business and should not refer to specific earnings figures or ranges which are not reasonableunder the circumstances.
      (I) Periodic Investment Plans. Advertisements and sales literature [Communications with the public] should not discuss or portray any type of continuous or periodic investment plan without disclosing that such a plan does not assure a profit and does not protect against loss in declining markets. In addition, if the material deals specifically with the principles of dollar-cost averaging, it should point out that since such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his financial ability to continue his purchases through periods of low price levels.
      (J) References to Regulatory Organizations. Communications with the public shall not make any reference to membership in the Association or to registration or regulation of the securities being offered, or of the underwriter, sponsor, or any member or associated person, which reference could imply endorsement or approval by the Association or any federal or state regulatory body. References to membership in the Association or Securities Investors Protection Corporation shall comply with all applicable By-Laws and Rules pertaining thereto.
      (K) Identification of Sources. Statistical tables, charts, graphs or other illustrations used by members in advertising or sales literature should disclose the source of the information if not prepared by the member.
      (L) Claims of Tax Free/Tax Exempt Returns. Income or investment returns may not be characterized in communications with the public 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 in advertisements and sales literature. References in advertisements and sales literature to tax free/tax exempt current income must indicate which income 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 otherwise make it clear that income is free from federal income tax.
      (M) Comparisons. In making a comparison in advertisements or sales literature, 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. In communications with the public, i[I]nvestment 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, hypothetical illustrations of mathematical principles are not considered projections of performance; e.g., illustrations designed to show the effects of dollar cost averaging, taxfree compounding, or the mechanics of variable annuity contracts or variable life policies.

      IM-2210-1. Communications with the Public About Collateralized Mortgage Obligations (CMOs)

      (a) General Considerations
      For purposes of the following guidelines, the term "collateralized mortgage obligation" (CMO) refers to a multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. CMOs are also known as "real estate mortgage investment conduits" (REMICs). As a result of the 1986 Tax Reform Act, most CMOs are issued in REMIC form to create certain tax advantages for the issuer. The term CMO and REMIC are now used interchangeably. In order to prevent [a communication about] advertisements and sales literature regarding CMOs from being false or misleading, there are certain factors to be considered, including, but not limited to, the following:
      (1) Product Identification
      In order to assure that investors understand exactly what security is being discussed, all communications concerning CMOs should clearly describe the product as a "collateralized mortgage obligation." Member firms should not use the proprietary names for CMOs as they do not adequately identify the product. To prevent confusion and the possibility of misleading the reader, communications should not contain comparisons between CMOs and any other investment vehicle, including Certificates of Deposit.
      (2) Educational Material
      In order to ensure that customers are adequately informed about CMOs members are required to offer to customers educational material which covers the following matters:
      (A) A discussion of CMO characteristics as investments and their attendant risks;
      (B) An explanation of the structure of a CMO, including the various types of tranches;
      (C) A discussion of mortgage loans and mortgage securities;
      (D) Features of CMOs, including: credit quality, prepayment rates and average lives, interest rates (including effect on value and prepayment rates), tax considerations, minimum investments, transactions costs and liquidity;
      (E) Questions an investor should ask before investing; and
      (F) A glossary of terms that may be helpful to an investor considering an investment.
      (3) Safety Claims
      A communication should not over-state the relative safety offered by the CMO. Although CMOs generally offer low investment risk, they are subject to market risk like all investment securities and there should be no implication otherwise. Accordingly, references to liquidity should be balanced with disclosure that, upon resale, an investor may receive more or less than his original investment.
      (4) Claims About Government Guarantees
      (A) Communications should accurately depict the guarantees associated with CMO securities. For example, in most cases it would be misleading to state that CMOs are "government guaranteed" securities. A government agency issue could instead be characterized as government agency backed. Of course, private-issue CMO advertisements should not contain references to guarantees or backing, but may disclose the rating.
      (B) If the CMO is offered at a premium, the communication should clearly indicate that the government agency backing applies only to the face value of the CMO, and not to any premium paid. Furthermore, communications should not imply that either the market value or the anticipated yield of the CMO is guaranteed.
      (5) Simplicity Claims
      CMOs are complex securities and require full, fair and clear disclosure in order to be understood by the investor. A communication should not imply that these are simple securities that may be suitable for any investor seeking high yields. All CMOs do not have the same characteristics and it is misleading to indicate otherwise. Even though two CMOs may have the same underlying collateral, they may differ greatly in their prepayment speed and volatility.
      (6) Claims About Predictability
      A communication would be misleading if it indicated that the anticipated yield and average life of a CMO were assured. It should disclose that the yield and average life will fluctuate depending on the actual prepayment experience and changes in current interest rates.

    • 98-82 SEC Approves Amendments To Automated Confirmation Transaction Service And Transaction Reporting Rules

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      Executive Summary

      On September 14, 1998, the Securities and Exchange Commission (SEC) approved rule amendments that are designed to integrate transaction information reported to the Automated Confirmation Transaction ServiceSM (ACTSM) operated by The Nasdaq Stock Market, Inc. (Nasdaq®) with order information reported to the newly approved Order Audit Trail SystemSM (OATSSM).1

      Questions regarding the rule changes may be directed to the National Association of Securities Dealers, Inc. (NASD®) via phone at (888) 700-OATS or (301) 590-6503, or via e-mail at oatscsc@nasd.com.

      Discussion

      In March 1998, the SEC approved new NASD Rules 6950 through 6957 (the OATS Rules2). OATS is designed to provide NASD Regulation, Inc. (NASD RegulationSM) with the ability to reconstruct markets promptly, conduct efficient surveillance, and enforce NASD and SEC rules. The SEC has directed that OATS must provide an accurate, time-sequenced record of orders and transactions from the receipt of an order through its execution.3 To accomplish this, NASD Regulation will combine information submitted to OATS with transaction data reported by members through ACT and quotation information disseminated by Nasdaq.4

      The SEC has approved amendments to the NASD transaction reporting and ACT rules to require members to submit transaction data to ACT that will be integrated with order information reported to OATS.5 The amended rules affect Nasdaq National Market®, Nasdaq SmallCapSM, and Nasdaq Convertible Debt Securities. The ACT trade data and the OATS order information will be used to construct an integrated audit trail. Under the amended rules, all trade reports for OATS-eligible securities entered into Nasdaq's ACT system will be required to have a time of execution expressed in hours, minutes, and seconds. The trade reports also will be required to have a unique order identifier sufficient to allow a comparison of the information contained in the trade report with data submitted to OATS. In addition, the rule amendments codify the requirement that all ACT participants, including those that use third parties to submit trade report information to Nasdaq, must obtain and use a unique Market Participant Symbol for trade reporting and audit trail purposes.

      The rule amendments will be implemented in tandem with the effective dates for implementation of the OATS Rules. The OATS Rules will become effective according to the following schedule:

      • Phase 1: By March 1, 1999, electronic orders received by Market Makers and Electronic Communication Networks (ECNs) must be reported.


      • Phase 2: By August 1, 1999, all electronic orders must be reported.


      • Phase 3: By July 31, 2000, all non-electronic, or manual, orders must be reported.

      The text of the rule changes as well as other information about OATS is available on the NASD Regulation Web Site (www.nasdr.com).


      Endnotes

      1 See Securities Exchange Act Release No. 40437 (September 14, 1998), 63 FR 50272 (September 21, 1998) (File No. SR-NASD-98-60).

      2 See Notice to Members 98-33 for a complete description of the OATS Rules.

      3 See In the Matter of National Association of Securities Dealers, Inc., Securities Exchange Act Release No. 37538 (August 8, 1996); Administrative Proceeding File No. 3-905, at 7-8.

      4 ACT is an automated system owned and operated by Nasdaq that captures transaction information in real-time.

      5 The amended rules are Marketplace Rules 4632, 4642, 4652, 6120, and 6130.

    • 98-81 NASD Regulation Requests Comment On Whether Some Rules Should Be Repealed As Obsolete Or Amended To Provide Institutional Customer Exception

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      Comment Period Expires: November 30, 1998

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      NASD Regulation Request For Comment 98-81

      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) is requesting comment from members and other interested persons as to whether any National Association of Securities Dealers, Inc. (NASD®) rules or By-Laws should be repealed because they are now obsolete or whether particular rules should distinguish between retail and institutional customers in their application.

      Questions concerning this Request For Comment may be directed to Mary M. Dunbar, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8252; or Eric Moss, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8982.

      Background And Discussion

      The NASD Regulation Office of General Counsel is undertaking a review of the NASD rules and By-Laws for the following purposes: (1) to determine if there are obsolete or otherwise unnecessary rules that could be repealed or that should be modernized in light of technological or industry developments; or (2) to determine if particular rules should distinguish between retail and institutional customers in their application. The overarching principles in this review will be to ensure that NASD rules promote balanced and effective self-regulation of the securities industry in order to protect investors and ensure market integrity, taking into account costs and technological advances. NASD Regulation invites members and other interested parties to submit suggestions for its review. Members will be notified of any rule changes that are proposed as a result of this review.

      Request For Comment

      NASD Regulation encourages all interested parties to comment on the proposal. Comments should be mailed to:

      Joan Conley
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, D.C. 20006-1500

      or e-mailed to:
      pubcom@nasd.com

      Important Note: The only comments that will be considered are those submitted via e-mail or in writing.

      Comments must be received by November 30, 1998. Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the Securities and Exchange Commission.

    • For Your Information For October

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      OATS Update

      IMPORTANT! Non-Market Makers in Nasdaq securities are NOT required to submit an Order Audit Trail SystemSM (OATSSM) Subscriber Initiation and Registration Form to the NASD until after January 1999. Only Market Makers in Nasdaq securities and ECNs were required to submit the Form by September 14, 1998.

    • Year 2000 Update For October

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      SEC Reporting Requirement

      In July of this year, the National Association of Securities Dealers, Inc. (NASD®) issued Special Notice to Members 98-63alerting members to a new reporting requirement imposed by an amendment to Securities and Exchange Commission (SEC) Rule 17a-5. The SEC rule amendment requires broker/dealers to file two Year 2000 reports using the new BD-Y2K Form. The first report was due to the SEC and designated examining authority (DEA) on or before August 31, 1998. The second report is due April 30, 1999.

      The SEC and the NASD are working closely with all the self-regulatory organizations as well as the Securities Industry Association (SIA) to improve their ability to identify potential Year 2000 failures. Much of this work will be accomplished through careful analysis of the two reports required by the SEC of both broker/dealers and transfer agents.

      The NASD strongly encourages those member firms that did not meet the August 31 deadline to submit the Year 2000 report immediately. The NASD sent out over 1,500 letters notifying NASD member firms that failed to comply with the SEC Year 2000 reporting requirement that the NASD and SEC will file disciplinary actions as appropriate. As of September 22, 195 firms were still delinquent in filing the Form BD-Y2K. The NASD and the SEC will be taking appropriate disciplinary action against these firms.

      Broker/Dealer Contingency Plans

      As the NASD and its member firms prepare their systems and applications to operate successfully in the face of the Year 2000 challenge, contingency planning is an essential step that should not be neglected. Contingency planning for Year 2000 occurs at different levels for member firms. Each broker/dealer is responsible for developing a written plan that ensures business continuity through the Year 2000.

      Currently, contingency plans are being developed by industry associations like the Federal Reserve Board and SIA. The SIA has formed a policy-level contingency planning committee of experts to examine contingencies that might arise should computer programs and other automated systems not correctly recognize the century date change. The committee will focus on (1) developing steps to cushion the pressures on financial markets, financial institutions, and clearance and settlement systems that arise the last couple of weeks leading up to 2000 and first couple of weeks into 2000, and (2) developing contingency arrangements for maintaining business continuity during the century date change.

      According to industry guidelines, organizations should begin constructing their contingency plans by the end of 1998 and spend 1999 detailing results and preparing business operations where needed. If you are not sure what a contingency plan is or when it would be useful, it is similar to Murphy's Law—be prepared for anything that could go wrong. For example, what will you do if you rely on public transportation, and it doesn't work on January 1, 2000? Or, if you rely on satellite feeds for clock synchronization, and they don't operate? Or, if your local telecommunications company were unable to function, how would you notify your customers? Lastly, how would you manage an orderly shutdown of your business?

      The following column displays a high-level outline of the contents of a sample contingency plan. We share this with NASD member firms solely as an example.

      Year 2000 contingency plans shouldinclude:

      1 The objective of the plan (e.g., continue normal operations, continue in a degraded mode, abort the function as quickly and safely possible, etc.)
      2 Criteria for invoking the plan (e.g., missing a renovation milestone, reaching a Year 2000-related failure date, experiencing serious system failures, inability of a vendor to provide required service, etc.).
      3 Schedule of activities, dependencies, and resources required from triggering events.
      4 Expected life of the events (How long can operations continue in contingency operating mode?).
      5 Roles, responsibilities, and authority.
      6 Procedures for invoking contingency mode.
      7 Procedures for operating in contingency mode.
      8 Resource plan for operating in contingency mode (e.g., staffing, scheduling, materials, supplies, facilities, temporary hardware and software, communications, etc.).
      9 Criteria for returning to normal operating mode.
      10 Procedures for returning to normal operating mode.
      11 Procedures for recovering lost business events or data.

      To find out more about contingency planning and legal issues surrounding the Year 2000 challenge, attend the Year2000 Legal Seminars being held October13 (Chicago), October 20 (Atlanta), andNovember 3 (New York City). This Year2000 legal seminar will also be featuredat the annual NASD Regulation FallSecurities Conference being heldNovember 4-6 in San Francisco.

      For more information on required Year 2000 reporting, help in developing a member firm Year 2000 contingency planning, and/ or details about Year2000workshops, contact the NASDYear 2000 Program Office by e-mailat y2k@nasd.com or by calling its toll-free number, at (888) 227-1330.

    • 98-80 Nominees For NASD Board Of Governors

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      National Association of Securities Dealers, Inc. Notice Of Nominees

      The Annual Meeting of members of the National Association of Securities Dealers, Inc. (NASD®) will be held on December 21, 1998. A notice of meeting, including the precise date, time, and location of the Annual Meeting, will follow on or about November 16, 1998.

      The individuals nominated by the NASD National Nominating Committee for election on the NASD Board of Governors are identified in this document. Pursuant to Section 10 of Article VII of the NASD By-Laws, a person who has not been so nominated for election to the Board of Governors may be included on the ballot for the election of Governors if (a) within 45 days of the date of this Noticesuch person presents to the Secretary of the NASD petitions in support of such nomination duly executed by at least three percent of the members of the NASD (as of the date of this Notice the NASD has 5,575 members, the applicable three percent threshold is therefore 167 members), and (b) the Secretary certifies that such petitions have been duly executed by the Executive Representatives of the requisite number of members of the NASD and the person being nominated satisfies the classification of the governorship to be filled based on the information provided by the person as is reasonably necessary for the Secretary to make the certification.

      Questions regarding this Notice may be directed to:

      Joan C. Conley
      Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1500
      (202) 728-8381

      or

      T. Grant Callery
      Senior Vice President and General Counsel
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1500
      (202) 728-8285

      The following persons (see attached profiles) have been nominated by the National Nominating Committee1 to serve on the Board of Governors of the NASD for a term noted or until their successors are duly elected or qualified. Terms of office run from January to January.

      INDUSTRY
      Name Term
      E. David Coolidge, III
      Chief Executive Officer
      William Blair & Company, L.L.C.
      1999-2000
      James Dimon President,
      COO and Director of Travelers Group
      Chairman & Co-Chief Executive Officer of
      Salomon Smith Barney
      1999-2002
      Richard C. Romano2 1999-2002
      President
      Romano Brothers & Company
      1999-2002
      NON-INDUSTRY
      H. Furlong Baldwin
      Chairman
      Mercantile Bankshares Corporation
      1999-2002
      Eugene M. Isenberg 1999-2002
      Chairman and Chief Executive Officer
      Nabors Industries, Inc.
      1999-2002
      Arthur Rock
      Principal
      Arthur Rock & Co.
      1999-2002
      James F. Rothenberg
      President
      Capital Research and Management Company
      1999-2002
      PUBLIC
      Gerald R. Ford
      38th President of the United States
      1999-2000
      Elaine L. Chao
      Distinguished Fellow
      The Heritage Foundation
      1999-2002
      Kenneth M. Duberstein
      Chairman and Chief Executive Officer
      The Duberstein Group
      1999-2002
      Donald J. Kirk
      Executive-in-Residence
      Columbia University
      1999-2002
      John D. Markese
      President
      American Assoc. of Individual Investors
      1999-2002

      National Association of Securities Dealers, Inc.

      Profiles Of Board Nominees

      Nominees For Industry Governors

      E. David Coolidge, III is Chief Executive Officer of William Blair & Company, L.L.C. Mr. Coolidge joined William Blair & Company in 1969 and was elected Chief Executive Officer of the firm in 1995. Mr. Coolidge currently serves on the Board of the Pittway Corporation, the Kellogg Graduate School of Management at Northwestern University, the University of Chicago, the Rush-Presbyterian-St. Luke's Medical Center, the Rush North Shore Medical Center, and the Better Government Association. Mr. Coolidge holds a B.A. from Williams College and an M.B.A. from the Harvard Graduate School of Business. Mr. Coolidge currently serves on the NASD Board of Governors (1996 to present) and is a member of the NASD Audit Committee.

      James (Jamie) Dimon is President, Chief Operating Officer and Director of Travelers Group, and Chairman and Co-Chief Executive Officer of Salomon Smith Barney. Mr. Dimon joined the firm in 1986. He was appointed President of Travelers Group in 1991 and became Chief Operating Officer in 1993. He was named Chairman and Chief Executive Officer of Smith Barney in 1996. Mr. Dimon is on the Board of Trustees of New York University Medical Center, the Board of Directors of the Center on Addiction and Substance Abuse, the Board of Directors of Tricon Global Restaurants, Inc., and the Board of Directors of the Welfare to Work Partnership. Mr. Dimon holds a B.A. from Tufts University and an M.B.A. from Harvard University Graduate School of Business. He currently serves on the NASD Board of Governors (1996 to present) and is Chairman of the NASD Management Compensation Committee.

      Richard C. Romano is President, Romano Brothers & Company, having joined the firm in 1964. Mr. Romano has served on the Industry/Regulatory Council for Continuing Education, the NASD District Committee and the NASD Board of Governors (1985 to 1988). Mr. Romano currently serves on the NASD National Nominating Committee and is Vice Chairman of the NASD Small Firm Advisory Board. He holds a B.S. from the University of Illinois and an M.S. and Ph.D. from the University of Delaware.

      National Association of Securities Dealers, Inc.

      Profiles Of Board Nominees

      Nominees For Non-Industry Governors

      H. Furlong Baldwin is Chairman of the Mercantile Bankshares Corporation; he was elected as Chairman in 1984. Mr. Baldwin joined Mercantile-Safe Deposit & Trust Company in 1956 and was elected President in 1970 of Mercantile- Safe Deposit & Trust Company and Mercantile Bankshares Corporation. Mr. Baldwin serves on the Boards of Baltimore Gas & Electric Company, Constellation Holdings, Inc., GRC International, Inc., Offitbank, Wills Group, and The St. Paul Companies. Mr. Baldwin graduated from Princeton University and served on active duty with the U.S. Marine Corps. Mr. Baldwin currently serves on the NASD National Nominating Committee (1998 to present).

      Eugene M. Isenberg is Chairman and Chief Executive Officer of Nabors Industries, Inc., a position he has held since 1987. He serves as a Director of the American Stock Exchange and also Danielson Holding Corporation, an insurance holding company. From 1969 to 1982, Mr. Isenberg was Chairman of the Board and principal shareholder of Genimar, Inc., a steel trading and building products manufacturing company, which was sold in 1982. From 1955 to 1968, Mr. Isenberg was employed in various management capacities with the Exxon Corporation. Mr. Isenberg is the founder and principal sponsor of the Parkside School for children with learning disabilities and has established the Eugene M. Isenberg Scholarships at the University of Massachusetts where the School of Management is named after him. He was an instructor at Princeton University from 1951 to 1952 and served as an officer in the U.S. Navy from 1952 to 1955. Mr. Isenberg holds a B.A. from the University of Massachusetts and an M.A. from Princeton University in 1952. Mr. Isenberg completed the program for Senior Executives at M.I.T.

      Arthur Rock is Principal of Arthur Rock & Co., a venture capital firm in San Francisco, California. Mr. Rock founded the firm in 1969. Prior to that time, he spent seven years as a general partner at Davis & Rock. He served as Chairman of the Board of Directors of Scientific Data Systems, Inc. from 1962 to 1969 (when they merged with Xerox Corporation); he was a Director of Xerox Corporation from 1969 to 1972; a member of the Executive Committee and Director of Teledyne, Inc. from 1961 to 1994; a Director of Apple Computer, Inc. from 1980 to 1993; and he is Founder, Past Chairman of the Board of Directors, Chairman of the Executive Committee and Lead Director of Intel Corporation. Mr. Rock serves on the Boards for Echelon and Air Touch Communications. He has been a member of the visiting committee at Harvard Business School and is a member of the Board of Trustees of the California Institute of Technology. Mr. Rock is involved in many cultural and civic organizations in the San Francisco area. He holds a B.S. from Syracuse University and an M.B.A. from Harvard University. Mr. Rock currently serves on the NASD Board of Governors (1998 to present).

      James F. Rothenberg is President of Capital Research and Management Company. Mr. Rothenberg assumed the position of President and Director of Capital Research and Management Company in 1994, having joined the company in 1970. Mr. Rothenberg serves on the Boards of the Huntington Memorial Hospital, KCET (Public Television for Southern and Central California), and the Westridge School. Mr. Rothenberg holds a B.A. in English from Harvard College and an M.B.A. from Harvard Graduate School of Business. He currently serves on the NASD Board of Governors (1996 to present), The Nasdaq Stock Market® Board of Directors, the Nasdaq Listing Subcommittee, and the Management Compensation and Finance Committee.

      National Association of Securities Dealers, Inc.

      Profiles Of Board Nominees

      Nominees For Public Governors

      Gerald R. Ford served as 38th President of the United States. Before entering the Presidency in 1974, President Ford served as Vice President for nine months under President Richard Nixon. Prior to this, President Ford served in the U.S. House of Representatives for 25 and one-half years. Since leaving the White House in 1977, President Ford has lectured at many colleges and universities and participated in public policy forums and conferences. President Ford serves as an Advisor to the Board of the American Express Company and is a member of the Board of The Travelers Group. President Ford holds a B.A. from the University of Michigan and an LL.B. from Yale University Law School.

      Elaine L. Chao was appointed a Distinguished Fellow at The Heritage Foundation in 1996. Prior to this, she was President and Chief Executive Officer of the United Way of America, Director of the Peace Corps, and Deputy Secretary of the U.S. Department of Transportation. She was also Vice President, Syndications, at Bank America Capital Markets Group. Ms. Chao is currently a Director of Dole Food Company, Inc., Vencor, Inc., and Protective Life Corporation. Ms. Chao holds an A.B. from Mt. Holyoke College and an M.B.A. from Harvard University Business School. Ms. Chao currently serves on the NASD Board of Governors (1996 to present) and the NASD Audit Committee.

      Kenneth M. Duberstein is Chairman and Chief Executive Officer of The Duberstein Group. Prior to this, Mr. Duberstein served as Chief of Staff to President Ronald Reagan from 1988 to 1989. During President Reagan's two terms in office, Mr. Duberstein also served in the White House as Deputy Chief of Staff (1987), as well as both the Assistant and the Deputy Assistant to the President for Legislative Affairs (1981 to 1983). Mr. Duberstein currently serves on the Board of Governors of the American Stock Exchange and on the Board of Directors at the Boeing Company, Cinergy Corporation, Federal National Mortgage Association, and The St. Paul Companies, Inc. He is Vice Chairman of the Kennedy Center for the Performing Arts. Mr. Duberstein holds an A.B. from Franklin and Marshall College and an M.A. from American University.

      Donald J. Kirk is Executive-in-Residence at Columbia University, Graduate School of Business. Mr. Kirk became a Professor of Accounting at Columbia University in 1987 and served in that capacity until 1995 when he became an Executive-in-Residence at the school. Mr. Kirk served as a member of the Financial Accounting Standards Board from 1973 to 1987, serving as Chairman from 1978 to 1987. Mr. Kirk currently serves as a Director of General Re Corporation, as a Trustee of the Fidelity Group of Mutual Funds, and is a member of the Public Oversight Board of the American Institute of CPAs. Mr. Kirk is Chairman of the Board of Trustees of Greenwich Hospital and a Director of Yale-New Haven Health Services Corp. Mr. Kirk holds a B.A. from Yale University and an M.B.A. from New York University. Mr. Kirk currently serves on the NASD Board of Governors (1996 to present) and as the Chairman of the NASD Audit Committee.

      John D. Markese is President of the American Association of Individual Investors. Mr. Markese holds a doctorate in Finance from the University of Illinois. Mr. Markese currently serves on the NASD Board of Governors (1996 to present), The Nasdaq Stock Market Board of Directors, and the Nasdaq Listing Subcommittee.

      Members of NASD Board of Governors with Terms Not Expiring in January 1999

      Governors with Terms Expiring January 2000
      Industry Non-Industry Public
      Jon S. Corzine
      Chairman and Chief Executive OfficerGoldman,
      Sachs & Co.

      Kenneth J. Wessels
      Senior Executive Vice President
      Dain Rauscher Incorporated
      Arvind Sodhani
      Vice President and Treasurer
      Intel CorporationNancy
      Kassebaum Baker
      Retired United States Senator

      Robert R. Glauber
      Adjunct Lecturer
      John F. Kennedy School
      of Government
      Harvard University

      Governors with Terms Expiring January 2001
      Industry Non-Industry Public
      Herbert M. Allison
      President and Chief Operating Officer
      Merrill Lynch & Co., Inc

      Frank E. Baxter
      Chairman and Chief Executive Officer
      Jefferies Group, Inc.

      Donald B. Marron
      Chairman and Chief Executive Officer
      PaineWebber Group, Inc.

      Todd A. Robinson
      Chairman and Chief Executive Officer
      LPL Financial Services
      Michael W. Brown
      Retired Chief Financial Officer
      Microsoft Corporation

      Harry P. Kamen
      Retired Chairman of the Board and Chief Executive Officer
      Metropolitan Life Insurance Company

      James S. Riepe
      Vice Chairman
      T. Rowe Price Associates, Inc.

      Howard Schultz
      Chairman and Chief Executive Officer
      Starbucks Coffee Company
      Paul H. O'Neill
      Chairman and Chief Executive Officer
      ALCOA


      Footnotes

      1 NASD National Nominating Committee—Committee Chair: Daniel P. Tully, Merrill Lynch & Co. Members: H. Furlong Baldwin, Mercantile Bankshares Corporation, Thomas Hale Boggs, Jr., Patton Boggs, L.L.P., John S. Chalsty, Donaldson, Lufkin & Jenrette, Inc., Alfred E. Osborne, Jr., UCLA, Richard C. Romano, Romano Brothers & Company. Committee members Romano and Baldwin did not participate in the committee deliberations concerning their nominations.

      2 An amendment to the NASD By-Laws reserving a position on the NASD Board of Governors (the Board) for a person associated with a firm having not more than 150 registered persons was approved by the members on September 14, 1998. That amendment is now pending approval by the Securities and Exchange Commission (SEC). The nomination of Mr. Romano to the Small Firm position on the Board anticipates but is not dependent on the SEC's approval. The NASD National Nominating Committee has determined that in the event SEC approval is not obtained by the time the proxy must be mailed to the membership, Mr. Romano will remain on the ballot as a candidate for one of the vacant Industry positions on the Board.

    • 98-79 Fixed Income Pricing System Additions, Changes, And Deletions As Of July 23, 1998

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      As of July 23, 1998, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      ACCC.GA Advanced Accessory Corp 9.750 10/01/07
      ACF.GB Amercredit Corp 9.250 02/01/04
      ACHD.GA Amscan Holdings Inc 9.875 12/15/07
      ACHT.GA Amer Architectural Prods Corp 11.750 12/01/07
      ADLA.GK Adelphia Communications Corp 8.375 02/01/08
      AEPI.GB AEP Industries Inc. 9.875 11/15/07
      AGLS.GB Anchor Glass Container Corp 9.875 03/15/08
      AGLS.GC Anchor Glass Container Corp 11.250 04/01/05
      ALYM.GA Amer Lawyer Media Hldgs Inc 12.250 12/15/08
      ALYW.GA Amer Lawyer Media Inc 9.750 12/15/07
      AMAQ.GA AMSC Acquisition Co Inc 10.250 04/01/08
      AMI.GC Acme Metals Inc 10.000 12/15/07
      AOR.GC Aurora Foods Inc 8.750 07/01/08
      BEC.GD Beckman Instruments Inc 7.100 03/04/03
      BEC.GE Beckman Instruments Inc 7.450 03/04/08
      BKEI.GB Burke Industries Inc 9.687 08/15/07
      BKI.GA Buckeye Technologies Inc 8.000 10/15/10
      BVCC.GA Bay View Capital Corp 9.125 08/15/07
      BXG.GA Bluegreen Corp 10.500 04/01/08
      CBS.GA CBS Corp 7.150 05/20/05
      CDIG.GH CSC Holdings Inc 7.250 07/15/08
      CDIG.GI CSC Holdings Inc 7.625 07/15/18
      CFS.GA Comforce Corp 15.000 12/01/09
      CGXE.GA Cogentrix Energy Inc 8.100 03/15/04
      COF.GA Capital One Financial Corp 7.125 08/01/08
      COSE.GB Costilla Energy Inc 10.250 10/01/06
      CREQ.GA Crescent Real Estate Equities Ltd 6.625 09/15/02
      CREQ.GB Crescent Real Estate Equities Ltd 7.125 09/15/07
      CVXP.GM Cleveland Electric Illum Co 7.880 11/01/17
      CWAL.GA Commonwealth Aluminum Corp 10.750 10/01/06
      DAYI.GB Day Intl Group Inc 9.500 03/15/08
      DKCL.GA Doskocil Mfg Co Inc 10.125 09/15/07
      DSIN.GA Desa International Inc 9.875 12/15/07
      EGFM.GA Eagle Family Foods Inc 8.750 01/23/98
      EPHO.GB Econophone Inc 11.000 02/15/08
      EPIH.GC Eagle-Picher Industries Inc 9.000 11/29/99
      ESA.GA Extended Stay Amer Inc 9.150 03/15/08
      FCLT.GA Facilicom Intl Inc 10.500 01/15/08
      FERP.GA Ferrellgas Partners L.P. 9.375 06/15/06
      FJ.GA Fort James Corp 9.000 02/01/06
      FM.GA Foodmaker Inc 8.375 04/15/08
      FMNI.GA FM 1993A Corp 9.750 11/01/03
      FOMX.GE Foamex LP/Foamexcap Corp 13.500 08/15/05
      FRAG.GA French Fragrance Inc 10.375 05/15/07
      FWTN.GA FWT Inc 9.875 11/15/07
      FXFW.GB Fox Family Worldwide Inc 10.250 11/01/07
      GBTV.GC Granite Broadcasting Corp 8.875 05/15/08
      GCR.GF Gaylord Container Corp 9.375 06/15/07
      GCR.GG Gaylord Container Corp 9.875 02/15/08
      GOTH.GB Gothic Energy Corp 14.125 05/01/06
      HMHP.GC HMH Properties Inc 7.875 08/01/05
      HMHP.GD HMH Properties Inc 7.875 08/01/08
      HVCP.GA Haven Capital Trust I 10.46 02/01/27
      ICFC.GA Icon Fitness Corp 14.000 11/15/06
      ICOG.GA ICO Global Communication Hldgs 15.00 08/01/05
      IGL.GA IMC Global Inc 9.450 12/12/11
      IGRP.GC ICG Holding Inc 11.625 03/15/07
      IKN.GA Ikon Office Solutions Inc 7.300 11/01/27
      ITCD.GB ITC Delta Com Inc 8.875 03/01/08
      KES.GA Keystone Consolidated Ind Inc 9.625 08/01/07
      KMCP.GA Kmart Corp 9.78 01/05/20
      KMCP.GB Kmart Corp 9.35 01/02/20
      KMCP.GC Kmart Corp 8.99 07/05/10
      KMFD.GA Kmart Funding Corp 9.44 07/01/18
      KMFD.GB Kmart Funding Corp 8.80 07/01/10
      KMFD.GC Kmart Funding Corp 7.56 01/01/99
      LAAC.GA La Petite Academy Inc 10.00 05/15/08
      LBPB.GA Liberty Group Pub Inc 11.625 02/01/09
      LVLT.GA Level 3 Communications Inc 9.125 05/01/08
      MCNC.GA MCMS Inc 9.750 03/01/08
      MPTR.GA ML Cap Tr I 9.875 03/01/27
      NAFC.GA Nash Finch Co 8.500 05/01/08
      NOPT.GA Northeast Optic Network Inc 12.75 08/15/08
      NUMA.GA Numatics Inc 9.625 04/01/08
      NXTL.GG NexTel Communication Inc 11.500 09/01/03
      OLYM.GC Olympic Financial Ltd 10.125 03/15/01
      PENN.GA Penn National Gaming Inc 10.625 12/15/04
      PNM.GH Public Service Co New Mex 7.50 08/01/18
      PNM.GI Public Service Co New Mex 7.1 08/01/05
      PRLU.GA Price Communications Cellular Hldg 11.25 08/15/08
      PUCR.GA Production Resources Group LLC 11.500 01/15/08
      SFHP.GA SF Holdings Group Inc 12.750 03/15/08
      TDHC.GA Thermadyne Holdings Corp 12.500 06/01/98
      TMWR.GA Time Warner Telecom LLC/Inc 9.750 07/15/08
      TWA.GC Trans World Airlines Inc 11.375 04/15/03
      WDMR.GA Windmer-Durable Hldgs Inc 10.000 07/31/08

      As of July 23, 1998, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      ACNI.GD American Medical Intl Inc 13.500 08/15/01
      AMI.GB American Medical Intl Inc 11.375 02/01/95
      AXAI.GA Axia Inc 11.000 03/15/01
      BYX.GA Bayou Steel Corp LA Place 10.250 03/01/01
      CLNH.GA CLN Holdings Inc 0.00 05/15/01
      DOSK.GA Doskocit Cos Inc 9.750 07/15/00
      ENGL.GA Engle Homes Inc 11.750 12/15/00
      FITZ.GA Fitzgerald Gaming Corp New 13.000 12/31/02
      FLM.GC Fleming Cos Inc 9.500 04/01/16
      FOMX.GC Foamex L.P./Cap Corp 9.500 06/01/00
      GOTH.GA Gothic Energy Corp 12.250 09/01/04
      IKN.GA Ikon Office Solutions Inc 7.300 11/01/27
      MMG.GB Metromedia Intl Group Inc 9.5 08/01/98
      NXTL.GG Nextel Communications Inc 11.500 09/01/03
      PKBR.GA Park Broadcasting Inc 11.750 05/15/04
      RYDR.GA Ryder Trust Inc 10.000 12/01/06
      STVN.GA Stevens J P & Co Inc 9.000 03/01/17
      U.GB U.S. Air Inc 10.000 07/01/03
      UTCI.GA Uniroyal Tech Corp 11.750 06/01/03

      As of July 23, 1998, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      ACNI.GD AMI.GD American Medical Intl Inc 13.500 08/15/01
      ACNI.GE AMI.GE American Medical Intl Inc 11.000 10/15/00
      AMI.GA ACME.GA Acme Metals Inc 12.500 08/01/02
      AMI.GB ACME.GB Acme Metals Inc 13.500 08/01/04
      AOR.GA AURO.GA Aurora Foods Inc 9.875 02/15/07
      AOR.GB AURO.GB Aurora Foods Inc 9.875 02/15/07
      BUCL.GB BKI.GB Buckeye Cellulose Inc 8.500 12/15/05
      BUCL.GC BKI.GC Buckeye Cellulose Inc 9.250 09/15/08
      CYYS.GA CTYS.GA Cityscape Financial Corp 12.750 06/01/04
      MPN.GA PGN.GA Mariner Post-Acute Network Inc 10.50 11/01/07

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, NASDR Market Regulation, at (301) 590-6451.

      Any questions regarding the FIPS master file should be directed to Cheryl Glowacki, Nasdaq® Market Operations, at (203) 385-6310.

    • 98-78 NASD Clarifies Operation Of The Limit Order Protection Rule During Unusual Market Conditions

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      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD® or Association) is issuing this Noticeto clarify the application of the Association's Limit Order Protection Rule (Conduct Rule IM-2110-2) in instances where the market for a given security is experiencing "abnormal" market conditions. Specifically, consistent with pronouncements by the Securities and Exchange Commission (SEC) concerning the obligations of Market Makers to display customer limit orders during unusual market conditions, the NASD is modifying its interpretation of the Limit Order Protection Rule that was previously set forth in Notice to Members 95-67, to provide that, under appropriate circumstances, limit orders need not be filled within one minute if activated during unusual market conditions and if all reasonable steps are taken to execute the transaction as soon as possible following activation. In such instances, which often occur at the opening or upon the commencement of trading following a trading halt or an initial public offering (IPO), members are required to execute customer limit orders as soon as possible under the circumstances.

      Questions concerning this Notice may be directed to the Office of General Counsel, The Nasdaq Stock Market, Inc., at (202) 728-8294, or the Market Regulation Department Legal Section, at (301) 590-6410.

      Discussion

      The Limit Order Protection Interpretation, IM-2110-2, provides that:

      A member firm that accepts and holds an unexecuted limit order from its customer (whether its own customer or the customer of another member firm) in a Nasdaq security and that continues to trade the subject security for its own marketmaking account at prices that would satisfy the customer's limit order, without executing that limit order shall be deemed to have acted in a manner inconsistent with just and equitable principles of trade, in violation of Rule 2110[.]

      In Notice to Members 95-67, the Association provided guidance as to the obligation of member firms that execute a transaction at a price that would satisfy a customer's limit order ( i.e., at a price equal to or better than that of the customer limit order). Specifically, in Question 5, the Association stated the following:

      Q5: Once a member is obligated to execute a limit order, how quickly must it execute the limit order?

      A: If a member trades through a limit order that it has accepted, the Interpretation provides that it must contemporaneously execute such limit order. To meet this obligation, a member must execute the limit order as quickly as possible. Absent reasonable justification that is adequately documented by the member firm, a limit order must at least be executed within a general time parameter of one minute after it has been activated.

      Subsequent to the issuance of this one-minute requirement to fill activated limit orders, the SEC adopted its Order Handling Rules in August 1996. Specifically, among other things, the SEC amended the Firm Quote Rule (SEC Rule 11Ac1- 1) and adopted a new rule governing the public display of customer limit orders, the Display Rule (SEC Rule 11Ac1-4). The Display Rule requires Market Makers to display the full price and size of qualifying customer limit orders in their quotes, subject to certain enumerated exceptions. Once a customer limit order is obligated to be publicly displayed in accordance with the Display Rule, the Display Rule requires that such customer limit order be displayed "immediately," unless a specific exception to the rule applies. In the release accompanying the adoption of the Order Handling Rules, the SEC gave the following guidance as to what it meant by "immediately display":

      Assuming that a specialist or OTC market maker does not rely on one of the exceptions to the Display Rule, . . . such specialist or OTC market maker must display the order as soon as practicable after receipt which, under normal market conditions, would require display no later than 30 seconds after receipt.

      Subsequent to the adoption of the Order Handling Rules, the SEC's Division of Market Regulation (the Division) clarified in two letters to the NASD, dated November 22, 1996, and January 3, 1997, what the SEC meant by "30 seconds after receipt" and "normal market conditions." In the November 22, 1996 letter, the Division stated that the "30 second time period [for the display of a customer limit order] begins when the order is received by the specialist or trader that will display the order (or the firm's automated display system)." As for when market conditions are not "normal," such that OTC Market Makers would not be required to display limit orders within 30 seconds of receipt, the Division also stated in the November 22 letter that "OTC market openings should not currently be viewed as 'normal market conditions' for purposes of the Limit Order Display Rule." In such cases, during OTC market openings, the Division stated that "limit orders held at the opening must be displayed as soon as practicable under the circumstances."

      In its January 3, 1997 letter to the NASD, the Division stated that "normal market conditions" do not exist for the purposes of strict compliance with the Display Rule's "30 seconds after receipt" requirement in an additional two situations: reopening of trading after a trading halt; and the commencement of trading in an IPO. In this letter, the Division also gave guidance on how a Market Maker is to determine when market conditions have returned to "normal," such that customer limit orders are required to be publicly displayed within 30 seconds: "The Division believes that market makers must make an independent assessment, based on the trading conditions of the stock, as to when trading and quoting in the stock has returned to normal market conditions. This time frame could be one minute for some stocks and longer for others; moreover, the time frame for a stock to return to normal market conditions could vary from day to day."

      In light of the Division's statements regarding the application of the Display Rule in the circumstance where there are not normal market conditions, the NASD has likewise determined to apply this same rationale to the application of the one-minute reasonableness parameter in the context of obligations under the Limit Order Protection Interpretation. Accordingly, to the extent that unusual market conditions exist for a particular Nasdaq® security ( i.e., "not normal") and a member executes a transaction that activates a limit order during this time period, such member would not be presumptively deemed in violation of the Limit Order Protection Rule if it failed to execute the limit order within a one-minute period, provided the member executed the order as soon as possible under the circumstances. In this connection, as fully consistent with the SEC's interpretation of the Display Rule, "normal market conditions" potentially do not include OTC market openings for specific securities, the resumption of trading after a trading halt, and the commencement of trading after an IPO. In every case where normal market conditions do not exist, Market Makers must make an independent assessment, based on the trading conditions of the specific security, as to when trading and quoting in the stock has returned to normal market conditions. This time frame could be one minute for some stocks and longer for others; moreover, the time frame for a stock to return to normal market conditions could vary from day to day.

    • 98-77 Executive Representatives Must Maintain Internet Electronic Mail Account By January 1, 1999; Complimentary Hard Copy Distribution Of Key Publications To End January 1, 1999

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      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) By-Laws were recently amended to require members' Executive Representatives to maintain electronic mail accounts for the purpose of updating firm contact information electronically by no later than January 1, 1999.

      Once established, member Internet access and e-mail will open up many options for timely communications with members and associated cost savings. It also will assist members with timely internal distribution of NASD information, notices, and publications. Thus, effective January 1, 1999, the primary distribution method for NASD Notices to Membersand Regulatory & Compliance Alertwill be via the NASD Regulation, Inc. (NASD RegulationSM) Web Site (www.nasdr.com). Members that elect not to use the Web Site versions will have the option of subscribing to hard-copy versions at cost.

      Questions regarding this Noticemay be directed to Jay Cummings, Director, Internet and Investor Education, NASD Regulation, at (301) 590-6070.

      Background And Discussion Amendment To Article IIV, Section 3

      NASD Regulation established a Web Site that has been operating since August 1996. A significant effort is being made to provide meaningful content for the benefit of member firms and the investing public. Development of Internet technology presents an alternative method to distribute information of interest to industry participants, as well as to collect and update member firm information.

      On August 5, 1997, the Membership Committee recommended the adoption of an amendment to the NASD By-Laws to require each Executive Representative, beginning no later than January 1, 1999, to maintain an Internet e-mail account for communication with the NASD and to update firm contact information via the NASD Regulation Web Site (www.nasdr.com).

      Pursuant to Special NASD Notice to Members 97-97, the NASD membership approved an amendment to the NASD By-Laws to require members to update information electronically and maintain e-mail accounts beginning no later than January 1, 1999. This amendment was subsequently approved by the NASD Board of Governors (Board) and the Securities and Exchange Commission (SEC).

      The NASD must have current and accurate records of the names of members' Executive Representatives and other individuals who hold positions of significant responsibility within member firms. This information is used by the Corporate Secretary for member balloting, by NASD Regulation's Member Regulation Department for compliance purposes, and by Corporate Communications in identifying key individuals for use in targeted mailings. The current method for acquiring this information is through the filing of an NASD form entitled "NASD Member Firm Contact Questionnaire" (Questionnaire).

      The recent By-Law change will improve the data collection process by requiring each Executive Representative to access his/her firm's Questionnaire via the NASD Regulation Web Site and update it on a periodic basis. (Each Executive Representative will be able to access only his/her own firm's Questionnaire; the information will be password-protected to prevent any public access.) The information then will be linked to the internal NASD Regulation systems that require this data. Further, the By-Law change requires each member to maintain an Internet e-mail address on behalf of its Executive Representative. This e-mail address will be used proactively to send messages reminding the Executive Representative to review and update his/her firm's contact information and to provide notification of important publications and information that have been added to the NASD Regulation Web Site. Firms that do not wish to acquire e-mail capability solely for their purposes may choose to designate an address in care of a vendor that would be responsible for forwarding information delivered electronically.

      As part of the process to implement password protection for each Executive Representative, and in order to issue user identifications and passwords, NASD Regulationwill send a simple information access contract to each firm's Executive Representative in November. Each Executive Representative will be asked to sign the contract on behalf of his/her firm and to verify his/her status as the firm's Executive Representative and his/her Internet e-mail address. Each firm will have the option to designate a second individual who would be able to access the Questionnaire on behalf of the Executive Representative.

      Once the information access contract is signed and returned, NASD Regulation will issue a password and user identification to the Executive Representative and his/her designee, as appropriate. Receipt of a password and user identification will enable the Executive Representative and his/her designee to access the NASD Regulation Web Site, to update the firm's Questionnaire, and to receive e-mail from NASD Regulation concerning new information or publications that have been posted to its Web Site.

      Complimentary Hard Copy Distribution Of Key Publications To End

      Effective January 1, 1999, complimentary distribution of hard-copy NASD Notices to Members and Regulatory & Compliance Alert will be discontinued. The January 1, 1999, implementation date was selected to coincide with the requirement that each Executive Representative, beginning not later than January 1, 1999, maintain an Internet e-mail account for communication with the NASD and to update firm contact information via the NASD Regulation Web Site. NASD Regulation believes that it is sensible to link the implementation dates of these two proposals so that members that currently do not have an e-mail account and Internet access can arrange to obtain them at the same time and have time to do so.

      In NASD Notice to Members 97-92, NASD Regulation requested member comment on the proposal to discontinue complimentary hard-copy distribution of Notices to Members and Regulatory & Compliance Alert. The chief concern expressed by commenters was the inconvenience of having to check the NASD Regulation Web Site periodically to determine if new information had been posted. In response to this concern, the Board and the NASD Regulation Board of Directors approved the discontinuation of the complimentary hard-copy distribution of Notices to Membersand Regulatory & Compliance Alertwith the understanding that NASD Regulation will proactively alert Executive Representatives via their e-mail addresses of the posting of new Notices to Membersand Regulatory & Compliance Alertsto the NASD Regulation Web Site.

      Members that elect not to use the Web Site as the source for Notices to Membersand Regulatory & Compliance Alert will have the option of subscribing to hard-copy versions. Each Executive Representative will be eligible for one subscription to Notices to Membersat cost, i.e., $15 per year. Each branch office will be eligible for one subscription to Regulatory & Compliance Alertat cost, also $15 per year. Additional subscriptions will be available at the current charge of $225 per year for each additional Notices to Memberssubscription and $80 per year for each additional subscription to Regulatory & Compliance Alert.

      Subscriptions may be placed through NASD MediaSourceSM at (301) 590- 6142.

    • 98-76 Maximum SOES Order Sizes Set To Change October 1, 1998

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      Operations
      Systems
      Trading



      Executive Summary

      Effective October 1, 1998, the maximum Small Order Execution SystemSM (SOESSM) order sizes for 488 Nasdaq National Market® (NNM) securities will be revised in accordance with National Association of Securities Dealers, Inc. (NASD®) Rule 4710(g).

      For more information, please contact Nasdaq® Market Operations at (203) 378-0284.

      Description

      Under Rule 4710, the maximum SOES order size for an NNM security is 1,000, 500, or 200 shares, depending on the trading characteristics of the security. The Nasdaq Workstation II® (NWII) indicates the maximum SOES order size for each NNM security. The indicator "NM10," "NM5," or "NM2" displayed in NWII corresponds to a maximum SOES order size of 1,000, 500, or 200 shares, respectively.1

      The criteria for establishing maximum SOES order sizes are as follows:

      (1) a 1,000-share maximum order size shall apply to NNM securities on SOES with an average dailynon-block volume of 3,000 sharesor more a day, a bid price of less than or equal to $100, and three or more Market Makers;
      (2) a 500-share maximum order size shall apply to NNM securities on SOES with an average daily nonblock volume of 1,000 shares or more a day, a bid price of less than or equal to $150, and two or more Market Makers; and
      (3) a 200-share maximum order size shall apply to NNM securities with an average daily non-block volume of less than 1,000 shares a day, a bid price of less than or equal to $250, and two or more Market Makers.

      In accordance with Rule 4710, Nasdaq periodically reviews the maximum SOES order size applicable toeach NNM security to determine if the trading characteristics of the issue have changed so as to warrant an adjustment. Such a review was conducted using data as of June 30, 1998, pursuant to the aforementioned standards. The maximum SOES order-size changes called for by this review are being implemented with three exceptions.

      • First, issues were not permitted to move more than one size level. For example, if an issue was previously categorized in the 1,000-share level, it would not be permitted to move to the 200-share level, even if the formula calculated that such a move was warranted. The issue could move only one level to the 500-share level as a result of any single review.


      • Second, for securities priced below $1 where the reranking called for a reduction in the level, the maximum SOES order size was not reduced.


      • Third, for the top 50 Nasdaq securities based on market capitalization, the maximum SOES order sizes were not reduced, regardless of whether the reranking called for a reduction.

      In addition, with respect to initial public offerings (IPOs), the SOES ordersize reranking procedures provide that a security must first be traded on Nasdaq for at least 45 days before itis eligible to be reclassified.

      Thus, IPOs listed on Nasdaq within the 45 days prior to June 30, 1998, were not subject to SOES order-size reranking procedures.

      Following is a listing of the 488 NNM issues that will have the maximum SOES order size changed on October 1, 1998.

      Maximum SOES Order Size Changes In NNM Securities
      All Issues In Alphabetical Order By Security Name
      (Effective October 1, 1998)

      Symbol Security Name Old Level New Level
      CTAC 1-800 CONTACTS INC 500 1000
      A
      ACMTA A C M A T CP CL A 500 200
      ABRI ABRAMS INDS INC 500 200
      ACSY ACSYS INC 500 1000
      ADECY ADECCO SA ADR 1000 500
      DINE ADVANTICA RES 500 1000
      DINEW ADVANTICA WTS 500 1000
      AFED AFSALA BANCORP INC 500 1000
      ASII AIRPORT SYS INTL I 500 1000
      ASTI ALLERGAN SPEC WI 200 500
      ALYD ALYDAAR SOFTWARE 500 1000
      AMBC AMER BNCP OHIO 500 1000
      AMCE AMER CLAIMS EVALUA 500 1000
      ALGI AMER LOCKER GROUP 500 1000
      ANAT AMER NATL INS CO 1000 500
      ABFI AMERICAN BUS FIN S 1000 500
      ADPI AMERICAN DENTAL 200 500
      APPM AMERICAN PHYS PART 500 1000
      AMSFF AMERICAN SAFETY 500 1000
      AMESW AMES DEPT ST WT C 1000 500
      AMKR AMKOR TECHNOLOGY 200 500
      AMCT AMRESCO CAP TRUST 200 500
      AMSGA AMSURG CORP CL A 500 1000
      AMSGB AMSURG CORP CL B 500 1000
      ANCOW ANACOMP INC WTS 200 500
      ANDR ANDERSEN GROUP INC 500 1000
      ALREF ANNUITY AND LIFE 200 500
      APSOP APPLE SOUTH FIN PFD 500 200
      ACTC APPLIED CELLULAR T 500 1000
      AFCO APPLIED FILMS CORP 500 1000
      AMCC APPLIED MICRO 500 1000
      ARMHY ARM HLDGS ADS 200 500
      ARTW ART S WAY MFG CO I 500 200
      ARTI ARTISAN COMPONENTS 500 1000
      ASAM ASAHI/AMERICA INC 1000 500
      ASPC ASPEC TECH INC 200 500
      SIDE ASSOC MATERIALS 200 500
      APWR ASTROPOWER INC 500 1000
      ATGC ATG INC 200 500
      ATPC ATHEY PRODUCTS CP 500 1000
      AIII AUTOLOGIC INFO INT 1000 500
      AXHM AXIOHM TRANS SOL 500 200
      B
      BTBTY B T SHIP SPONSOR ADR 500 200
      BPAO BALDWIN PIANO ORGA 500 1000
      BLDPF BALLARD POWER SYST 500 1000
      BFOH BANCFIRST OHIO CP 500 1000
      BARI BANK RHODE ISLAND 200 500
      BWFC BANK WEST FIN CORP 1000 500
      BKUNZ BANKUNITED CAP II 1000 500
      BBHF BARBERS HAIRSTYLIN 1000 500
      BFSB BEDFORD BCSHS INC 1000 500
      BASI BIOANALYTICAL SYST 500 1000
      BIORY BIORA AB ADR 500 1000
      BDMS BIRNER DENTAL 500 1000
      BONS BMJ MEDICAL MGMT 500 1000
      BNCM BNC MORTGAGE INC 200 500
      BEYE BOLLE INC 200 500
      XTRM BRASS EAGLE INC 500 1000
      BRZS BRAZOS SPORTSWEAR 500 1000
      BRID BRIDGFORD FOODS CP 1000 500
      BTSR BRIGHTSTAR INFO 200 500
      BRYO BRIO TECHNOLOGY 200 500
      BRCM BROADCOM CORP CL A 200 500
      BRKL BROOKLINE BANCORP 200 500
      MILK BROUGHTON FOODS 500 1000
      BRGP BUSINESS RESOURCE 1000 500
      C
      COLTY C O L T TELECOM AD 1000 500
      CLBR CALIBER LEARN NTWK 200 500
      CIBN CALIFORNIA IND BNC 200 500
      CNTBY CANTAB PHARM 200 500
      CARS CAPITAL AUTO SBI 500 1000
      CSWC CAPITAL SOUTHWEST 200 500
      CASA CASA OLE' RESTRS I 1000 500
      CASS CASS COMMERCIAL CO 1000 500
      CAVB CAVALRY BANCORP 200 500
      CWCOF CAYMAN WATER ORD 500 1000
      CDNW CDNOW INC 500 1000
      CNDSP CELLNET FNDG PFD 200 500
      CEBK CENTRAL CO OP BANK 1000 500
      CFAC CENTRAL FIN ACCEPT 1000 500
      CVBK CENTRAL VA BKSHS I 500 200
      CHANF CHANDLER INS CO LTD 1000 500
      CRAI CHARLES RIVER 200 500
      CHAS CHASTAIN CAP CORP 200 500
      CNBA CHESTER BANCORP IN 1000 500
      CINS CIRCLE INCOME SHAR 500 1000
      CTBP COAST BANCORP 1000 500
      CCPRZ COAST FED LIT CPR 200 500
      CBMD COLUMBIA BANCORP M 1000 500
      CFKY COLUMBIA FIN KY 200 500
      COLM COLUMBIA SPRTSWR 200 500
      CCHM COMBICHEM INC 200 500
      CCBP COMM BANCORP INC 500 200
      CMND COMMAND SYSTEMS 200 500
      CLBK COMMERCIAL BANKSHR 500 1000
      CNAF COMMERCIAL NATL FI 200 500
      CELS COMMNET CELL 500 1000
      CBIV COMMUNITY BANCSHAR 1000 500
      CFGI COMMUNITY FIN GP INC 500 1000
      CFBC COMMUNITY FIRST BN 1000 500
      CMPS COMPASS INTL SVCS 200 500
      CLTDF COMPUTALOG LTD 500 200
      CNDR CONDOR TECH SOLU 500 1000
      CNNG CONNING CORP 500 1000
      BUYR CONS CAPITAL CORP 500 1000
      CNGL CONTL NATURAL GAS 500 1000
      COOP COOPERATIVE BKSHS 1000 500
      CSCQW CORRECTIONAL SVCS 500 1000
      CRRC COURIER CP 500 1000
      CVOL COVOL TECHS INC 200 500
      CWLZ COWLITZ BANCORPN 200 500
      CKEYF CROSSKEYS SYS 500 1000
      CRSB CRUSADER HLDG CORP 500 1000
      CAWW CULTURALACCESS WW 500 1000
      CGII CUNNINGHAM GRAPHIC 200 500
      CRGN CURAGEN CORP 200 500
      CYSP CYBERSHOP INTL 500 1000
      D
      DNFCP D & N CAP CORP PFD 500 200
      DACG DA CONSULTING GRP 200 500
      DECAF DECOMA CL A 200 500
      HERBL DECS TRUST III 200 500
      DCBI DELPHOS CITIZENS B 1000 500
      DNLI DENALI INC 500 1000
      DCBK DESERT COMMUNITY B 500 200
      DTRX DETREX CP 1000 500
      DEVC DEVCON INTL CP 500 1000
      DCPI DICK CLARK PROD IN 200 500
      DMSC DISPATCH MGMT SVCS 500 1000
      DOCC DOCUCORP INTL 200 500
      DIIBF DOREL INDS CL B 200 500
      DCLK DOUBLECLICK INC 200 500
      DRRAP DURA AUTO CAP TR 200 500
      DXPE DXP ENTERPRISE 500 200
      E
      ESREF E S G RE LTD 500 1000
      ERTH EARTHSHELL CORP 200 500
      EDBR EDISON BROS STORES 500 1000
      ECTLW ELCOTEL INC WTS 500 1000
      EBSC ELDER-BEERMAN ST 200 500
      ELIX ELECTRIC LIGHTWAV 500 1000
      EPIQ ELECTRONIC PROCESS 500 1000
      ESCP ELECTROSCOPE INC 500 1000
      ELRWF ELRON ELEC INDS WTS 200 500
      EMLD EMERALD FINANCIAL 500 1000
      ENGSY ENERGIS ADS 500 1000
      ENSI ENERGYSOUTH INC 1000 500
      ETRC EQUITRAC CP 1000 500
      ECGC ESSEX COUNTY GAS C 1000 500
      EVOL EVOLVING SYSTEMS 200 500
      EXDS EXODUS COMMUN 200 500
      XTND EXTENDED SYSTEMS 200 500
      F
      FCNB F C N B CP 1000 500
      FMCO F M S FINANCIAL CP 200 500
      FTMTF FANTOM TECHS INC 1000 500
      FAMCK FEDERAL AGRIC MORT C 500 1000
      FFFLP FIDELITY CAP TR I 500 1000
      FFOH FIDELITY FIN OF OH 1000 500
      FBNC FIRST BANCP TROY N 500 200
      FBCG FIRST BKG CO SE GA 500 200
      FCTR FIRST CHARTER CP 500 1000
      FCNCA FIRST CITIZENS A 500 1000
      FCFCP FIRST CITY FINL PFD 500 200
      FTCG FIRST COLONIAL GP 200 500
      FCGI FIRST CONSULTING 500 1000
      THFF FIRST FIN CP (IN) 500 1000
      FFIN FIRST FINL BKSHS I 500 1000
      FFHS FIRST FRANKLIN CP 200 500
      FKFS FIRST KEYSTONE FIN 1000 500
      FOBBA FIRST OAK BROOK CL A 1000 500
      FSTH FIRST SO BCSHS INC 500 200
      FSLB FIRST STERLING BKS 1000 500
      FVCX FIRST VIRTUAL CP 200 500
      FCFCO FIRSTCITY SPCL PFD 500 200
      FLGSP FLAGSTAR CAP PFD A 200 500
      FAME FLAMEMASTER CP THE 1000 500
      FLCHF FLETCHER'S FINE FOOD 500 200
      FLXI FLEXIINTL SOFTWARE 500 1000
      FNBF FNB FINANCIAL SVC 500 1000
      FOCL FOCAL INC 500 1000
      FMAX FRANCHISE MORTGAGE 500 1000
      FKKY FRANKFORT FRST 500 1000
      FELE FRANKLIN ELEC INC 500 1000
      FREEY FREEPAGES GR PLC ADR 200 500
      FTBK FRONTIER FIN CORP 200 500
      FFHH FSF FINANCIAL CP 500 1000
      FNDTF FUNDTECH LTD 200 500
      G
      GZEA G Z A GEOENVIRON 1000 500
      GMTC GAMETECH INTL INC 500 1000
      GRTS GART SPORTS CO 500 1000
      GBNK GASTON FED BANCP 200 500
      GBBKP GBB CAP I CUM TR PFD 500 200
      GMCC GEN MAGNAPLATE CP 1000 500
      GLGC GENE LOGIC INC 500 1000
      GEND GENESIS DIRECT INC 200 500
      GNSSF GENESIS MICROCHIP 200 500
      GABC GERMAN AMER BANCOR 500 200
      GETY GETTY IMAGES INC 500 1000
      GICOF GILAT COMMUN LTD 500 1000
      GTSG GLOBAL TELESYSTEMS 500 1000
      GSBNZ GOLDEN LIT WTS 200 500
      GNCNF GORAN CAPITAL INC 1000 500
      GCLI GRAND COURT LIFE 200 500
      GBTVP GRANITE BRDCT CP PFD 1000 500
      PEDE GREAT PEE DEE BCP 500 1000
      GSBC GREAT SOUTHERN BNC 500 1000
      GBCOB GREIF BROS CP CL B 500 200
      GRIF GRIFFIN LAND NURS 200 500
      GSOF GROUP I SOFTWARE 200 500
      GSTX GST TELECOMMUN INC 200 500
      GSLC GUARANTY FIN CP 1000 500
      GWBK GULF WEST BANKS 200 500
      H
      HACH HACH CO 500 1000
      HKID HAPPY KIDS INC 200 500
      HFGI HARRINGTON FIN GRP 1000 500
      HFFB HARRODSBURG FIRST 1000 500
      HPAC HAWKER PACIFC AERO 500 1000
      HAYZ HAYES CORP 500 1000
      HDLD HEADLANDS MTG CO 500 1000
      HSDC HEALTH SYS DESIGN 500 1000
      HWLD HEALTHWORLD CORP 500 1000
      ARCAF HEIDEMIJ N.V. 1000 500
      HBSC HERITAGE BNCP (DE) 200 500
      HFWA HERITAGE FINL CP 500 1000
      HRLYW HERLEY INDS WTS 500 1000
      HIFS HINGHAM INSTI SAVI 500 200
      HOLT HOLT'S CIGAR HLDGS 500 1000
      HLFC HOME LOAN FINL CP 200 500
      HPBC HOME PORT BNCP INC 1000 500
      HFBC HOPFED BANCORP INC 500 1000
      HZWV HORIZON BNCP INC 500 1000
      HOFF HORIZON OFFSHORE 200 500
      HHLAF HURRICANE HYDROCAR 500 1000
      HYPT HYPERION TELECOMM 200 500
      I
      IPPIF I P L ENERGY INC 500 200
      ISSX I S S GROUP INC 200 500
      ISAC IC ISAACS & CO 500 1000
      ICLRY ICON PLC ADS 200 500
      IVISF ICOS VISION SYST 500 1000
      IMAG IMAGEMAX INC 500 1000
      IGPFF IMPERIAL GINSENG PRO 1000 500
      INDBP INDEP CAP TR I PFD 500 200
      ICBC INDEPENDENCE COMM 200 500
      IAABY INDIGO AVIATIO ADS 200 500
      IHIIZ INDUSTRIAL HLDG WT 1000 500
      IHIIW INDUSTRIAL WTS D 500 1000
      IAIC INFO ANALYSIS INC 500 1000
      IACO INFORMATION ADVANT 500 1000
      INOC INNOTRAC CORP 200 500
      IDEA INNOVASIVE DEVICES 1000 500
      ISNR INTEGRATED SENS SL 200 500
      IVBK INTERVISUAL BOOKS 1000 500
      ITVU INTERVU INC 500 1000
      INTT INTEST CORPORATION 1000 500
      IBOC INTL BANCSHS CP 200 500
      IROQ IROQUOIS BNCP 500 1000
      IRWNP IRWIN FIN CUM TR P 1000 500
      IYCOY ITO YOKADO CO ADR 200 500
      IUBCP IUB CAP TRUST PFD 500 1000
      J
      JEFFP J B I CAPITAL TR PFD 200 500
      JAMSP JAMESON INNS PFD 200 500
      JPST JPS TEXTILE GRP 500 1000
      K
      KTII K TRON INTL INC 500 1000
      KTIC KAYNAR TECHS INC 500 1000
      KEQU KEWAUNEE SCIENTIFI 500 1000
      KOSS KOSS CP 500 1000
      L
      LCLD LACLEDE STEEL CO 1000 500
      LKFNP LAKELAND FINL TR PFD 1000 500
      LARK LANDMARK BSCHS INC 200 500
      LDMK LANDMARK SYSTEMS 500 1000
      LFED LEEDS FED SAV BANK 200 500
      LTCW LET'S TALK CELL 500 1000
      LVLT LEVEL 3 COMM INC 200 500
      LIHRY LIHIR GOLD LTD ADR 500 1000
      LNDL LINDAL CEDAR HOMES 500 1000
      MALT LION BREWERY INC T 500 1000
      JADEF LJ INTL INC 200 500
      JADWF LJ INTL WTS 4/2002 200 500
      LJLB LJL BIOSYSTEMS 200 500
      LGCB LONG ISLAND COMM 500 1000
      LOILY LUNDIN OIL GDS 500 1000
      LYNX LYNX THERAPEUTICS 500 1000
      M
      MBLF M B L A FINL CORP 500 200
      MFBC M F B CORP 500 200
      MKFCF MACKENZIE FIN CP 200 500
      MTMS MADE2MANAGE SYS 500 1000
      MGNB MAHONING NATL BCP 500 1000
      MBNK MAIN STREET BNCP 200 500
      MANH MANHATTAN ASSOC 200 500
      MARN MARION CAP HLDGS I 500 1000
      MARSB MARSH SUPERMARKETS B 1000 500
      MSDX MASON-DIXON BCSHS 1000 500
      MSDXO MASON-DIXON TR II 200 500
      MOIL MAYNARD OIL CO 1000MCCL MCCLAIN INDUSTRIES 1000 500
      MBIA MERCHANTS BNCP IL 1000 500
      MRCY MERCURY COMP SYS 500 1000
      MIGI MERIDIAN INS GP IN 500 1000
      MRET MERIT HOLDING CP 1000 500
      METNF METRONET NON-VTG B 500 1000
      METFP METROPOLITAN CAP 200 500
      MGCX MGC COMMUN INC 200 500
      MUSE MICROMUSE INC 500 1000
      MSEX MIDDLESEX WATER CO 500 1000
      MDWY MIDWAY AIRLINES CP 500 1000
      MBHI MIDWEST BANC HLDG 200 500
      MBSI MILLER BUILDING SY 500 1000
      MEXP MILLER EXPLORATION 500 1000
      MFFC MILTON FED FINL CP 1000 500
      MSPG MINDSPRING ENTER I 1000 500
      MNES MINE SAFETY APPLS 500 1000
      MOBI MOBIUS MGMT SYST 200 500
      MCRI MONARCH CASINO 1000 500
      MBBC MONTEREY BAY BANCO 1000 500
      MHCO MOORE HANDLEY INC 500 1000
      MWRK MOTHERS WORK INC 500 1000
      CRGO MOTOR CARGO INDS 500 1000
      MOTR MOTOR CLUB OF AMER 500 1000
      MPWG MPW INDUSTRIAL SVS 500 1000
      LABL MULTI COLOR CP 1000 500
      MYST MYSTIC FINANCIAL 500 1000
      N
      NTAWF NAM TAI ELEC WTS 500 1000
      NGEN NANOGEN INC 200 500
      NANX NANOPHASE TECHS CP 500 1000
      NARA NARA BANK N A 500 1000
      NBAK NATL BNCP ALASKA 200 500
      NHHC NATL HOME HLTH CAR 1000 500
      NIRTS NATL INC RLTY TR 500 1000
      NCBEP NCBE CAP TR I PFD 200 500
      NERAY NERA AS ADR 1000 500
      NECSY NETCOM SYSTEMS ADR 500 1000
      NHTB NEW HAMPSHIRE THRI 1000 500
      NHCH NEWMARK HOMES CORP 200 500
      NSBC NEWSOUTH BANCORP I 1000 500
      NBCP NIAGARA BANCORP 200 500
      NOLD NOLAND CO 500 200
      NRTI NOONEY REALTY TRUS 200 500
      NASI NORTH AMERN SCI 500 1000
      NBSI NORTH BSCHS INC 1000 500
      NOVB NORTH VALLEY BNCP 200 500
      NRIM NORTHRIM BANK 500 1000
      NSCF NORTHSTAR COMPUTER 500 1000
      NWFL NORWOOD FIN CORP 200 500
      NOVI NOVITRON INTL INC 1000 500
      NUTR NUTRACEUTICAL INTL 200 500
      NYMXF NYMOX PHARM CORP 500 1000
      O
      OCENY OCE ADR 200 500
      ODFL OLD DOMINION FREIG 1000 500
      OWWI OMEGA WORLDWIDE 200 500
      OMNI OMNI ENERGY SVCS 500 1000
      OXGNW OXIGENE INC WTS 500 1000
      OYOG OYO GEOPSPACE CP 500 1000
      P
      PVCC P V C CONTAINER CP 500 1000
      PBSF PACIFIC BANK NATL 500 1000
      PWHS PAPER WAREHOUSE 500 1000
      PBOC PBOC HOLDINGS INC 200 500
      PCCC PC CONNECTION INC 200 500
      PDSFW PDS FINANCIAL WTS 200 500
      PMFRA PENNSYLVANIA MAN 500 1000
      PSFC PEOPLES-SIDNEY FIN 500 1000
      PFDC PEOPLES BANCORP 200 500
      PEBK PEOPLES BANK 200 500
      PPLS PEOPLES BK CP OF I 200 500
      PBKBP PEOPLES CAP TR PFD 500 200
      SBAN PERPETUAL BK FSB 500 1000
      PETR PETROCORP INC 1000 500
      PHLYL PHIL CONS GR PRIDE 200 500
      PHLYZ PHIL CONS IN PRIDE 200 500
      PGLD PHOENIX GOLD INTL 500 1000
      PTRN PHOTRAN CORP 200 500
      PHFC PITTSBURGH HOME FI 1000 500
      PFSL POCAHONTAS BNCP 500 1000
      BPOPP POPULAR INC PFD A 1000 500
      POWI POWER INTEGRATN 500 1000
      PRFN PRESTIGE FIN CP 1000 500
      PTVL PREVIEW TRAVEL INC 500 1000
      PNBC PRINCETON NATL BNC 500 1000
      PVII PRINCETON VIDEO 500 1000
      PRTW PRINTWARE INC 1000 500
      PGNX PROGENICS PHARM 500 1000
      PGENW PROGENITOR INC WTS 500 1000
      POVT PROVANT INC 200 500
      PRHC PROVINCE HEALTHCR 500 1000
      PRTG PRT GROUP 500 1000
      Q
      QCFB Q C F BANCORP INC 200 500
      QGLY QUIGLEY CORP THE 500 1000
      R
      RDGE READING ENT INC 500 1000
      RLCO REALCO INC 500 200
      RNWK REALNETWORKS INC 500 1000
      REFN REGENCY BANCORP 200 500
      RBCF REPUBLIC BKG CP FL 500 1000
      RESR RESEARCH INC 500 1000
      RTROW RETROSPETTIVA WTS 1000 500
      RCBK RICHMOND COUNTY 200 500
      RIDG RIDGEVIEW INC 500 1000
      RTST RIGHT START INC 1000 500
      RGCO ROANOKE GAS CO 1000 500
      RCCK ROCK FINANCIAL CP 200 500
      ROCLF ROYAL OLYMPIC CRU 500 1000
      S
      SJNB S J N B FINANCIAL 500 1000
      STVI S T V GROUP INC 500 1000
      SNDS SANDS REGENT THE 1000 500
      SABB SANTA BARBARA BCP 500 1000
      SCNYA SAUCONY INC 1000 500
      OKSBO SBI CAP TR PFD 500 200
      SCHR SCHERER HEALTHCARE 500 1000
      STIZ SCIENTIFIC TECH IN 1000 500
      SENEB SENECA FOODS CP B 500 200
      SEVN SEVENSON ENVIRONME 500 1000
      SFXE SFX ENT CL A 200 500
      SHPGY SHIRE PHARM 200 500
      SHOE SHOE PAVILION INC 200 500
      SHBK SHORE BANK 500 200
      SGNS SIGNATURE INNS INC 1000 500
      SBGIP SINCLAIR BRD PFD SE 1000 500
      SKAN SKANEATELES BANCP 1000 500
      SMEDF SMED INTL INC 500 1000
      SOMR SOMERSET GP INC TH 500 200
      SONO SONOSIGHT INC 200 500
      SORC SOURCE INFO S2S3 500 1000
      UMPQ SOUTH UMPQUA BANK 200 500
      SFFB SOUTHERN FIN BNCP 1000 500
      SMBC SOUTHERN MO BNCP I 1000 500
      SBSI SOUTHSIDE BANCSHS 200 500
      SBSIP SOUTHSIDE CAP TR 200 500
      SPLI SPECTRA-PHYSICS 500 1000
      SDCOZ SPIROS DEV CP UTS 500 1000
      SGDE SPORTSMEN'S GUIDE 500 1000
      STMT STARMET CORP 500 1000
      SFSW STATE FINL SVCS CL 1000 500
      SLFI STERLING FINL CP 500 1000
      WINS STEVEN MYERS ASSOC 500 1000
      SCBHF STIRLING COOKE BRN 500 1000
      SXNBP SUCCESS CAP TR I 200 500
      SUBK SUFFOLK BNCP 500 1000
      SBGA SUMMIT BANK CORP 1000 500
      SRDX SURMODICS INC 200 500
      SMPX SYMPHONIX DEVICES 500 1000
      SYBBF SYNSORB BIOTCH INC 200 500
      T
      TAVA T A V A TECH 500 1000
      TPNZ TAPPAN ZEE FIN 1000 500
      TGNT TELIGENT INC 500 1000
      TSCP TELSCAPE INTL INC 500 1000
      THRNY THORN PLC ADR 500 1000
      TIER TIER TECHS CL B 500 1000
      TSBK TIMBERLAND BANCORP 500 1000
      TRNI TRANS INDS INC 1000 500
      TRGNY TRANSGENE SA ADR 200 500
      TRED TREADCO INC 1000 500
      TREVW TREEV INC WTS 500 200
      TSSS TRIPLE S PLASTICS 500 1000
      TFCO TUFCO TECHS INC 1000 500
      U
      UFPT U F P TECH INC 500 1000
      USHG U S HOME & GRDN IN 500 1000
      USNC U S N COMM INC 500 1000
      USVI U S VISION INC 500 1000
      UCBC UNION COMM BANCORP 500 1000
      UBCD UNIONBANCORP INC 500 1000
      UTCIW UNIROYAL TECH CP WTS 200 500
      UIRT UNITED INVST RLTY 200 500
      UPFC UNITED PANAM FIN 200 500
      URSI UNITED ROAD SVCS 200 500
      UTCC URSUS TELECOM CP 200 500
      CLEC US L E C CP 200 500
      USWB US WEB CORPORATION 500 1000
      UBANP USBANCORP CAP TR 200 500
      V
      VIBC V I B CORP 500 1000
      VSEC V S E CP 200 500
      VALN VALLEN CP 500 1000
      VALU VALUE LINE INC 500 1000
      VTRAO VBC CAPITAL I CAP 500 200
      VENT VENTURIAN CP 500 1000
      VRIO VERIO INC 200 500
      VRSN VERISIGN INC 500 1000
      VIAX VIAGRAFIX CORP 200 500
      VBNJ VISTA BANCORP INC 1000 500
      VNWK VISUAL NETWORKS 500 1000
      VTNAF VITRAN CP INC 500 200
      VYSI VYSIS INC 500 1000
      W
      WSBI WARWICK COMMUN 500 1000
      WSCI WASHINGTON SCI INDS 500 1000
      WASH WASHINGTON TRUST 500 1000
      WBSTP WEBSTER PFD CAP B 1000 500
      WEFC WELLS FINANCIAL CP 500 1000
      WEYS WEYCO GP INC 200 500
      WMSI WILLIAMS INDS INC 200 500
      WREI WILSHIRE R E INV 200 500
      WMFG WMF GROUP LTD 500 1000
      WYNT WYANT CORP 1000 500
      Y
      YDNT YOUNG INNOVATIONS 500 1000


      Endnote

      1 Previously, Nasdaq Market Makers were required to maintain a minimum quotation size for an NNM security in an amount equal to the maximum SOES order size for that security. See generally, NASD Rule 4613(a)(1) - (2). On July 15, 1998, the Securities and Exchange Commission approved an amendment to NASD Rule 4613(a)(1)(C), which reduced the minimum quotation size for all Nasdaq securities to one normal trading unit when a Market Maker is not displaying a limit order, and which thus eliminated the requirement that Market Makers quote a size equal to the maximum SOES order size.

    • 98-75 SEC Approves Rule Change Relating To Non- Cash Compensation For Mutual Funds And Variable Products

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      Senior Management
      Legal & Compliance
      Mutual Fund

      Registered Representatives
      Training
      Variable Contracts



      Executive Summary

      On July 15, 1998, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD®) Rules 2820 (Variable Contracts Rule) and 2830 (Investment Company Rule) that regulate non-cash compensation arrangements for the sale and distribution ofvariable contracts and investment company securities. Generally, the amendments adopt new definitions, impose recordkeeping requirements, and limit the manner in which members can pay or accept non-cash compensation. The amendments are effective January 1, 1999, under the implementation plan described below.

      Questions concerning this Notice may be directed to R. Clark Hooper, Executive Vice President, Office of Disclosure and Investor Protection, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8325, and Robert J. Smith, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Discussion

      Background

      The amendments are the latest in a series of NASD Regulation proposals designed to control the use of noncash compensation in connection with a public offering of securities. Previous rule amendments established restrictions on non-cash compensation in connection with transactions in direct participation program securities (DPPs), real estate investment trusts (REITs), and corporate debt and equity offerings.

      The amendments are the final product of a process that began over 10 years ago and involved several versions of the rules published in various Notices to Members and submitted to the SEC. In developing the amendments, the staff and NASD Regulation's Investment Companies Committee, the Independent Dealer/Insurance Affiliate Committee, and the Variable Insurance Products Committee considered the current environment in which investment company and variable contract securities are sold.

      NASD Regulation believes that the increased use of non-cash compensation for the sale of variable contracts and investment company securities heightens the potential for loss of supervisory control over sales practices and increases the perception of inappropriate practices, which may result in a loss of investor confidence. NASD Regulation also believes that the increased use of non-cash compensation creates significant point-of-sale incentives that may compromise the requirement to match the investment needs of the customer with the most appropriate investment product. NASD is continuing to examine and develop an approach to the payment of certain types of cash compensation that may raise similar issues.1

      Description

      Prior to the amendments, the Variable Contracts Rule did not contain provisions regarding non-cash compensation and the Investment Company Rule generally required disclosure in the prospectus of noncash compensation arrangements. Thus, the amendments establish new requirements in the Variable Contracts Rule and modify current Investment Company Rule requirements.

      Definitions

      Affiliated Member: The term "affiliated member" has been adopted for both the Variable Contracts and Investment Company Rules to include a member that, directly or indirectly, controls, is controlled by, or is under common control with a non-member company. The term reflects a common type of relationship existing in the variable contracts and investment company industries whereby a non-member is affiliated through ownership or control with one or more broker/dealer member firms used for underwriting and/or wholesale and retail distribution services.

      Compensation: For ease of reference in appropriate paragraphs of the amendments, a new definition of "compensation" has been included to mean "cash compensation and noncash compensation."

      Cash Compensation: For both the Variable Contracts and Investment Company Rules, this term is defined to include any discount, concession, fee, service fee, commission, assetbasedsales charge, loan, override orcash employee benefit received inconnection with the sale and distribution of investment companys and variable contract securities. The new term also includes cash employee benefits to make clear that certain payments of ordinary employee benefits as part of an overall compensationpackage are not included in the efinition of non-cash compensation or governed under the non-cash provisions.

      Non-Cash Compensation: This term is identical in applicability in both the Variable Contracts and Investment Company Rules and encompasses any form of compensation received by a member in connection with the sale and distribution of variable contracts and investment company securities that is not cash compensation, including, but not limited to, merchandise, gifts and prizes, travel expenses, meals, and lodging.

      Offeror: The term "offeror" in the Variable Contracts Rule is defined as an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to aseparate account of an insurancecompany or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person of such entities, and in the Investment Company Rule as an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person of suchentities. The term "affiliated person"in the definition of "offeror" is defined in accordance with Section 2(a)(3) of the Investment Company Act of 1940 (1940 Act). The term "underwriter" is defined in Section 2(a)(40) of the1940 Act and is intended to reference the underwriter through which the investment or insurance company distributes securities to participating dealers for sale to the investor.

      Regulation Of Cash And Non-Cash Compensation Arrangements

      Introduction:The amendments adopt as paragraph (h) of the Variable Contracts Rule and paragraph (l) of the Investment Company Rule (replacing the current provisions of that section) new provisions governing the payment and receipt of noncash compensation by members and associated persons of members. Under the Variable Contracts Rule, the amendments apply to the sale and distribution of both variable annuity and variable life products; under the Investment Company Rule the amendments apply to the sale and distribution of investment company securities registered under the 1940 Act.

      Subparagraphs (h)(1) and (l)(1): Limitation on Receipt of Compensation by Associated Persons, and Exception from Limitations: Subparagraph (h)(1) of the Variable Contracts Rule and (l)(1) of the Investment Company Rule prohibit a person associated with a member from accepting any compensation from any person other than the member with which the person is associated.

      An exception from this general prohibition permits the receipt of compensation by an associated person from a non-member company if the member agrees to the arrangement, the receipt is treated as compensation received by the member for purposes of NASD rules, the recordkeeping requirement in the proposed rule change is satisfied, and, the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or applicable "no-action" letter issued by the SEC or its staff that applies to the specific fact situation of the arrangement.

      The exception reflects the view of the SEC as expressed in Securities Exchange Act Rel. No. 34-8389 (August 29, 1968) that, under certain circumstances, such commission payments to associated persons may be made by a life insurance company acting on behalf of a subsidiary broker/dealer.2 The SEC has issued a number of "no-action" letters permitting, among other things, associated persons of members to receive compensation for the sale of variable contract products from a licensed corporate insurance agent acting on behalf of one or more insurance companies.3 The Investment Company Rule includes the same exception in order to recognize SEC no-action letters that permit an insurance company to establish a commission account as a ministerial service to make payments of commission overrides for sales of insurance and investment company securities products.4

      Subparagraphs (h)(2) and (l)(2): Securities as Compensation: New subparagraphs (h)(2) of the Variable Contracts Rule and (l)(2) of the Investment Company Rule prohibit members and associated persons of members from receiving compensation in the form of securities of any kind. This prohibition is similar to a prior requirement in the Investment Company Rule.

      Subparagraphs (h)(3) and (l)(3): Recordkeeping Requirement:New subparagraphs (h)(3) of the Variable Contracts Rule and (l)(3) of the Investment Company Rule require that members maintain records of all compensation, cash and non-cash, received from offerors. The records must include the names of the offerors, the names of the associated persons, and the amount of cash and the nature and, if known, the value of non-cash compensation received.

      NASD Regulation expects records regarding the "nature" of non-cash compensation received to disclose whether the non-cash compensation was received in connection with a sales incentive program or a training and education meeting. Thus, for example, records for a training and education meeting should include information demonstrating that the requirements of a training and education meeting were complied with, including the date and location of the meeting, the fact that attendance at the meeting is not conditioned on the achievement of a previously specified sales target, the fact that the payment is not applied to the expenses of guests of associated persons of the member, and any other information required to enable NASD Regulation to determine compliance with the rule.

      The recordkeeping requirement does not apply to two types of de minimis non-cash compensation allowable under subparagraphs (h)(4)(A) and (B) of the Variable Contracts Rule and (l)(5)(A) and (B) of the Investment Company Rule, discussed more fully below under the exceptions to the prohibition on non-cash compensation.

      Subparagraph (l)(4): Prospectus Disclosure of Cash Compensation: New subparagraph (l)(4) in the Investment Company Rule prohibits members from accepting cash compensation from offerors unless such compensation is disclosed in a prospectus. In the case where special cash compensation arrangements are made available by an offeror to a member, which arrangements are not made available on the same terms to all members to distribute the securities, the disclosure must include the name of the recipient member and the details of the special arrangements. This requirement is similar to the prior requirement in subparagraph (l)(1)(C) of the Investment Company Rule to disclose ll compensation in the prospectus, but has been modified to reference only "cash compensation" because non-cash compensation is prohibited in a manner that would obviate the need for disclosure of any such non-cash compensation.

      Subparagraphs (l)(4)(A) and (B) provide an exception from disclosure for compensation arrangements between: (1) principal underwriters of the same security; and (2) the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment. By their terms, these provisions describe arrangements that would not trigger the proposed recordkeeping requirements.

      Subparagraphs (h)(4) and (l)(5): Prohibition on Non-Cash Compensation: New subparagraphs (h)(4) of the Variable Contracts Rule and (l)(5) of the Investment Company Rule generally prohibit, with certain exceptions, a member or person associated with a member from directly or indirectly accepting or making payments or offers of payments of any non-cash compensation. There are several exceptions to the general prohibition that permit certain non-cash arrangements.

      Subparagraphs (h)(4)(A) and (B) and (l)(5)(A) and (B): These provisions permit the payment and acceptance of gifts that do not exceed an annual amount, currently $100 per person, and an occasional meal, ticket to a sporting event or the theater, or comparable entertainment for persons associated with a member and, if appropriate, their guests, which is neither so frequent nor so extensive as to raise any question of propriety. Since such gifts and entertainment are considered non-cash items, they are not required to be disclosed in the prospectus. In addition, thesetwo forms of non-cash compensationare specifically excepted from the recordkeeping requirement of the proposed rules.

      The provisions also require that the acceptance or payment of such noncash items not be preconditioned on the achievement of a sales target. Thus, gifts and entertainment are permitted to be provided as recognition for past sales or as encouragement for future sales, but not as part of an incentive program or plan which requires that the recipient reach a specific sales goal as a priorcondition to receive the entertainmentor gift. These exceptions permit the continuation of longestablished, normal business practices, involving benefits with relatively small value such that they are unlikely to impact overall compensation incentives.

      Subparagraphs (h)(4)(C) and (l)(5)(C):These exceptions permit, under certain conditions, payment or reimbursement by offerors in connection with meetings held by the offeror or by a member for the purpose of training or education of associated persons of a member. It is not unusual for offerors to pay for such meetings in order to discuss their products and to reimburse certain expenses related to meetings held by members in exchange for the opportunity to make a presentation to the associated persons of the member on a particular training or education topic. Since investment company and variable contract products are continuously offered, it is particularly important that associated persons receive education opportunities, updates on any portfolio changes or structural changes to a current product, and explanations of new products.

      Payments for training or education meetings are subject to the recordkeeping requirement in subparagraph (h)(3) of the Variable Contracts Rule and subparagraph (l)(3) of the Investment Company Rule. This provision ensures that information on such payments and reimbursements is maintained in the records of the member and, therefore, capable of examination and regulatory oversight by NASD Regulation.

      Associated persons must obtain the member's prior approval to attend the meeting and the member may not base attendance on the achievement of a sales target or other incentives. Members should establish a procedure so that their records reflect that appropriate approval has been providedto associated persons in connection with such meetings. Although a member may not condition attendance at the meeting on the achievement of a sales target, this is not intended to prevent a member from designating persons to attend a meeting to recognize past performance or encourage future performance.

      The location of the meeting must be appropriate to its purpose. A showing of appropriate purpose is demonstrated where the location is the office of the offeror or the member, or a facility located in the vicinity of such office. In order to address meetings where the attendees are from a number of offices in a region of the country, the meeting location may be in a regional location.

      The payment or reimbursement by an offeror must not be applied to the expenses of guests of the associated person.

      Finally, the payment or reimbursement by the offeror must not be conditioned by the offeror on the achievement of a sales target or any other incentive. This requirement is intended to ensure that the offeror making the payment or reimbursement does not participate in any manner in a member's decision as to which associated persons will attend a member's or offeror's meeting.

      Subparagraphs (h)(4)(D) and (l)(5)(D):These provisions permit non-cash compensation arrangements between a member and its associated persons, and between a non-member company and its sales personnel who are associated persons of an affiliated member. In permitting such arrangements, NASD Regulation recognizes that in the life insurance industry, for example, nonmember insurance companies may hold non-cash sales incentive programs for their sales personnel who are also associated persons of the non-member's affiliated broker/dealer and are licensed to sell both variable contract securities and non-securities insurance products. As a practical matter, an insurance company or investment company affiliated with a broker/dealer is in a position to contribute to and affect the structure of its affiliated broker/dealer's in-house incentive compensation program.

      The permissible non-cash arrangements are subject to four conditions: (1) the non-cash compensation arrangement must be based on the total production of associated persons with respect to all investmentcompany or variable product securities distributed by that member, (2) the credit received for each investment company or variable contract security must be equally weighted, (3) no unaffiliated non-member company or other unaffiliated member may directly or indirectly participate in the member's or non-member's organization of a permissible noncash compensation arrangement, and (4) the recordkeeping requirements must be satisfied.

      The total production and equal weighting requirements address the danger that non-cash incentive programs may motivate salespersons at the point-of-sale to recommend a specific product on the basis of the incentive rather than a desire to meet the investment needs of the customer. The total production and equal weighting requirements are intended to limit the impact of non-cash sales incentives at point-of-sale.

      Regarding the condition for equal weighting, NASD Regulation recognizes that methods for determining compensation credits could vary, including measurements based on gross production to the firm or net commissions to the associated person. Either practice, as well as other arrangements, such as new accounts opened or assets under management, would be acceptable so long as the concept of "equal weighting" is met and not skewed by disparate commission, payout, or reallowance structures for individual products.

      Because of the substantial differences in design, purpose, cost structure, commission payouts, and target audience for variable annuity and variable life products, NASD Regulation has determined that the total production and equal weighting requirements may apply separately to variable annuity and variable life products, and they do not need to be combined in the same incentive arrangement.

      Regarding the third condition, NASD Regulation recognizes that non-cash arrangements are sometimes structured directly between offerors and salespersons, away from the supervisory purview of the broker/dealer. Thus, under the third condition, the non-cash compensation arrangement is subject to the restriction that no unaffiliated non-member entity (usually an offeror) or another member can participate directly or indirectlyin the member's or its affiliate's organization of a permissible noncash sales incentive program. This provision is intended to ensure that third-party offerors or otherbroker/dealers do not influence, or ineffect control, the organization of apermissible non-cash sales incentive program. This restriction is not, however,intended to prevent third-party offerors or other members from making a presentation on its products at a member's or its affiliate's in-housesales incentive meeting.

      Finally, under the fourth condition, payments or non-cash sales incentives are subject to the recordkeeping requirements.

      Subparagraphs (l)(5)(E) and (h)(4)(E): These provisions permit a non-member entity (usually an offeror) or another member to contribute to a member's in-house non-cash sales incentive program, and a member to contribute to a non-cash arrangement of a non-member, subject to the same four conditions identified above. These provisions are intended to permit third-party offerors and other members to contribute to the non-cash incentive program of a member involving variable contracts or investment company securities in order to benefit the associated persons of the member that sell the securities. These provisions also permit members to contribute to noncash compensation programs of non-members, such as banks, for example, involving variable contracts or investment company securities.

      Proposed Implementation Of New Rules

      The amendments to the Variable Contracts and Investment Company Rules are implemented in the following manner. The amendments are effective on January 1, 1999. As of that date, members' new sales incentive programs must comply with the amendments. Existing sales incentive programs that are ongoing as of January 1, 1999, may continue under previous rules for a period not to exceed six months following January 1, 1999. Thus, during the sixmonth implementation period, sales could be applied to existing incentive programs under previous rules, and new incentive programs as limited by the new amendments could commence. Finally, non-cash sales incentives or awards earned by registered representatives under existing programs would be permitted to be received by the registered representative for a period not to exceed 12 months following the expiration of the six-month implementation period.


      Endnotes

      1 See NASD Notice to Members 97-50(August 1997).

      2 In Securities Exchange Act Rel. No. 34-8389, the SEC stated that no question will be raised by the staff regarding an arrangement where a life insurance company makes commission payments directly to its life insurance agents who are also persons associated with the insurance company's subsidiary broker/dealer, so long as: (1) such payments are made as a purely ministerial service and properly reflected on the books and records of the broker/dealer; (2) a binding agreement exists between the insurance company and the broker/dealer that all books and records are maintained by the insurance company as agent on behalf of the broker/dealer and are preserved in conformity with the requirements of Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934; (3) all such books and records are subject to inspection by the Commission in accordance with Section 17(a) of the Exchange Act; and (4) the subsidiary broker/dealer has assumed full responsibility for the securities activities of all persons engaged directly or indirectly in the variable annuity operation.

      3 See Traditional Equinet(Pub. Avail. January 8, 1992); and Mariner Financial Services(Pub. Avail. December 16, 1988), which include references to other SEC no-action letters in the in-coming letters requesting the SEC no-action position.

      4 See The Mutual Benefit Life Insurance Company (Pub. Avail. January 21, 1985) and other SEC noaction letters cited therein.


      Text Of Amendments To Rules 2820 And 2830

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

      Rule 2820. Variable Contracts of an Insurance Company

      (a) No change
      (b) Definitions
      (1) - (2) No change
      (3) The terms "affiliated member," "compensation," "cash compensation,""non-cash compensation" and"offeror" as used in paragraph (h) ofthis Section shall have the following meanings:
      "Affiliated Member" shall mean a member which, directly or indirectly,controls, is controlled by, or is undercommon control with a non-member company.
      "Compensation" shall mean cash compensation and non-cash compensation. "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override, or cash employee benefit received in connection with the sale and distribution of variable contracts.
      "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of variable contracts that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.
      "Offeror" shall mean an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to a separate account of an insurance company or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities.
      (c) - (g) No change
      (h) Member Compensation
      In connection with the sale and distribution of variable contracts:
      (1) Except as described below, no associated person of a member shall accept any compensation from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements where a non-member company pays compensation directly to associated persons of the member, provided that:
      (A) the arrangement is agreed to by the member;
      (B) the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "noaction" letter issued by the Securities and Exchange Commission that applies to the specific fact situation of the arrangement;
      (C) the receipt by associated persons of such compensation is treated as compensation received by the member for purposes of NASD rules; and
      (D) the recordkeeping requirement in subparagraph (h)(3) is satisfied.
      (2) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.
      (3) Except for items as described in subparagraphs (h)(4)(A) and (B), a member shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received.
      (4) No member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Notwithstanding the provisions of subparagraph (h)(1), the following non-cash compensation arrangements are permitted:
      (A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors* and are not preconditioned on achievement of a sales target.
      (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
      (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (i) the recordkeeping requirement in subparagraph (h)(3) is satisfied;
      (ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a noncash compensation arrangement permitted by subparagraph (h)(4)(D);
      (iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a region allocation with respect to regional meetings;
      (iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
      (v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by subparagraph (h)(4)(D).
      (D) Non-cash compensation arrangements between a member and its associated persons or a nonmember company and its sales personnel who are associated persons of an affiliated member, provided that:
      (i) the member's or non-member's non-cash compensation arrangement, if it includes variable contracts, is based on the total production of associated persons with respect to all variable contracts distributed by the member;
      (ii) the non-cash compensation arrangement requires that the credit received for each variable contract is equally weighted;
      (iii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and
      (iv) the recordkeeping requirement in subparagraph (h)(3) is satisfied.
      (E) Contributions by a non-member company or other member to a noncash compensation arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that the arrangement meets the criteria in subparagraph (h)(4)(D).
      *The current annual amount fixed by the Board of Governors is $100.

      2830. Investment Company Securities

      (a) No change
      (b) Definitions
      (1) ["Associated person of an underwriter," as used in paragraph (1), shall include an issuer for which an underwriter is the sponsor or a principal underwriter, any investment adviser to such issuer, or any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such underwriter, issuer, or investment adviser.] The terms "affiliated member," "compensation," "cash compensation," "noncash compensation" and "offeror" as used in paragraph (l) of this section shall have the following meanings:

      "Affiliated Member" shall mean a member which, directly or indirectly, controls, is controlled by, or is under common control with a non-member company.

      "Compensation" shall mean cash compensation and non-cash compensation.

      "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connectionwith the sale and distribution of investment company securities.

      "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of investment company securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travelexpenses, meals and lodging.

      "Offeror" shall mean an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities.
      (2)- (10) No change
      (c) - (k) No change
      (l) [Dealer Concessions] Member Compensation
      [(1) No underwriter or associated person of an underwriter shall offer, pay or arrange for the offer or payment to any other member in connectionwith retail sales or distribution of investment company securities, any discount, concession, fee or commission (hereinafter referred to as "concession") which:]
      [(A) is in the form of securities of any kind, including stock, warrants or options;]
      [(B) is in a form other than cash (e.g.. merchandise or trips), unless the member earning the concession may elect to receive cash at the equivalent of no less than the underwriter's cost of providing the non-cash concession: or]
      [(C) is not disclosed in the prospectus of the investment company. If the concessions are not uniformly paid to all dealers purchasing the same dollar amounts of securities from the underwriter, the disclosure shall include a description of the circumstances of any general variations from the standard schedule of concessions. If special compensation arrangements have been made with individual dealers, which arrangements are not generally available to all dealers, the details of the arrangements, and the identities of the dealers, shall also be disclosed.]
      [(2) No underwriter or associated person of an underwriter shall offer or pay any concession to an associated person of another member, but shall make such payment only to the member.]
      [(3)
      (A) In connection with retail sales or distribution of investment company shares, no underwriter or associated person of an underwriter shall offer or pay to any member or associated person, anything of material value, and no member or associated person shall solicit or accept anything of material value, in addition to the concessions disclosed in the prospectus.]
      [(B) For purposes of this paragraph (1)(3), items of material value shall include but not be limited to:]
      [(i) gifts amounting in value to more than $50 per person per year.]
      [(ii) gifts or payments of any kind which are conditioned on the sale of investment company securities.]
      [(iii) loans made or guaranteed to a non-controlled member or person associated with a member.]
      [(iv) wholesale overrides (commissions) granted to a member on its own retail sales unless the arrangement, as well as the identity of the member, is set forth in the prospectus of the investment company.]
      [(v) payment or reimbursement of travel expenses, including overnight lodging, in excess of $50 per person per year unless such payment or reimbursement is in connection with a business meeting, conference or seminar held by an underwriter for informational purposes relative to the fund or funds of its sponsorship and is not conditioned on sales of shares of an investment company. A meeting, conference or seminar shall not be deemed to be of a business nature unless: the person to whom payment or reimbursement is made is personally present at, or is en route to or from, such meeting in each of the days for which payment or reimbursement is made; the person on whose behalf payment or reimbursement is made is engaged in the securities business; and the location and facilities provided are appropriate to the purpose, which would ordinarily mean the sponsor's office.]
      [(C) For purposes of this paragraph (l)(3), items of material value shall not include:]
      [(i) an occasional dinner, a ticket to a sporting event or the theater, or comparable entertainment of one or more registered representatives which is not conditioned on sales of shares of an investment company and is neither so frequent nor so extensive as to raise any question of propriety.]
      [(ii) a breakfast, luncheon, dinner, reception or cocktail party given for a group of registered representatives in conjunction with a bona fide businessor sales meeting, whether at the headquarters of a fund or its underwriter or in some other city.]
      [(iii) an unconditional gift of a typical item of reminder advertising such as a ballpoint pen with the name of the advertiser inscribed, a calendar pad,or other gifts amounting in value to notmore than $50 per person per year.]
      [(4) The provisions of this subsection (1) shall not apply to:]
      [(A) Contracts between principal underwriters of the same security.]
      [(B) Contracts between the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as itsunderlying investment.]
      [(C) Compensation arrangements of an underwriter or sponsor with its own sales personnel.]
      In connection with the sale and distribution of investment company securities:
      (1) Except as described below, no associated person of a member shallaccept any compensation from anyone other than the member with which the person is associated. Thisrequirement will not prohibit arrangementswhere a non-member companypays compensation directly to associated persons of the member, provided that:
      (A) the arrangement is agreed to by the member;
      (B) the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "noaction" letter issued by the Securities and Exchange Commission or itsstaff that applies to the specific fact situation of the arrangement;
      (C) the receipt by associated persons of such compensation is treated as compensation received by the member for purposes of NASD rules; and
      (D) the recordkeeping requirement in subparagraph (l)(3) is satisfied.
      (2) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.
      (3) Except for items described in subparagraphs (l)(5)(A) and (B), a member shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received.
      (4) No member shall accept any cash compensation from an offeror unless such compensation is described in a current prospectus of the investment company. When special cash compensation arrangements are made available by an offeror to a member, which arrangements are not made available on the same terms to all members who distribute the investment company securities of the offeror, a member shall not enter into such arrangements unless the name of the member and the details of the arrangements are disclosed in the prospectus. Prospectus disclosure requirements shall not apply to cash compensation arrangements between:
      (A) principal underwriters of the same security; and
      (B) the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment.
      (5) No member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Notwithstanding the provisions of subparagraph (l)(1), the following non-cash compensation arrangements are permitted:
      (A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors* andare not preconditioned on achievement of a sales target.
      (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
      *The current annual amount fixed by the Board of Governors is $100.
      (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (i) the recordkeeping requirement in subparagraph (l)(3) is satisfied;
      (ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangementpermitted by subparagraph (l)(5)(D);
      (iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;
      (iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
      (v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by subparagraph (l)(5)(D).
      (D) Non-cash compensation arrangements between a member and its associated persons or a nonmember company and its sales personnel who are associated personsof an affiliated member, provided that:
      (i) the member's or non-member's non-cash compensation arrangement, if it includes investment company securities, is based on the total production of associated persons with respect to all investment company securities distributed by the member;
      (ii) the non-cash compensation arrangement requires that the credit received for each investment company security is equally weighted;
      (iii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible noncash compensation arrangement; and
      (iv) the recordkeeping requirement in subparagraph (l)(3) is satisfied.
      (E) Contributions by a non-member company or other member to a noncash compensation arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that the arrangement meets the criteria in subparagraph (l)(5)(D).

    • 98-74 SEC Approves Rule Amendment Relating To Hearings On Suspensions And Cancellations For Failure To Comply With Arbitration Awards

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      Executive Summary

      On May 26, 1998, the Securities and Exchange Commission (SEC) approved an amendment to National Association of Securities Dealers, Inc. (NASD®) Rule 9514 authorizing hearing officers from the NASD Regulation, Inc. (NASD RegulationSM) Office of Hearing Officers to presideover non-summary proceedingsinvolving cancellations and suspensionsrelated to failure to comply withan NASD-imposed arbitration award or settlement agreement. The amendment became effective on May 26, 1998.

      Questions regarding this Notice may be directed to Joseph Furey, Vice President, Office of Hearing Officers, NASD Regulation, at (202) 728- 8008, or Mary Dunbar, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8252.

      Background And Description Of Amendment

      This amendment changes the composition of the hearing panels used for non-summary proceedings in which the NASD seeks to suspend or cancel the membership of amember firm or the registration of an associated person for failure to comply with an arbitration award or a settlement agreement related to an NASD arbitration or mediation. Previously, a hearing panel composed of one current NASD Regulation director plus at least one other current or former NASD or NASD Regulation board member heard these non-summary suspension proceedings. Pursuant to the amendment, a single member of the Office of Hearing Officers,appointed by the Chief Hearing Officer, will preside over these nonsummary proceedings.

      The Office of Hearing Officers is an independent office within NASD Regulation whose purpose is to provide a group of independent and professional hearing officers (comprised of attorneys with appropriate experience and training) to preside over formal NASD disciplinary proceedings under the NASD Rule 9200 Series.

      NASD Regulation determined that board members were not required for these non-summary proceedings because the issues involved are narrow and largely administrative. Designating a single hearing officer to preside over these non-summary proceedings also providesadministrative efficiencies in conducting the hearings and rendering decisions. The amendment does not alter the ability of memberfirms and their associated persons to request a hearing concerning a failure to pay an arbitration award; it merely alters the composition of the hearing panel. The members of the Office of Hearing Officers are wellsuited to resolve the issues presented in these types of hearings due to the training and experience gained in oversight of the NASD's disciplinary proceedings.


      Text Of Amendment

      (Note: New text is underlined; deletions are bracketed.)

      Rule 9514. Hearing and Decision

      (a) and (c)-(f) No Change
      (b) Designation of Party for the Association and Appointment of Hearing Panel
      If a member, associated person, or other person subject to a notice under Rule 9512 or 9513 files a written request for a hearing, an appropriate department or office of the Association shall be designated as a Party in the proceeding, and a Hearing Panel shall be appointed. (1) If the President of NASD Regulation or NASD Regulation staff issued the notice initiating the proceeding under Rule 9512(a) or 9513(a), the President of NASD Regulation shall designate an appropriate NASD Regulation department or office as a Party [, and the NASD Regulation Board shall appoint a Hearing Panel. The Hearing Panel shall be composed of two or more members]. For proceedings initiated under Rule 9513(a) concerning failure to comply with an arbitration award or a settlement agreement related to an NASD arbitration or mediation, the Chief Hearing Officer shall appoint a Hearing Panel composed of a Hearing Officer. For any other proceedings initiated under Rule 9512(a) or 9513(a) by the President of NASD Regulation or NASD Regulation staff, the NASD Regulation Board shall appoint a Hearing Panel composed of two or more members; [One] one member shall be a Director of NASD Regulation, and the remaining member or members shall be current or former Directors of NASD Regulation or Governors. The President of NASD Regulation may not serve on [the] a Hearing Panel.

    • 98-73 Firms Required To Register For Order Audit Trail System; Amendments To OATS Rules

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      98-73 Attachment

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      Executive Summary

      In March 1998, the Securities and Exchange Commission (SEC) approved new National Associationof Securities Dealers, Inc. (NASD®) Rules 6950 through 6957 — the Order Audit Trail System (OATSSM) Rules. The effective dates for the OATS Rules vary according to the following schedule:

      • Phase 1: By March 1, 1999, electronic orders received by Market Makers and Electronic Communication Networks (ECNs) must be reported.


      • Phase 2: By August 1, 1999, all electronic orders must be reported.


      • Phase 3: By July 31, 2000, all nonelectronic, or manual, orders must be reported.

      (See Notice to Members 98-33 for a complete description of the OATS Rules.)

      In accordance with the OATS Rules, the NASD is now requiring all NASD member firms that make markets in Nasdaq® securities and ECNs to register for OATS using the newly developed Subscriber Initiation and Registration Form (see the following Form). Market Makers and ECNs that are required to record and report order information to OATS under the OATS Rules must complete and return this Form to the NASD by September 14, 1998, regardless of whether they are scheduled to report in Phase 1 or by Phase 3 (July 31, 2000).1 Members that fail to complete and return the Form will be unable to report OATS data to the NASD; failure to report order information is a violation of NASD Rules 6955 and 2110.

      In addition, all third parties that intend to submit data on a member's behalf during Phase 1 also must submit a copy of the Form by September 14, 1998.

      The Form should be mailed to: NASD Regulation, Inc. Business Program Support 15201 Diamondback Drive Rockville, MD 20850

      Or faxed to: (888) 345-6275 or (301) 590-6504.

      Questions regarding OATS or the Form may be directed to the NASD via phone at (888) 700-OATS or (301) 590-6503, or via e-mail at oatscsc@nasd.com. Information about OATS is available on the NASD RegulationSM Web Site (wwww.nasdr.com).

      Also, on July 31, 1998, the SEC approved amendments to OATS Rules 6954 and 6957 and NASD Rule 3110 (the Books and Records Rule).2 The amendments clarify the recording and recordkeeping requirements associated with the OATS Rules.

      Discussion

      Registration For OATS Reporting

      Information requested on the Form is necessary to register members and non-member third parties to report order information to OATS. The Form requires member firms and nonmember third parties to identify contacts for administrative, technical, and compliance issues; organizations that will be reporting OATS information on their behalf; organizations on whose behalf they are reporting; and the transport method that they will use for reporting, such as file transfer protocol (FTP) or email.

      The NASD will use the information furnished on the Form to schedule the installation of network circuits forfirms reporting via FTP and provide Subscriber Packets. These Subscriber Packets will supply instructions about requesting a circuit fromthe network provider; deadlines for circuit installation; user IDs and passwords for accessing OATS; assigned reporting dates within the phase; and a Subscriber Manual describing procedures for transmitting data to OATS, performing self-administration, and using OATS applications on the Web.

      All firms that handle or execute orders for Nasdaq securities will be required to complete a Form before they can begin reporting to OATS. In January 1999, a version of the Form and the Subscriber Manual will be available for firms and third parties that will begin reporting in Phase 2 (August 1, 1999) or Phase 3. Firms will be able to download the Form and the Manual from the OATS Web Pages or request them from the NASD.

      Amendments To OATS Rules

      OATS Rule 6954(c) sets forth the order information that must berecorded when an order is transmitted, either from one department to another within a member firm or to another member. This Rule has been amended by adding a newparagraph that will now require members to record certain information when an order is transmitted to anon-member, such as to a foreign broker/dealer or to a foreign exchange. NASD members will be required to report this information to OATS pursuant to OATS Rule 6955.

      OATS Rule 6954(a)(4) and the Books and Records Rule, which require members to record and maintain specified information related to OATS, have been revised to set forth specific recordkeeping requirements. In particular, both rules have been amended to specifically reference the period of time for retaining records specified in SEC Rule 17a-4(b) and the conditions set forth in SEC Rule 17a-4(f) for reproducing records on micrographic media or by means of electronic storage media.

      The Books and Records Rule also has been amended to require members to record and maintain information relevant to the OATS data recording and reporting requirements only with respect to an "order" in Nasdaq equity securities, as defined by OATS Rule 6951(j). Finally, OATS Rule 6957(d) has been revised to indicate the effective dates for compliance with the amendments to the Books and Records Rule. The OATS Rules, revised to reflect these amendments, can be found on the NASD Regulation Web Site (www.nasdr.com).

      The effective dates for compliance with the amended rules are:

      • Rule 3110(h)(1)(A) and (B): March 1, 1999


      • Rule 3110(h)(1)(C): July 31, 2000


      • Rule 3110(h)(2) and (3): March 1, 1999


      • Rule 6954(a)(4): March 1, 1999


      • Rule 6954(c)(6): August 1, 1999, for electronic orders; July 31, 2000, for manual orders.


      Endnotes

      1 Members previously received notice of this requirement through a posting on the NASD Regulation Web Site on September 2, 1998. Firms that make markets in Nasdaq securities and ECNs received this Form via mail in early September.

      2 Securities Exchange Act Release No. 40286 (July 31, 1998), 63 FR 42088 (August 6, 1998).

    • 98-72 Regional Nominating Committee Nominees For The National Adjudicatory Council

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      Executive Summary

      The purpose of this Notice is to advise members of the Regional Nominating Committee Nominees for the 1999 National Adjudicatory Council (NAC). Pursuant to nomination procedures outlined in Special Notice to Members 98-62, nominees for NAC are presented to the membership. If an officer, director, or employee of a National Association of Securities Dealers, Inc. (NASD®) member is interested in being considered as an additional candidate, he/she must indicate his/her interest to the Secretary of NASD Regulation, Inc. (NASD RegulationSM) or the Regional Nominating Committee Chairman in the region (a map of the five regions is attached) within 14 calendar days of the date of the Regional Nominating Committee document. The Secretary of NASD Regulation or the Regional Nominating Committee Chairman shall make a written record of the time and date of such notification.

      Questions concerning this procedure may be directed to the member's District Director or Alden S. Adkins, General Counsel, NASD Regulation, at (202) 728-8332; Joan C. Conley, Corporate Secretary, NASD, at (202) 728-8381; or Norman Sue, Jr., Associate General Counsel, NASD Regulation, at (202) 728-8117.

      National Adjudicatory Council

      In 1999, the NAC will be a 12-member committee with half of the members representing industry and half representing non-industry. The industry members serve as volunteers, and five of the six industry members will be nominated by region (a map of the five regions is attached) and approved by the NASD's National Nominating Committee (NNC). One industry member will be nominated by the NNC as an at-large member. In 1999, half of the industry and non-industry members will be appointed for one-year terms, with the remaining members appointed for two-year terms. These oneand two-year term appointments will be determined by the NNC after the regional nomination and the at-large selection have been approved by the NNC. After 1999, all terms will be two-year terms, and service of two consecutive terms is permissible. The Chairman of the NAC will be elected by the incoming NAC members, and, in accordance with relevant By-Laws, has a seat on the NASD Regulation Board of Directors and NASD Board of Governors.

      The NAC is the successor to the National Business Conduct Committee (NBCC). As such, it is responsible for the oversight of the disciplinary program of NASD Regulation, the most active of all securities industry self-regulatory programs. The NAC also is responsible for the development of regulatory and enforcement policy and rule changes relating to the business and sales practices of NASD members.

      The NAC's mission is to assure fairness, expedition, and consistency in the disciplinary and regulatory actions for which it is responsible; to identify and address potential regulatory issues; and to enforce current and establish new disciplinary policy.

      The NAC meets at least six times a year. It always meets every other month for a full day to decide appellate cases, rule on applications and exemption requests, and to address policy matters. It may transact additional business through supplementary telephone meetings. In preparation for these meetings, NAC members receive "kits" consisting of draft decisions on appellate cases and memoranda discussing proposed rules and other matters. The draft decisions range in number from 5 to 20 per kit, and in length up to 20 pages each. Required preparation time for each meeting is extensive, and is in addition to time required to travel to the meetings and the meetings' time. Most meetings are held in Washington D.C. or New York City, but this year the NAC also met in Denver and San Francisco in order to meet with District Committees to discuss issues of common interest.

      NAC members also serve about every other month on two-person Hearing Panels designated to hear appeals or calls for review in disciplinary, membership, or financial and operational limitation cases, as well as on Hearing Panels designated to conduct initial hearings in summary and non-summary suspension, eligibility, and statutory qualification cases. In addition, two to four NAC members also serve as members of the Review Subcommittee, which meets from one to four hours weekly by telephone to discuss and accept or reject proposed settlements in disciplinary actions, to review all nondefault initial decisions in disciplinary and membership cases, and to rule on miscellaneous motions or requests. The members of the NAC are supported by the staff of the NASD Regulation Office of General Counsel in connection with the foregoing adjudicatory and policymaking responsibilities.


      1999 National Adjudicatory Council Nominees

      West Region (Districts 1, 2, 3a, and 3b)

      Nominee: Nicholas C. Cochran
      American Investors Company
      Hayward, California

      Nicholas C. Cochran is Chairman of American Investors Company in Hayward, California. He started that firm in 1992. Prior to that time, he was with Foothill Securities, Inc. and Equity Engineering, Inc. Mr. Cochran is a former member of the NASD District 1 Committee (1994 to 1996) and a current member of the National Adjudicatory Council.

      South Region (Districts 5, 6, and 7)

      Nominee: Raymond E. Wooldridge
      Southwest Securities
      Dallas, Texas

      Raymond E. Wooldridge is Vice Chairman of Southwest Securities, Inc.; having joined the firm in 1986. Prior to that time, he held various positions at the firm of Eppler, Guerin & Turner, Inc., including Chief Executive Officer. Mr. Wooldridge is a former member of the NASD Board of Governors (1994 to 1996) and the NASD District 6 Committee (1974 to 1976). He holds a B.A. in Economics from Washington & Lee University.

      Central Region (Districts 4, 8a, and 8b)

      Nominee: Ronald D. Brooks
      Banc One Capital Markets
      Columbus, Ohio

      Ronald D. Brooks is Chairman and Chief Executive Officer of Banc One Capital Corporation in Columbus, Ohio. He joined Banc One Capital in 1984. Prior to that time, he was with The Ohio Company. Mr. Brooks is a former member of the NASD District 8 Committee (1994 to 1996) and has served on several disciplinary panels. He holds a B.A. in International Studies from Ohio State University.

      North Region (Districts 9 and 11)

      Nominee: Richard J. DeAgazio
      Boston Capital Services
      Boston, Massachusetts

      Richard J. DeAgazio is President of Boston Capital Services, Inc., and Executive Vice President of Boston Capital Corporation in Boston, Massachusetts. Mr. DeAgazio joined Boston Capital in 1982. Prior to that time, he was a Senior Vice President and Director of Exchange Securities, Inc. Mr. DeAgazio has served on several NASD committees and is a former member of the NASD Board of Governors (1992 to 1995). He holds a B.S./B.A. in Finance from Northeastern University.

      New York (District 10)

      Nominee: David A. DeMuro
      Lehman Brothers
      New York, New York

      David A. DeMuro is Senior Vice President and Senior Counsel at Lehman Brothers, Inc. Mr. DeMuro joined Lehman Brothers in 1984. Prior to that time, he held various positions with the Securities and Exchange Commission in Detroit, Chicago, Los Angeles, and Washington, D.C. Mr. DeMuro is a current member of the NASD Membership Committee. He holds a B.A. from the University of Michigan and a J.D. from the University of Notre Dame.

      For Regional Map for National Adjudicatory Council Nominations NYC please refer to PDF File.

    • For Your Information For September

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      Year 2000 Update Reminder To Members About SEC Filing Requirements

      The Securities and Exchange Commission (SEC) recently amended its Rule 17a-5 to require all broker/dealers to file two reports concerning Year 2000, using Form BD-Y2K (Form). All members received this information available through NASD Special Notice to Members 98-63.

      The new reports relate to each member's readiness and activities to prepare its businesses to address Year 2000 challenges and risks. The amendment requires all National Association of Securities Dealers, Inc. (NASD®) members with FOCUS capital requirements of $5,000 or greater on or after December 31, 1997 to file the two reports with the SEC and the firm's designated examining authority (DEA). The first report was due to the SEC and DEA on or before August 31, 1998. The second report will be due April 30, 1999. The results of these reports will be made public.

      Each of the two reports has two parts. Part I must be completed by each NASD member with a $5,000 or greater net capital requirement. Amember must also complete Part II (in addition to Part I) if it has a $100,000 or greater net capital requirement.

      NASD Regulation, Inc. (NASD RegulationSM) examiners will be determining whether the reports are completed in accordance with SEC Rule 17a-5; if they are not, NASD Regulation will begin disciplinary actions and ensure that the reports are obtained during any routine exam.

      Any questions or comments may be directed to the NASD Year 2000 Program Office at (888) 227-1330. To obtain a copy of the Form, please go to the NASD Regulation Web Site (www.nasdr.com) and look for Special ASD Notice to Members 98-63, Attachment 2, on the Notices to Members Web Page.

      Industry Beta Test

      The Securities Industry Association (SIA) indicated that its first beta testing effort within the securities industry was a successful endeavor. During this test securities firms and markets—including The Nasdaq Stock Market®—were able to operate in a simulated Year 2000 environment. Testing began on July 13, 1998, and was completed on July 22, 1998.

      As part of the overall industry effort, the NASD and Nasdaq® Test Centers successfully operated to support this beta test. These test centers are available to test with external constituents. Members should call (888) 227-1330 to schedule Year 2000 testing.

      Announcement - Upcoming District 2 Compliance Seminars

      District 2 will host "Compliance Check-Up" seminars this fall that will feature panel discussions on branch office supervision and compliance issues; continuing education; new Forms U-4 and U-5; and recent regulatory developments. There will also be an on-line demonstration of the NASD Regulation Web Site (www.nasdr.com).

      The seminars will be held in the three following areas:

      • Los Angeles on September 17


      • San Diego on September 24


      • Orange County on October 1

      To register or for more information, call Ianthe Philips, NASD Regulation, at (213) 627-2122. The registration form and additional information about the seminars are also available from the NASD Regulation Web Site (www.nasdr.com).

      Correction To Notice to Members 98-66

      In the August 1998 issue of Notices to Members, on page 497, the third sentence in the last paragraph under subhead Background - SelectNet And SOES should read:

      The SOES rules currently contain a specific provision, NASD Rule 4720(c)(4), that requires SOES order entry firms to maintain the physical security of Nasdaq equipment located on the premises of the firm to prevent unauthorized entry of information into SOES.

      Misrepresentation Of Certificates

      It has come to the attention of NASD Regulation that private vendors may be offering commemorative certifi- cates to persons who pass NASDoffered qualification examinations. NASD Regulation is concerned that these certificates could be misused by registered persons or may be misinterpreted by customers and cause general confusion about what the ertificates may represent. Passing a qualification exam is just one step in the registration process; customers may erroneously assume that it is the only step. Furthermore, registration status may change; a registration may be suspended, canceled, or voluntarily terminated, but the presence of a certificate commemorating the passage of a qualification examination may erroneously suggest otherwise. For these reasons, the staff believes that display of such certifi- cates at any business location may violate NASD Rule 2110.

    • 98-71 NASD Regulation Requests Comment On Whether To Modify The Public Disclosure Program To Limit The Period For Disclosure Of Certain Criminal Information

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      Comment Period Expires: September 30, 1998

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      Executive Summary

      Under the current interpretation governing the Public Disclosure Program, information on all felony offenses is disclosed indefinitely. NASD Regulation, Inc. (NASD Regulation) requests comment from members and other interested persons on whether to: (1) maintain the current interpretation; or (2) amend the interpretation to disclose indefinitely information concerning "investment-related" offenses, as described below, but limit to 10 years disclosure of information concerning all other felonies. Any such change would not affect the information required to be reported on Form U-4 and permanently made available to federal and state regulators, self-regulatory organizations (SROs), and prospective employers in the securities industry. In other words, such information would remain on an individual's record, but as proposed would not be disclosed publicly after 10 years.

      NASD Regulation is seeking comment on this issue at this time for two principal reasons. First, associated persons have expressed the view that some aged felony charges or convictions do not bear any relationship to the securities industry or reflect on their capacity for fair dealing. Second, information disclosed under the Public Disclosure Program will soon be more easily and widely accessible via the NASD Regulation Web Site (www.nasdr.com). NASD Regulation will weigh the comments it receives in determining whether or not continued public disclosure of certain aged felony offenses through this widely accessible medium strikes the most appropriate balance between a public investor's interest in knowing relevant information about an associated person and such person's privacy and reputational interests.

      Questions concerning this Request For Comment may be directed to Ann E. Bushey, Assistant Director, CRD/Public Disclosure, NASD Regulation, at (301) 590-6389; Mary M. Dunbar, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8252; or Richard E. Pullano, Counsel, CRD/Public Disclosure, NASD Regulation, at (301) 212-3789.

      Background And Discussion Current Interpretation On Disclosure

      The securities industry and its regulators have established exceptionally stringent licensing and qualification requirements. Among other things, persons seeking registration to sell securities are required to file a Form U-4 with Central Registration Depository (CRD) that describes their employment and disciplinary history, including whether they have been charged with or convicted of any felony or certain misdemeanors. Form U-4 requires reporting of anycharge or conviction of, or guilty and no contest plea to: (1) any felony or misdemeanor involving investments or investment-related business, fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses (hereinafter collectively referred to as "investment-related" offenses); and (2) any other felony (hereinafter referred to as "other felony" offenses).1

      Under NASD Regulation's current Public Disclosure Program (Program), all of this criminal history, as well as other employment and disciplinary information reported to the CRDSM system, is disclosed to the public in response to a written, telephonic, or electronic inquiry. The Program is governed by Interpretive Material 8310-2 of the NASD rules (Interpretation). The principal purpose of the Program is to help investors make informed choices about the persons and firms with whom they may wish to do business. The securities industry is unique in providing this level of information about its licensed persons to the public. 2

      The NASD established the Program in 1988. At that time, investors were required to make their inquiries in writing. In 1990, Congress amended the Securities Exchange Act of 1934 (Exchange Act) to expand access to the Program by requiring the NASD to stablish and maintain a toll-free telephone number to receive investor inquiries.3 Until 1998, the NASD responded to all inquiries by mailing a summary of the public disclosure information to the requester. In 1998, the Program was expanded to provide administrative data (e.g., employment history, registration statuses, etc.) via the Internet and to accept electronic mail requests for any remaining public disclosure information; NASD Regulation responds to such requests by electronic mail. In 1999, NASD Regulation will expand disclosure via the Internet further to provide any requester with on-line access to all information disclosed under the Program,including criminal istory.

      Proposed Change To Interpretation

      In response to a variety of concerns raised by a number of associated persons, NASD Regulation is seeking comment on a policy change that would establish a 10-year time limit on disclosure of information on "other felonies."4 NASD Regulation believes it is appropriate to seek comment at this time because of the unique nature of the Program and the significant issues implicated by the current Interpretation. NASD Regulation presented this proposed policy change to a number of NASD Regulation district and standing committees and received mixed responses.

      Some associated persons and others have argued that aged information on "other felony" offenses is unrelated to the securities business or to the person's capacity for fair dealing, and therefore such information is not relevant to an investor's decision to do business with a particular person. According to this view, public disclosure of such information through the Web Site for an indefinite period of time subjects associated persons to a continuing penalty that serves no remedial purpose, particularly if the criminal charge or conviction occurred many years ago and the person's disciplinary record is otherwise unsullied. In addition, there is some concern that the ease of Web access and the instantaneous provision of information will encourage persons other than investors (e.g., neighbors or competitors) to investigate the associated person's background and misuse the information. This concern extends not only to business and personal reputations, but also to the reputations of children, spouses, and other family members, particularly where the associated person and his or her family live in a small community.

      The proposed policy change would address these concerns by limiting to 10 years the public disclosure of "other felony" offenses, which would include, among others, driving while intoxicated, possession or sale of controlled substances, and certain violent crimes. For example, if a 50- year-old registered person had been charged with, or convicted of, driving while intoxicated at age 25, and the offense in that particular state was a felony, then NASD Regulation could discontinue disclosure under the proposed policy change.

      The 10-year time limit is consistent with other provisions of the law that concern the disclosure or probative value of criminal history information. For example, the 10-year limit would ensure public disclosure of the "other felony" convictions that cause someone to be subject to a statutory disqualification under the provisions of the Exchange Act during the period that they are subject to disqualification. Such individuals may not apply to work or, if registered, continue to work in the securities industry without first seeking and obtaining appropriate regulatory approvals.5 A 10-year disclosure period for "other felony" offenses also is consistent with the 10-year time limitation for the reporting of all criminal events for member firms and their control affiliates on Form BD.6 Further, Rule 206(4) under the Investment Advisers Act of 1940, which specifies which financial and disciplinary information an investment adviser must disclose to a client, requires disclosure of convictions for specified offenses for a period of 10 years from the time of the event. Finally, the Federal Rules of Evidence place a low probative value on convictions that are more than 10 years old in determinations of admissibility for purposes of impeaching the credibility of a witness.7 These provisions of law suggest that the proposed 10-year limit on disclosure of certain felonies may be appropriate.

      While some NASD Regulation district and standing committees expressed support for this proposal for the reasons set forth above, other committees expressed opposition to the proposal. Some committees expressed concern that non-disclosure of even aged criminal information could undercut the investor education and protection purposes of the Program. Some investors may believe any information concerning an associated person's ability to obey the law is relevant, even after 10 years; for such investors, criminal behavior may reflect on the associated person's moral character, which may affect the investor's ability to develop a trusting business relationship.8 Some committees expressed concern that the proposal could have incongruous results, i.e., indefinite disclosure of insignificant misdemeanor offenses but time-limited disclosure of serious felonies. To avoid such results, some committees suggested that violent crimes against a person, certain crimes against the government (including tax evasion), and offenses involving drug trafficking should always be disclosed, but that disclosure of certain misdemeanor convictions and criminal charges could be time-limited. Such misdemeanors could include, for example, a shoplifting offense involving an item of little value or an offense that could be characterized as a "youthful indiscretion."

      In light of these concerns, NASD Regulation seeks comment as to whether an alternative proposal to that described in the Executive Summary would be appropriate. For example, the classes of aged felony offenses that would not be disclosed could be narrowed to specified categories, or the period of disclosure could be lengthened to 15 or 20 years, rather than 10 years. In providing comments about any alternative proposal, NASD Regulation asks that commenters keep in mind the technical and administrative limitations of the Public Disclosure Program. While the computer systems that support the Program could be programmed to limit disclosure by date of occurrence or general category of offense (i.e., "investmentrelated" felony, "investment-related" misdemeanor, or "other felony"), any further refinements would require the review of individual criminal histories and manual settings to the computer system, which would be costly, timeconsuming, and necessarily more subjective.

      Conclusion

      The Public Disclosure Program serves an important investor protection purpose and has been endorsed by Congress and the Securities and Exchange Commission (SEC). NASD Regulation believes that careful consideration should be given to balancing the interests of both the investing public and associated persons, particularly given the personal privacy interests implicated by permitting the public to obtain criminal information anonymously over the Internet, when such information otherwise would not be available to the public without considerable effort.9 Accordingly, NASD Regulation seeks comment from interested parties on what standard of disclosure strikes an appropriate balance between an investor's interest in relevant information and an associated person's privacy interest.

      Request For Comment

      NASD Regulation encourages all interested parties to comment on the proposal. Comments should be mailed to:

      Joan Conley
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, D.C. 20006-1500

      or e-mailed to:
      pubcom@nasd.com

      Important Note:The only comments that will be considered are those submitted via e-mail or in writing.

      Comments must be received by September 30, 1998. Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation Board of Directors, may be reviewed by the National Association of Securities Dealers, Inc. (NASD®) Board of Governors, and must be approved by the Securities and Exchange Commission (SEC).


      Endnotes

      1 Form U-4 has elicited information about all felony offenses since 1981. In 1990, with the passage of the International Securities Enforcement Cooperation Act of 1990, convictions less than 10 years old for any felony offense (not just those relating to investments, fraud, or theft) became the basis for a statutory disqualification under Section 3(a)(39) of the Exchange Act.

      2 NASD Regulation is not aware of any other profession that discloses on-line such comprehensive disciplinary and criminal history, even if such information is required to be reported for licensing purposes. Currently, 14 states provide information on-line about medical professionals, including physicians, physician's assistants, and nurses. See www.docboard.org. Like the current Public Disclosure Program on the Internet for brokers, most states provide the medical professional's name, status, work address, birth date, date of license and license expiration, education, and specialty. Twelve of the 14 states also include whether "disciplinary" information exists; if so, the Web sites do not provide details on-line but rather direct the person to contact the state medical board. Two states, California and Massachusetts, provide disciplinary information on-line. California releases certain hospital disciplinary actions, malpractice judgments, and arbitration awards. Massachusetts releases any of the following that occurred in the last 10 years: felony or serious misdemeanor convictions, malpractice actions, and disciplinary actions by a hospital or the state medical board.

      3 Section 15A(i) of the Exchange Act provides, in pertinent part, "[a] registered securities association shall . . . establish and maintain a toll-free telephone listing to receive inquiries regarding disciplinary actions involving its members and their associated persons, and . . . promptly respond to such inquiries in writing." The legislative history indicates that the appropriate scope of disciplinary actions should be developed by the NASD, working with the SEC and state securities regulators. The toll-free number is (800) 289-9999. The NASD received over 137,000 requests for public disclosure summaries in 1997 via the toll-free number.

      4 As under the current Interpretation, the "investment-related" offenses listed above would continue to be disclosed to the public indefinitely.

      5 Under Section 3(a)(39)(F) of the Exchange Act, criminal convictions of felonies and certain enumerated misdemeanors that are more than 10 years old do not cause a person to be subject to a statutory disqualification. The disqualification provisions in the Investment Company Act of 1940 (Section 9(a)(1)) and the Investment Advisers Act of 1940 (Section 203(e)) also contain 10-year limits for criminal convictions.

      6 Form BD is the uniform form used by brokerdealers to apply for registration with the SEC, states, and SROs. The term "control affiliates" generally refers to owners, officers, and directors of the broker/dealer. A control affiliate is sometimes required to file a Form U-4 as well, which, as described above, requires reporting of criminal history without time limitation.

      7 Fed. R. Evid. 609.

      8 Compare Jeffrey P. Donohue, Developing Issues Under the Massachusetts Physician Profile Act, 23 Am. J. Law & Medicine, 115, 120 (1997).

      9 Although the criminal information at issue here generally is a matter of public record, the availability of such information to the general public is usually limited or is difficult to access. NASD Regulation is not aware of any other organization or medium that would provide the general public with immediate access to this broad a range of criminal information in one centralized place.

    • 98-70 Fixed Income Pricing System Additions, Changes, And Deletions As Of June 24, 1998

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      As of June 24, 1998, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      ABAG.GA Safety Componets Intl Inc 10.125 07/15/07
      ALGX.GA Allegiance Telecom Inc 11.750 02/15/08
      AMH.GA Amerus Life Hldgs Inc 6.950 06/15/05
      BFSR.GB Saul B F Real Estate Inv Trst 11.625 04/01/02
      CBRN.GB Canadaigua Brands Inc 8.750 12/15/03
      CHCA.GC Chancellor Media Corp LA 8.125 12/15/07
      CNCX.GB Concentric Network Corp Del 12.750 12/15/07
      EGFM.GA Eagle Family Foods Inc 8.750 01/23/98
      EX.GC Exide Corp 10.000 04/15/05
      FMO.GB Federal Mogul Corp 7.500 07/01/04
      FMO.GC Federal Mogul Corp 7.750 07/01/06
      FMO.GD Federal Mogul Corp 7.875 07/01/10
      FTO.GA Frontier Oil Corp 9.125 02/15/06
      FXFW.GA Fox Family Worldwide Inc 9.250 11/01/07
      GND.GB Grand Casinos Inc 9.000 10/15/04
      IGRP.GB ICG Holdings Inc 13.500 09/15/05
      MARS.GA Marsh Super Markets Inc 8.875 08/01/07
      NIN.GA Nine West Group Inc 8.375 08/15/05
      NIN.GB Nine West Group Inc 9.000 08/15/07
      PANR.GB Pantry Inc 10.250 10/15/07
      PCKI.GA Printpack Inc 9.875 08/15/04
      PDAG.GA Panda Global Energy Co 12.500 04/15/04
      PDCU.GA Poland Communications Inc 9.875 11/01/03
      PGN.GA Paragon Health Network Inc 10.500 11/01/07
      PGTN.GA Pagemart Nationwide Inc 12.250 02/01/05
      PJMC.GA Peters (J.M.) Co 12.750 05/01/02
      PKD.GC Parker Drilling Co 9.750 11/15/06
      PKOH.GA Park-Ohio Industries Inc 9.250 12/01/07
      PKS.GD Premier Parks Inc 12.000 08/15/03
      PLTC.GB Plastic Containers Inc 10.000 12/15/06
      PLX.GA Plain Resources Inc 10.250 03/15/06
      PLX.GB Plains Resources Inc 10.250 03/15/06
      PNDF.GA Panda Funding Corp 11.625 08/20/12
      PNRA.GA Pioneer Americas Acq. Corp 9.250 06/15/07
      POAN.GA Protection One Alarm Inc 13.625 06/30/05
      PPP.GA Pogo Producing Co 8.875 05/15/07
      PRCG.GA Prescise Technology Inc 11.125 06/16/07
      PRGY.GA Petsec Energy Inc 9.500 06/15/07
      PTX.GB Pillowtex Corp 9.000 12/15/07
      PYX.GA Playtex Products Inc 8.875 07/15/04
      QWST.GB Qwest Communications Intl Inc 10.875 04/01/07
      RBXC.GA RXC Corp 11.250 10/15/05
      RCNC.GA RCN Corp 9.8 02/15/08
      RCNC.GB RCN Corp 11.000 07/01/08
      RDNH.GA Radnor Holdings Inc 10.000 12/01/03
      REGL.GA Regal Cinemas Inc 8.500 10/01/07
      RENC.GB Renco Metals Inc 12.000 07/15/00
      REXI.GA Resource America Inc 12.000 08/01/04
      RFPN.GA Rifkin Acq Partners L.P. 11.125 01/15/06
      RGCT.GA Riggs Capital Trust 7.625 12/31/26
      RHC.GA Rio Hotel & Casino Inc 9.500 04/15/07
      RIDL.GA Riddell Sports Inc 10.500 07/15/07
      RIV.GA Riviera Holdings Corp 10.000 08/15/04
      RLBD.GA Reliant Building Product Inc 10.875 05/01/04
      RMOC.GA Rutherford-Moran Oil Corp 10.750 10/01/04
      RNCC.GA Renaissance Cosmetics Inc 11.750 02/15/04
      ROV.GA Rayovac Corp 10.250 11/01/06
      RRI.GA Red Roof Inns Inc 9.625 12/15/03
      RSEH.GA Rose Hills Co 9.500 11/15/04
      RVSU.GF Revlon Consumer Products Corp 8.625 02/01/08
      RXIH.GA RXI Holdings Inc 14.000 07/15/02
      SACU.GA Salem Communications Corp 9.500 10/01/07
      SBGI.GD Sinclair Broadcast Grp Inc 9.000 07/15/07
      SCPR.GA Sovereign Capital Trust I 9.000 04/01/27
      SDW.GA Southdown Inc 9.500 04/15/07
      SELO.GA Selmer Co 11.000 05/15/05
      SFDS.GA Smithfield Foods Inc 7.625 02/15/08
      SGY.GA Stone Energy Corp 8.750 09/15/07
      SHST.GA Sheffield Steel Corp 11.500 12/01/05
      SHVC.GA Shop Vac Corp 10.625 09/01/03
      SLGC.GB Sterling Chemicals Inc 11.75 08/15/06
      SLGN.GC Silgan Holdings Inc 9.000 06/01/09
      SLNC.GA Sabreliner Corp 12.500 04/15/03
      SLTA.GA Specialty Foods Acq Corp 13.000 08/15/05
      SLTF.GA Specialty Foods Corp 11.125 10/01/02
      SLTF.GB Specialty Foods Corp 10.250 08/15/01
      SMMC.GA Simmons Co 10.750 04/15/06
      SPBR.GB Spanish Broadcasting Inc 12.500 06/15/02
      SRKT.GA Star Markets Co 13.000 11/01/04
      SROY.GA Southwest Royalties 10.500 10/15/04
      SUGR.GA Sullivan Graphics Inc 12.750 08/01/05
      SUWD.GA Sun World Int'l Inc 11.250 04/15/04
      SXFE.GA Six Flags Theme Parks Inc 12.250 06/15/05
      TEGY.GA Transamer Energy Corp 11.500 06/15/02
      TEGY.GB Transamer Energy Corp 13.000 06/15/02
      TETI.GA Teletrac Inc 14.000 08/01/07
      TGCP.GA Triangle Capital Trust 9.375 06/01/27
      TGRP.GA Telegroup Inc 10.500 11/01/04
      THWV.GA Therma-Wave Inc 10.625 05/15/04
      TKPX.GA Tekni-Plex Inc 11.250 04/01/07
      TLTH.GA Talton Hldgs Inc 11.000 06/30/07
      TLXU.GA Telex Communications Inc 10.500 05/01/07
      TMFD.GA Tom's Foods Inc 10.500 11/01/04
      TMWR.GA Time Warner Telecom LLC/Inc 9.375 07/15/08
      TOK.GB Tokheim Corp 11.500 08/01/06
      TRA.GA Terra Indus Inc 10.500 06/15/05
      TRHD.GA Transtar Hldg L.P. 13.375 12/15/03
      TRK.GA Speedway Motor Sports Inc 8.500 08/15/07
      TTX.GB Tultex Corp 9.625 04/15/07
      TVLC.GA Travel Centers of America Inc 10.250 04/01/07
      TWA.GB Trans World Airlines Inc 12.000 04/01/02
      TWNB.GA Twin Laboratories Inc 10.250 05/15/06
      TWSP.GA Town Sports Int'l Inc 9.750 10/15/04
      UDFS.GA United Defense Indus Inc 8.750 11/15/07
      UFIC.GA Unifi Communications Inc 14.000 03/01/04
      UIHA.GA UIH Australia/Pacific Inc 14.000 05/15/06
      UIHA.GB UIH Australia/Pacific Inc 14.000 05/15/06
      UIS.GI Unisys Corp 12.000 04/15/03
      UNCO.GA Unicco Service Co 9.875 10/15/07
      USMR.GA United Stationers Supply Co 12.750 05/01/05
      VDKP.GA Van De Kamps Inc 12.000 09/15/05
      VHT.GB Venture Holdings Trust 9.500 07/01/05
      VILG.GA Vialog Corp 12.750 11/15/01
      VOUT.GD Universal Outdoor Inc 9.750 10/15/06
      WALB.GB Walbro Corp 10.125 12/15/07
      WCII.GB Winstar Communications Inc 14.500 10/15/05
      WCII.GC Winstar Communications Inc 15.000 03/01/07
      WCTI.GA Williams Scotsman Inc 9.875 06/01/07
      WEQC.GA Winstar Equip II Corp 12.500 03/15/04
      WFGM.GA Waterford Gaming LLC 12.750 11/15/03
      WHLP.GA Windy Hill Pet Foods Co 9.750 05/15/07
      WHX.GA WHX Corp 10.500 04/15/05
      WLAL.GA Wells Aluminum Corp 10.125 06/01/05
      WLSN.GA Wilson Leather Inc 11.250 08/15/04
      WMHO.GA Williamhouse Regency (Del) Inc 11.500 06/15/05
      WRMD.GA Wright Medical Tech Inc 11.750 07/01/00
      WVTK.GA Wavetek Corp 10.125 06/15/07
      WZR.GA Wiser Oil Co 9.500 05/15/07
      YBTV.GC Young Broadcasting Inc 8.750 06/15/07
      YBTV.GD Young Broadcasting Inc 9.000 01/15/06
      YFM.GA Big City Radio Inc 11.250 03/15/05
      ZLC.GA Zale Corp 8.500 10/01/07

      As of June 24, 1998, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      ABKR.GA Anchor Bancorp Inc 8.937 07/09/03
      ADT.GA ADT Operations Inc 8.250 08/01/00
      ADT.GB ADT Operations Inc 9.250 08/01/03
      AFIN.GD American Financial Corp 9.750 04/20/04
      ALG.GA Arkla Inc 8.9 12/15/06
      ALG.GF Arkla Inc 10.000 11/15/19
      ALG.GG Arkla Inc 8.875 07/15/99
      ALIS.GA Allied Supermarkets Inc 6.625 05/15/98
      AME.GA Ametek Inc 9.750 03/15/04
      AMLH.GA American Life Holdings Co 11.250 09/15/04
      AMSD.GE American Standard Inc 9.875 06/01/01
      AMSD.GF American Standard Inc 10.500 06/01/05
      ARAG.GC ARA Group 8.500 06/01/03
      ARAS.GA Ara Services Inc 10.625 08/01/00
      ARTL.GB Amer Continental Corp 14.750 04/15/95
      ASRP.GA Astor Corp 10.500 10/15/06
      AVTR.GA Avatar Holdings Inc 9.000 10/01/00
      BKI.GA Buckeye Cellulose Corp 10.250 05/15/01
      BKSO.GA Bank South Corp 10.200 06/01/99
      BLT.GA Blount Inc 9.000 06/15/03
      BLYG.GA Bally's Casino Holding 10.500 06/15/98
      BOR.GA Borg-Warner Security Corp 9.125 05/01/03
      CAW.GA Caesars World Inc 8.875 08/15/02
      CBLV.GB Cablevision Inds Corp 9.250 04/01/08
      CCG.GA Chelsea GCA Rlty Partnership L.P. 7.750 01/26/01
      CCVS.GD Contl Cablevision Inc 8.625 08/15/03
      CCVS.GE Contl Cablevision Inc 9.000 09/01/08
      CCVS.GF Contl Cablevision Inc 8.500 09/15/01
      CCVS.GG Contl Cablevision Inc 8.875 09/15/05
      CCVS.GH Contl Cablevision Inc