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  • 1997

    • 97-97 Mail Vote — NASD Solicits Member Vote On Amendments To NASD By-Laws To Require Members To Update Information Electronically And Maintain Electronic Mail Accounts; And For Other Purposes

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      Last Voting Date: January 30, 1998

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD® or Association) invites members to vote to approve amendments to the NASD By-Laws to require executive representatives of members to update firm contact information electronically, to maintain electronic mail accounts, and for other purposes. The last voting date is January 30, 1998. The text of the proposed amendments follows this Notice.

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

      Background

      Amendment To Article IV, Section 3

      On August 5, 1997, the Membership Committee recommended the adoption of an amendment to the NASD By-Laws to require each executive representative, beginning not later than January 1, 1999, to maintain an Internet electronic mail account for communication with the NASD and to update firm contact information via the NASD Regulation Web Site. The NASD Regulation Board approved the recommendation at its September 23, 1997 meeting. The NASD Board approved the amendment at its December 11, 1997 meeting.

      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 Member Regulation for compliance purposes, and by Corporate Communications in identifying key individuals for use in target mailings. The current method for acquiring this information is through the filing of an NASD form entitled "NASD Member Firm Contact Questionnaire" (NMFCQ).

      The data requested on the NMFCQ is not required on any other form filing (e.g., Form BD or U-4). The data is available in the Central Registration Depository (CRDSM), but in a text form that renders it nearly impossible to interface to another system. Thus, members are required to file the NMFCQ with the CRD, where the information is data captured into the Member Profile System, an adjunct to the existing CRD system. The data is then viewable throughout the organization via the Member Profile System and is interfaced to regulatory and finance systems as well as the existing corporate mailing system for use in distributing publications, reports, voting ballots, and mail.

      A new procedure for collecting NMFCQ information in the future is necessary for two reasons. First, the CRD Redesign effort does not include rebuilding this function, so another alternative is required. Second, members are rarely updating these filings. Because the information solicited via the form is very important to support the NASD's business, the NASD must have a more efficient means for firms to update this information, thereby encouraging them to do so more regularly.

      The proposed By-Law change will improve the data collection process by requiring a firm to access its NMFCQ via the NASD Regulation Web Site and update it on a periodic basis. (A firm would be able to access only its own NMFCQ; the information would be password-protected to prevent any public access.) The information then would be interfaced to the internal NASD Regulation systems requiring this set of data. Further, the By-Law also would require each member to maintain an Internet e-mail address on behalf of its executive representative. This e-mail address would be used proactively to send messages reminding the firm to review and update its contact information.

      There are other reasons the staff is interested in member Internet access and e-mail. Once established, it opens up many options for timely communications with our members and associated cost savings. It also can assist members with timely internal distribution of NASD information, notices, and publications. Other potential initiatives include eliminating or reducing printed publications, sending more timely announcements and notices, and providing value-added services to members.

      The NASD is proposing a one-year transition period to accommodate small firms that may not currently have Internet access or electronic mail accounts.

      Technical Amendment To Article VII, Section 9(b)

      The NASD also proposes a technical amendment to Article VII, Section 9(b). In Special Notice to Members 97-75, the NASD proposed a comprehensive revision to its By-Laws to provide for a more streamlined corporate structure. The membership approved these changes on November 13, 1997, and the SEC approved them on November 14, 1997. See Securities Exchange Act Release No. 39326 (Nov. 14, 1997), 62 F.R. 62385 (Nov. 21, 1997).1 Article VII, Section 9(b) contained a typographical error that provided that the number of Industry committee members on the National Nominating Committee should equal or exceed the number of Non-Industry committee members. The terms "Industry" and "Non-Industry" were transposed. The Section should provide that the number of Non-Industry committee members should equal or exceed the number of Industry committee members. The National Nominating Committee is required to be composed in such a manner by the Undertakings agreed to by the NASD on August 8, 1996.2


      Endnotes

      1 In Securities Exchange Act Release 39470 (December 19, 1997), the SEC approved moving the effective date of these changes from the first NASD Board meeting in January 1998 to the conclusion of the annual meeting, currently scheduled for January 15, 1998.

      2 Securities Exchange Act Release No. 37538 (August 8, 1996) (SEC Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions, In the Matter of National Association of Securities Dealers, Inc., Administrative Proceeding File No. 3-9056).




      EXHIBIT A

      NASD BY-LAWS*
      (Note: new text is underlined; deletions are bracketed.)

      Article IV

      Executive Representative
      Sec. 3. Each member shall appoint and certify to the Secretary of the NASD one "executive representative" who shall represent, vote, and act for the member in all the affairs of the NASD, except that other executives of a member may also hold office in the NASD, serve on the Board or committees appointed under Article IX, Section 1 or otherwise take part in the affairs of the NASD. A member may change its executive representative upon giving notice thereof via electronic process or such other process the NASD may prescribe to the Secretary, or may, when necessary, appoint, by notice via electronic process to the Secretary, a substitute for its executive representative. An executive representative of a member or a substitute shall be a member of senior management and registered principal of the member. Not later than January 1, 1999, each executive representative shall maintain an Internet electronic mail account for communication with the NASD and shall update firm contact information via the NASD Regulation Web Site or such other means as prescribed by the NASD.

      Article VII

      Board of Governors
      Sec. 9. (b) The National Nominating Committee shall consist of no fewer than six and no more than nine members. The number of [Industry] Non-Industry committee members shall equal or exceed the number of [Non-Industry] Industry committee members. If the National Nominating Committee consists of six members, at least two shall be Public committee members. If the National Nominating Committee consists of seven or more members, at least three shall be Public committee members. No officer or employee of the Association shall serve as a member of the National Nominating Committee in any voting or non-voting capacity. No more than three of the National Nominating Committee members and no more than two of the Industry committee members shall be current members of the NASD Board.

      * As approved in Securities Exchange Act Release No. 39326 (November 14, 1997), 62 F.R. 62385 (November 21, 1997).

    • 97-96 Member Requirement: NASD Members Must Complete Year 2000 Compliance Survey

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      SUGGESTED ROUTING

       

      Senior Management
      Legal & Compliance
      Operations
      Syndicate

      Systems
      Technology
      Trading



      Executive Summary

      As the year 2000 approaches, organizations throughout the world are facing the formidable challenge of ensuring that their own computer systems, and other computer systems they depend upon, will continue to operate successfully when processing data/information with dates after December 31, 1999. This applies both to information technology systems used to conduct a securities business and general business support systems (e.g., telephone, power, elevator). This challenge is particularly acute in the securities industry,due to its heavy reliance on information technology.

      In response to this challenge, this Notice reiterates the responsibility of each and every member of the National Association of Securities Dealers, Inc. (NASD®) to analyze the readiness of its own computer systems, as well as other computer systems that each member relies upon. The NASD has been working in conjunction with other regulators and the securities industry to address these challenges, and has put forward several communications about this very important Year 2000 issue.1

      To ensure that members are on a course to make their systems and applications Year 2000 compliant, NASD Regulation, Inc., requires all members to return a completed "Year 2000 Compliance Survey" to NASD RegulationSM no later than January 31, 1998. Member firms that have returned a completed "Year 2000 Survey" to the New York Stock Exchange are exempt from this requirement at this time.

      Questions or comments regarding the survey should be directed to Adam Levine, Compliance Department, NASD Regulation, at (202) 728-8901; or Paul Voketaitis, Compliance Department, NASD Regulation, at (202) 728-8843. Questions regarding the NASD's Year 2000 Program should be directed to Lyn Kelly, Year 2000 Program Director, at (301) 590-6342.

      Background

      The Year 2000 problem, simply stated, is that computers typically have been programmed to use a two-digit number to represent the year for any date. Since dates are essential to many automated functions, it is absolutely critical for each and every member firm to act now to assess its information technology environment and make necessary changes toensure that automated processes with date-sensitive components will correctly identify "00" as the year 2000, rather than 1900, when processing dates on and after January 1, 2000.

      Member firms have the responsibility to determine the readiness of their internal computer systems, and other computer systems that they rely upon, for the Year 2000 challenge. In particular, members that use automated programs to satisfy their regulatory and compliance responsibilities must ensure that those systems are able to function successfully with dates after December 31, 1999. As stated in Notice to Members 97-16, "…computer failures related to Y2K problems generally will be considered neither a defense to violations of firms' regulatory or compliance responsibilities nor a mitigation of sanctions for such violations." Further background information on theYear 2000 problem and associated activities and publications are available on both the NASD Regulation Web Site, www.nassdr.com (go to "Members Check Here," and select the topic "Year 2000"); and the NASD Web Site, www.nasd.com, under the "News" area. The Securities Industry Association (SIA) also has a Year 2000 Web site (www.sia.com), and for a comprehensive look at Year 2000 information, visit www.year2000.com.

      NASD Regulation is working with other regulators and the securities industry to make sure that the Year 2000 challenge is met and that investor protection and market integrity are not jeopardized. This effort includes an initiative by NASD Regulation (in cooperation with other regulators) to ascertain whether members are taking appropriate steps to make certain that the automated systems they rely upon to meet theirregulatory, market participant, andinvestor protection obligations are Year 2000 compliant. This is being accomplished, in part, by including a special Year 2000 section in all cycle examinations. NASD Regulation examiners will use your survey response in the examinations process.

      Members are strongly encouraged to develop and implement an action plan to address any system changes required to achieve Year 2000 compliance. Also, members should contact vendors of the software and hardware products they use to ensure they are addressing the Year 2000 challenge. Introducing firms, in particular,are strongly encouraged to not only look at their own systems, but also to obtain written assurances from all service providers, including their clearing firms, that the software and hardware products they use are being reviewed for Year 2000 compliance.It is highly recommended that each firm accomplish all system changes by the end of 1998, so that 1999 can be used for monitoring the operations of all converted systemsand performing quality assurance and interface tests with other organizations.

      Survey

      As the next step in its Year 2000 initiative, NASD Regulation requires NASD members' written responses to the enclosed survey no later than January 31, 1998. Members must complete the survey and return it to the address indicated on the form. Furthermore, NASD Regulation requires an original (not mechanically generated) signature from the member firm's Chief Executive Officer in the designated space. Member firms that have returned a completed "Year 2000 Survey" to the New York Stock Exchange are not required to complete the NASD Regulation survey at this time.

      If members need an additional copy of the NASD Regulation survey, it will be posted on both the NASD Regulation and NASD Web Sites. To download the survey, go to either Web Site's Year 2000 section or tothe Notices to Members Web Pages. (Note: Members will not be able to fill out this survey on-line; members must use the enclosed survey form or print out the Web Site version of the survey and mail it in hard-copy format to the NASD Regulation Year 2000 Program Office identified on the survey.)

      Further Steps

      There will be additional steps taken with respect to Year 2000 by NASD Regulation. We plan, for example, to require that members certify to NASD Regulation later in 1998 the status of their Year 2000 compliance program and its readiness for testing. Subsequently, NASD Regulation also plans to require that each member certify that its systems have been remediated and other necessary steps have been taken to address systems compliance for Year 2000.

      Testing

      Both NASD Regulation and The Nasdaq Stock Market, Inc., have established test centers available to member firms to test those systems that interact with NASD systems (point-to-point testing). Testing will be available in July 1998. Details regarding test schedules will be distributed at the January 1998 SIA Year 2000 Conference and will also be available via the NASD Regulation and NASD Web Sites. NASD Regulation will also issue another Notice to Members regarding Year 2000 in the near future.

      The securities industry, coordinated by the SIA, is planning for industrywide testing from August 1998 to December 1999. This testing is intended to allow firms and other market participants to perform integrated, industry-wide testing.


      Endnote

      1 In order to coordinate and address Year 2000 efforts and issues, the NASD communicates regularly with its members and the securities industry. See the NASD Regulatory & Compliance Alert (September 1997); NASD Notices to Members—"For Your Information" section (July 1996); NASD Notice to Members 97-16 (March 1997); and Nasdaq's Subscriber Bulletin (June 1997). Also, in May 1997, Nasdaq Trading and Market Services began including Year 2000 as a topic at its quarterly vendor focus groups. And, there are Year 2000 Web Pages on both the NASD Web Site (www.nasd.com) and the NASD Regulation Web Site (www.nasdr.com).

    • 97-95 Fixed Income Pricing System Additions, Changes, And Deletions As Of November 21, 1997

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      SUGGESTED ROUTING

       

      Senior Management
      Corporate Finance
      Institutional
      Legal & Compliance

      Municipal
      Operations
      Systems
      Trading



      As of November 21, 1997, the following bonds were added to the Fixed Income Pricing SystemSM (FIPSSM).

      Symbol Name Coupon Maturity
      ELRT.GA Eldorado Resorts LLC 10.500 08/15/06
      GTAR.GA Globalstar L.P./Cap Corp 11.375 02/15/04
      GTAR.GB Globalstar L.P./Cap Corp 11.250 06/15/04
      TPLP.GB Tanger Properties LP 7.875 10/24/04
      LODG.GA Sholodge, Inc. 9.550 09/01/07
      SFC.GA Southern Pacific Funding Corp 11.500 11/01/04
      HMTT.GA HMT Technology Corp 5.750 01/15/04
      IACA.GA InterMedia Capital Partners IV 11.250 08/01/06
      KSAC.GD Kaiser Aluminum & Chemical Corp 10.875 10/15/06
      KPLA.GA Key Plasctics Inc. 10.250 03/15/07
      MBN.GA MBNA Capital I 8.278 12/01/26
      MBN.GA MBNA Capital I 6.518 02/01/27
      ICF.GB IFC Kaier International Inc. 13.000 12/31/03
      PAGE.GD Paging Network Inc. 10.000 10/15/08
      MCLD.GA McLeodUSA Inc 10.500 03/01/07
      PRWL.GC PriCellular Wirless Corp. 10.750 11/01/04
      ICEL.GB Intercel Inc 12.000 02/01/06
      KZME.GA Katz Media Corp 10.500 01/15/07
      FALC.GA Falcon Building Products Inc 9.500 06/15/07
      FALC.GB Falcon Building Products Inc 10.500 06/15/07
      SPPB.GA Specialty Paperboard Inc 9.375 10/15/06
      CGF.GA Carr-Gottstein Foods Inc 12.000 11/15/05
      NTLI.GA NTL Inc 10.000 02/15/07
      PTEL.GA Powertel Inc 11.125 06/01/07
      BFPT.GB Brooks Fiber Properties Inc 10.875 03/01/06
      BFPT.GC Brooks Fiber Properties Inc 10.000 06/01/07
      GTRC.GA Guitar Center Management Co Inc 11.000 07/01/06
      UTB.GA U.S. Timberlands Financial Corp 9.625 11/15/07
      CTYA.GH Century Communication Corp 8.375 11/15/17

      As of November 21, 1997, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      TRTX.GA Transtexas Gas Corp 10.500 09/01/00
      WAX.GA Waxman Industries Inc 13.750 06/01/99
      KFIN.GA K&F Industries Inc 13.750 08/01/01
      VON.GA Von-Cos Inc 9.625 04/01/02
      FBR.GA First Brands Corp 9.125 04/01/99
      KCC.GA K-III Communications Corp 10.625 05/01/02
      GNLN GA General Nutrition Inc 11.375 03/01/00
      BORN.GB Borden Inc 9.875 11/01/97
      DEC.GB Digital Equipment 7.000 11/15/97

      As of November 21, 1997, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      CE.GD CLEC.GB Calenergy Co 7.630 10/15/07
      FEN.GA FGAS.GA Forcenergy Inc 9.500 11/01/06
      FEN.GB FGAS.GB Forcenergy Inc 8.500 02/15/07
      STN.GB STCI.GB Station Casinos Inc 9.625 06/01/03
      STN.GD STCI.GD Station Casinos Inc. 9.750 04/15/07
      PHO.GA PTEL.GA People's Telephone Co Inc 12.250 07/15/02

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, NASD RegulationSM 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.

    • 97-94 NASD 1998 Holiday Schedule

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      SUGGESTED ROUTING

       

      Internal Audit
      Legal & Compliance
      Municipal
      Operations

      Syndicate
      Systems
      Trading



      The National Association of Securities Dealers, Inc. (NASD®) will observe the following holiday schedule for 1998:

      January 1 New Year's Day
      January 19 Martin Luther King Jr.'s Birthday (Observed)
      February 16 Presidents' Day
      April 10 Good Friday
      May 25 Memorial Day
      July 3 Independence Day (Observed)
      September 7 Labor Day
      November 26 Thanksgiving Day
      December 25 Christmas Day

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

    • 97-93 Trade Date — Settlement Date Schedule for 1998

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      SUGGESTED ROUTING

       

      Internal Audit
      Legal & Compliance
      Municipal
      Operations

      Syndicate
      Systems
      Trading



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

      The Nasdaq Stock MarketSM and the securities exchanges will be closed on Monday, January 19, 1998, 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 16 21
      14 20 22
      15 21 23
      16 22 26
      19 Markets Closed
      20 23 27

      Presidents' Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 16, 1998, 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 13 18
      11 17 19
      12 18 20
      13 19 23
      16 Markets Closed
      17 20 24

      Good Friday: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, April 10, 1998. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      April 2 April 7 April 9
      3 8 13
      6 9 14
      7 13 15
      8 14 16
      9 15 17
      10 Markets Closed
      13 16 20

      Memorial Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 25, 1998, 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 18 May 21 May 26
      19 22 27
      20 26 28
      21 27 29
      22 28 June 1
      25 Markets Closed
      26 29 2

      Independence Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Friday, July 3, 1998, 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 26 July 1 July 6
      29 2 7
      30 6 8
      July 1 7 9
      2 8 10
      3 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 7, 1998, 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 4 9
      2 8 10
      3 9 11
      4 10 14
      7 Markets Closed
      8 11 15

      Columbus Day: Trade Date — Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 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.

      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 6v 8
      Jan. 1, 1999 Markets Closed
      4 7 11

      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."

    • 97-92 NASD Regulation Requests Comment On Proposal To Discontinue Complimentary Hard Copy Distribution Of Notices To Members And Regulatory & Compliance Alert

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      Comment Period Expires January 31, 1998

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance



      Executive Summary

      NASD Regulation, Inc., is soliciting member comment on a proposal to discontinue after January 1, 1999, complimentary hard copy distribution of NASD Notices to Members and NASD Regulatory & Compliance Alert, which are currently available for free on the NASD RegulationSM Web Site (www.nasdr.com). Members that elect not to use the Web Site versions of these publications would have the option of subscribing to hard copy versions.

      Questions concerning this Request for Comment should be directed to Jay Cummings, Internet & Investor Education, NASD Regulation, at (301) 590-6070.

      Background

      NASD Regulation established a Web Site (www.nasdr.com) 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 the Internet technology presents an alternative method to distribute information of interest to industry participants.

      This year, National Association of Securities Dealers, Inc. (NASD®) Chairman Frank Zarb instituted a "Reinvesting For Our Future" Program. Objectives of the Reinvesting Program include achieving significant cost savings while providing the same level of service, and passing on costs more fairly by charging users for those services that they actually want and use.

      One proposal submitted as part of this program was that NASD Regulation discontinue complimentary hard copy distribution of NASD Notices to Members and NASD Regulatory & Compliance Alert, which currently may be viewed, downloaded, and printed for free via the NASD Regulation Web Site. Members that elect not to use Web Site versions of these publications would have the option of subscribing to hard copy versions. This proposal would allow NASD Regulation to reduce its expenses and pass on costs more fairly by charging only those members that choose to subscribe to a hard copy of these publications.

      Complimentary hard copy distribution of NASD Notices to Members and NASD Regulatory & Compliance Alert would cease on January 1, 1999. Between July 1, 1998 and December 31, 1998, subscribers and others who currently receive free hard copies of these publications would be notified through a letter and through advertisements in the publications: (1) of their availability on the Internet, (2) of the impending charge for hard copy delivery, and (3) of how to obtain a subscription and how much it will cost.

      The January 1, 1999, implementation date was selected to coincide with another technology proposal currently under consideration by the NASD. On December 11, 1997, the NASD Board of Governors will consider amendments to the NASD By-Laws that would require each executive representative, beginning not later than January 1, 1999, to maintain an Internet electronic mail account for communication with the NASD and to update firm contact information via the NASD Regulation Web Site. If the NASD Board approves the amendment, it will be submitted to the membership for a vote. 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 electronic mail account and Internet access can arrange to obtain them at the same time and have a reasonable time to do so.

      Request For Comment

      NASD Regulation encourages all members and interested parties to respond to this Notice. Comments should be mailed to:

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

      or e-mailed to:
      pubcom@nasd.com.

      Note: Members and interested parties may provide their comments through the NASD Regulation Web Site's "Request For Comments" Web page.

      Comments must be received by January 31, 1998.

    • 97-91 NASD Reminds Members Of Obligations Under Free-Riding And Withholding Interpretation

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      SUGGESTED ROUTING

      Senior Management
      Corporate Finance
      Internal Audit
      Legal & Compliance
      Syndicate



      Executive Summary

      NASD Regulation, Inc., reminds members of their obligations under the Free-Riding and Withholding Interpretation (IM-2110-1) with respect to venture capitalists and the cancellation safe harbor provisions. This information was previously provided to members through Compliance Desk in a Member Alert dated November 21, 1997.

      Questions concerning this Notice should be directed to Gary L. Goldsholle, Senior Attorney, Office of General Counsel, NASD RegulationSM, at (202) 728-8104.

      Background

      Venture Capital Investors

      NASD Regulation is reminding members of their obligations under the Free-Riding and Withholding Interpretation, IM-2110-1 (Interpretation), with respect to allocations of hot issues to venture capitalists. Paragraph (b)(4) of the Interpretation restricts sales of hot issues to certain persons affiliated with "a bank, savings and loan institution, insurance company, investment company, investment advisory firm or any other institutional type account (including, but not limited to, hedge funds, investment partnerships, investment corporations, or investment clubs)."1 A venture capitalist falls within the scope of paragraph (b)(4) when he or she is a senior officer of an "institutional type account" or otherwise is a person who may influence or whose activities directly or indirectly involve or are related to the function of buying or selling securities of an "institutional type account." This type of account includes, among others, investment partnerships and investment corporations, which are frequently used by venture capitalists. Members should ensure, therefore, that sales of hot issues to venture capitalists who are restricted under the Interpretation are made consistent with the Interpretation.

      Persons restricted under paragraph (b)(4) are generally referred to as conditionally restricted persons. As such, they may purchase hot issues from a member only if the member is "prepared to demonstrate that the securities were sold to such persons in accordance with their normal investment practice, that the aggregate of the securities so sold is insubstantial and not disproportionate in amount as compared to sales to members of the public and that the amount sold to any one of such persons is insubstantial in amount."2

      In 1994, the Securities and Exchange Commission (SEC) approved amendments to the Interpretation which, among other things, included an exemption for venture capital investors who meet certain enumerated criteria. The venture capital provisions of paragraph (h) of the Interpretation are not a general exemptive provision for venture capital investors. In fact, these narrow exemptive provisions were adopted because, under most circumstances, members otherwise would be prohibited from selling hot issues to venture capitalists. The venture capital investor provisions included in paragraph (h) of the Interpretation allow venture capital investors to purchase a hot issue security to maintain their percentage ownership interest in an entity, notwithstanding that such venture capital investor may be restricted under the Interpretation.

      Cancellation Safe Harbor

      NASD Regulation is also reminding members of the scope of the cancellation safe harbor provisions of paragraph (a)(3). Specifically, paragraph (a)(3) provides that it shall not be "a violation of the interpretation if a member which makes an allocation to a restricted person or account of an offering that trades at a premium in the secondary market, cancels the trade for such restricted person or account, prior to the end of the first business day following the date on which secondary market trading commences and reallocates such security at the public offering price to a non-restricted person or account."3 The SEC order adopting the cancellation safe harbor4 and the related NASD Notice to Members5 both stated that the cancellation provisions were intended to remedy concerns caused by inadvertent violations of the Interpretation that are corrected by the member making the distribution. Thus, paragraph (a)(3) permits members to allocate securities to restricted persons and subsequently reallocate such hot issue securities to other accounts within the time limits prescribed by the safe harbor only to the extent that such reallocation is to remedy an inadvertent violation of the Interpretation.6


      Endnotes

      1 IM-2110-1(b)(4).

      2 IM-2110-1(b)(5).

      3 IM-2110-1(a)(3).

      4 59 F. R. 64455, 64458 (December 14, 1994).

      5 NASD Notice to Members 95-7 (February 1995).

      6 This sentence has been modified from the Member Alert dated November 21, 1997, to more clearly define the scope of paragraph (a)(3).

    • 97-90 SOES Tier-Size Levels Set To Change January 1, 1998

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      Systems
      Trading



      Executive Summary

      Effective January 1, 1998, tier sizes for 544 Nasdaq National Market® 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 Small Order Execution SystemSM (SOESSM) order size for a Nasdaq National Market security is 1,000, 500, or 200 shares depending on the trading characteristics of the security. The Nasdaq Workstation IITM indicates the maximum SOES order size for each Nasdaq National Market security in its bid/offer quotation display. The indicator "NM10," "NM5," or "NM2" is displayed to the right of the security name, corresponding to a maximum SOES order size of 1,000, 500, or 200 shares, respectively.

      The criteria for establishing SOES tier sizes are as follows:

      • A 1,000-share tier size was applied to those Nasdaq National Market securities that had an average daily non-block volume of 3,000 shares or more a day, a bid price that was less than or equal to $100, and three or more market makers.


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


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

      In accordance with Rule 4710, Nasdaq periodically reviews the SOES tier size applicable to each Nasdaq National Market security to determine if the trading characteristics of the issue have changed so as to warrant a tier-size adjustment. Such a review was conducted using data as of September 30, 1997, pursuant to the aforementioned standards. The SOES tier-size changes called for by this review are being implemented with three exceptions.

      • First, issues were not permitted to move more than one tier-size level. For example, if an issue was previously categorized in the 1,000-share tier, it would not be permitted to move to the 200-share tier, even if the formula calculated that such a move was warranted. The issue could move only one level to the 500-share tier as a result of any single review. In adopting this policy, the NASD was attempting to maintain adequate public investor access to the market for issues in which the tier-size level decreased and to help ensure the ongoing participation of market makers in SOES for issues in which the tier-size level increased.


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


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

      In addition, with respect to initial public offerings (IPOs), the SOES tier-size 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, 1997, were not subjected to the SOES tier-size review.

      Following is a listing of the 544 Nasdaq National Market issues that will require an SOES tier-level change on January 1, 1998.

      Nasdaq National Market SOES Tier-Size Changes
      All Issues In Alphabetical Order By Security Name
      (Effective January 1, 1998)
      Symbol Security Name Old Tier
      Level
      New Tier Level
      A
      AANB ABIGAIL ADAMS NATL 1000 500
      AASIZ ADVANCED AERO WT B 500 1000
      ABFSP ARKANSAS BEST CV P 1000 500
      ABSC AURORA BIOSCIENCE 200 500
      ACCL ACCELGRAPHICS INC 500 1000
      ACLE ACCEL INTL CP 500 1000
      ACRN ACORN PRODUCTS INC 200 500
      ACSC ADVANCED COMM SYST 200 500
      ADLI AMER DENTAL TECHS 500 1000
      ADVNZ ADVANTA CP DEP SH 1000 500
      AEHR AEHR TEST SYSTEMS 200 500
      AFED AFSALA BANCORP INC 500 1000
      AFSC ANCHOR FIN CORP 200 500
      AHLS A H L SERVCES INC 500 1000
      ALGI AMER LOCKER GROUP 200 500
      ALLE ALLEGIANT BCP INC 500 1000
      ALLS ALLSTAR SYSTEMS IN 200 500
      ALRS ALARIS MEDICAL INC 200 500
      AMBC AMER BNCP OHIO 200 500
      AMBK A M B A N C CP 500 1000
      AMCE AMER CLAIMS EVALUA 500 1000
      AMGD AMER VANGUARD CP 500 1000
      AMIE AMBASSADORS INTL I 500 1000
      AMPI AMPLICON INC 200 500
      AMTD AMERITRADE HLDG A 500 1000
      AMZN AMAZON.COM INC 500 1000
      ANAT AMER NATL INS CO 1000 500
      ANCOW ANACOMP INC WTS 500 200
      APEX APEX PC SOLUTIONS 500 1000
      ARIAW ARIAD PHARM INC WT 1000 500
      ARMXF ARAMEX INTL LTD 500 1000
      ARSC ARIS CORPORATION 200 500
      ARTW ART S WAY MFG CO I 500 1000
      ASAM ASAHI/AMERICA INC 1000 500
      ASBI AMERIANA BANCORP 500 1000
      ASBP A S B FINANCIAL CP 500 1000
      ASCT ASCENT PEDIATRCS 200 500
      ASIS ASI SOLUTIONS INC 500 1000
      ATEN AT ENTERTAINMENT I 200 500
      ATHM AT HOME CORPORATIO 200 500
      ATLPA ATL PRODUCTS CL A 500 1000
      AVII ANTIVIRALS INC 200 500
      AVIIW ANTIVIRALS INC WTS 200 500
      AVTR AVATAR HLDGS INC 1000 500
      B
      BACU BACOU USA INC 1000 500
      BANCP BBC CAPITAL TR I P 500 1000
      BCBF B C B FIN SVCS CP 500 1000
      BCORY BIACORE INTL AB AD 1000 500
      BEAS B E A SYSTEMS INC 500 1000
      BEEF WESTERN BEEF INC 1000 500
      BEXP BRIGHAM EXPLORATIO 500 1000
      BFOH BANCFIRST OHIO CP 1000 500
      BGAS BERKSHIRE GAS CO 500 1000
      BGLVW BALLY'S GRAND WTS 200 500
      BGSS B G S SYSTEMS INC 1000 500
      BIGX EXCELSIOR-HENDERSO 200 500
      BINX BIONX IMPLANTS INC 500 1000
      BKCT BANCORP CONN INC 1000 500
      BKUNZ BANKUNITED CAP II 200 500
      BLCI BROOKDALE LIVING 500 1000
      BMCCP BANDO MCGLOC PFD A 200 500
      BNBCP B N B CAP TR PFD 200 500
      BNHNA BENIHANA INC A 500 1000
      BORAY BORAL LTD ADS 200 500
      BOTX BONTEX INC 200 500
      BREL BIORELIANCE CORP 200 500
      BRZS BRAZOS SPORTSWEAR 500 200
      BTBTY B T SHIP SPONSOR A 500 200
      BTRN BIOTRANSPLANT INC 200 500
      BUCK BUCKHEAD AMERICA C 500 1000
      C
      CAII CAPITAL ASSOC 500 1000
      CAIR CORSAIR COMMUNICAT 200 500
      CANX CANNON EXPRESS INC 500 200
      CAPS CAPITAL SAV BNCP I 1000 500
      CARY CAREY INTL INC 200 500
      CASH FIRST MIDWST FIN I 500 1000
      CBIV COMMUNITY BANCSHAR 200 500
      CBLI CHESAPEAKE BIOLOGI 200 500
      CBMD COLUMBIA BANCORP M 500 1000
      CBSAP COASTAL BANC PFD A 500 200
      CBSL COMPLETE BUSINESS 500 1000
      CCOW CAPITAL CP OF WEST 500 1000
      CDIR CONCEPTS DIRECT IN 200 500
      CDIS CAL DIVE INTL INC 200 500
      CDRD C D RADIO INC 500 1000
      CDWN COLONIAL DOWNS CL 500 1000
      CENI CONESTOGA ENTRPR I 1000 500
      CFAM CORPORATEFAMILY SO 200 500
      CFBC COMMUNITY FIRST BN 200 500
      CFCI C F C INTL INC 1000 500
      CFIC COMMUNITY FIN CP 500 1000
      CFINP CONSUMERS FIN CP P 500 200
      CHKRW CHECKERS DRIVE-IN 200 500
      CHNL CHANNELL COML CORP 1000 500
      CINS CIRCLE INCOME SHAR 500 1000
      CLBK COMMERCIAL BANKSHR 1000 500
      CLTDF COMPUTALOG LTD 200 500
      CMDAW CAM DESIGNS INC WT 200 500
      CMED COLORADO MEDTECH I 500 1000
      CMPX C M P MEDIA CL A 200 500
      CMRN CAMERON FINANCIAL 1000 500
      CNBA CHESTER BANCORP IN 500 1000
      CNBF C N B FINANCIAL CP 200 500
      CNCX CONCENTRIC NETWORK 200 500
      CNGL CONTL NATURAL GAS 200 500
      CNTBY CANTAB PHARM PLC A 200 500
      COBI COBANCORP INC 1000 500
      COOP COOPERATIVE BKSHS 500 1000
      COSC COSMETIC CENTER CL 500 1000
      COVB COVEST BANCSHARES 500 1000
      CRDM CARDIMA INC 200 500
      CRESY CRESUD SACIF ADR 500 1000
      CRZO CARRIZO OIL & GAS 200 500
      CSBI CENTURY SOUTH BKS 500 1000
      CSTR COINSTAR INC 200 500
      CTBP COAST BANCORP 200 500
      CTEN CENTENNIAL HLTHCR 200 500
      CTIC CELL THERAPEUTICS 500 1000
      CUIS CUISINE SOLUTIONS 1000 500
      CVSN CHROMAVISN MED SYS 200 500
      D
      DAHX DECRANE AIRCRAFT 500 1000
      DENHY DENISON INTL ADR 200 500
      DLTK DELTEK SYSTEMS INC 500 1000
      DNCC DUNN COMPUTER CORP 500 1000
      DNFCP D & N CAP CORP PFD 200 500
      DOCDF DOCDATA NV 500 1000
      DOMZ DOMINGUEZ SVCS CP 200 500
      DRYR DREYERS GRAND ICE 1000 500
      DSGIF D S G INTL LTD ORD 1000 500
      DSIT D S I TOYS INC 200 500
      DTMC D T M CORP 500 1000
      DTPI DIAMOND TECH PTNRS 500 1000
      E
      EACO E A ENGRG SCI TECH 500 1000
      ECSI ENDOCARDIAL SOLUTI 500 1000
      EDAPY EDAP TMS SA ADR 200 500
      EEFT EURONET SVCS INC 500 1000
      EFBI ENTERPRISE FED BNC 500 1000
      EGEO EAGLE GEOPHYSICAL 200 500
      EGHT 8 X 8 INC 200 500
      EGLB EAGLE BANCGROUP IN 500 1000
      EIRE EMERALD ISLE BANCO 500 1000
      ELET ELLETT BROTHERS IN 1000 500
      ELRWF ELRON ELEC INDS WT 200 500
      ELSE ELECTRO SENSORS IN 200 500
      EMKR EMCORE CORP 500 1000
      EMSI EFFECTIVE MGMT SYS 500 1000
      ENEX ENEX RESOURCE CP 500 1000
      ENMC ENCORE MEDICAL COR 500 1000
      ENMCW ENCORE MEDICAL CP 500 1000
      ENTS PHYSICIANS SPECIAL 500 1000
      EPEX EDGE PETROLEUM CP 500 1000
      EPMD EP MEDSYSTEMS INC 500 1000
      ESCP ELECTROSCOPE INC 500 1000
      ESPRY ESPRIT TELECOM ADR 500 1000
      ESSF E S S E F CP 500 1000
      ETCIA ELECTRONIC TELECOM 500 1000
      EVSNF ELBIT VISION SYSTE 500 1000
      EXAC EXACTECH INC 500 1000
      F
      FAIL FAILURE GP INC (TH 1000 500
      FAMCK FEDERAL AGRIC MORT 1000 500
      FARM FARMER BROTHERS 500 200
      FAVS FIRST AVIATION SVC 500 1000
      FBCI FIDELITY BANCORP D 500 1000
      FBHC FORT BEND HLDG COR 200 500
      FBNC FIRST BANCP TROY N 200 500
      FBNKP FIRST BKS CUM PFD 500 200
      FBNW FIRSTBANK CORP 200 500
      FBSI FIRST BANCSHARES I 500 200
      FFHH FSF FINANCIAL CP 500 1000
      FFSW FIRSTFEDERAL FINL 1000 500
      FGII FRIEDE GOLDMAN INT 200 500
      FIFS FIRST INV FIN SVC 500 1000
      FKFS FIRST KEYSTONE FIN 500 1000
      FLAG F L A G FINANCIAL 1000 500
      FLGS FLAGSTAR BANCORP 500 1000
      FLYAF C H C HELICO CL A 200 500
      FMSB FIRST MUTUAL SVGS 500 1000
      FMST FINISHMASTER INC 500 200
      FOBC FED ONE BANCORP IN 500 1000
      FORR FORRESTER RESRCH 1000 500
      FPBN F P BANCORP INC 500 1000
      FRGB FIRST REGIONAL BNC 500 1000
      FRME FIRST MERCHANTS CP 500 1000
      FSBI FIDELITY BANCORP I 200 500
      FSBIP FB CAPITAL TR PFD 500 200
      FSBT FIRST STATE CP 500 200
      FSCR FEDERAL SCREW WORK 200 500
      FSFH FIRST SIERRA FIN 500 1000
      FSNJ BAYONNE BANCSHARES 500 1000
      FSPG FIRST HOME BNCP IN 500 200
      FSPT FIRSTSPARTAN FIN C 200 500
      FSRVF FIRSTSERVICE CP VT 500 1000
      FTCG FIRST COLONIAL GP 200 500
      FUSC FIRST UNITED BNCP 200 500
      FVNB FIRST VICTORIA NAT 500 200
      FWRX FIELDWORKS INC 500 1000
      G
      GALTF GALILEO TECH LTD 200 500
      GBBK GREATER BAY BANCOR 500 1000
      GBTVP GRANITE BRDCT CP P 500 200
      GCABY GEN CABLE PLC ADR 1000 500
      GCOM GLOBECOMM SYS INC 200 500
      GCTI GENESYS TELECOMM L 200 500
      GFLS GREATER COMMUNITY 200 500
      GFLSP GCB CAP TRUST PFD 200 500
      GFNL GRANITE FINANCIAL 500 1000
      GIFI GULF ISLAND FAB 500 1000
      GIGA GIGA TRONICS INC 500 1000
      GLTB GOLETA NATL BANK 200 500
      GMRK GULFMARK OFFSHORE 500 1000
      GNCNF GORAN CAPITAL INC 500 1000
      GNWR GENESEE & WYOMING 500 1000
      GOSB GSB FINANCIAL CORP 200 500
      GPSI GREAT PLAINS SFTWA 200 500
      GSLA G S FINANCIAL CP 500 1000
      GSLC GUARANTY FIN CP 500 1000
      GTRC GUITAR CENTER INC 500 1000
      GZEA G Z A GEOENVIRON 1000 500
      H
      HAHN HAHN AUTOMOTIVE 200 500
      HAKI HALL KINION ASSOC 200 500
      HBCI HERITAGE BANCORP I 500 1000
      HBIX HAGLER BAILLY INC 200 500
      HCBB HCB BANCSHARES INC 500 1000
      HCRC HALLWOOD CONS RES 200 500
      HCRI HEALTHCARE RECOV 200 500
      HDVS H. D. VEST INC 500 1000
      HELIE HELISYS INC 500 1000
      HFFB HARRODSBURG FIRST 200 500
      HFFC H F FINANCIAL CP 500 1000
      HMCI HOMECORP INC 200 500
      HMII H M I INDUSTRIES I 500 1000
      HMLK HEMLOCK FED FIN CO 500 1000
      HPFC HIGH POINT FINL CO 500 1000
      HPWR HEALTH POWER INC 500 1000
      HRBF HARBOR FED BNCP IN 1000 500
      HSKA HESKA CORPORATION 200 500
      HTCO HICKORY TECH CP 200 500
      HTEI H T E INC 200 500
      HUDS HUDSON HOTELS CP 500 1000
      HYDEA HYDE ATHLETIC INDS 1000 500
      HYSQ HYSEQ INC 200 500
      HZWV HORIZON BNCP INC 500 1000
      I
      IATA IAT MULTIMEDIA 500 1000
      IBCPP INDEP BK CP CUM PF 500 200
      ICGX ICG COMMUNICATION 500 1000
      ICIQ INTL COMPUTEX INC 500 1000
      IDEA INNOVASIVE DEVICES 1000 500
      IHIIL INDUSTRIAL HLDG WT 500 1000
      IITCF I I T C HLDGS LTD 200 500
      IKOS I K O S SYSTEMS 1000 500
      ILABY INSTRUMENTATION AD 500 1000
      ILDCY ISRAEL DEVEL LTD A 500 200
      ILXO I L E X ONCOLOGY I 500 1000
      IMAA INFORMATION MGMT 200 500
      IMGXW NETWORK IMAGING WT 1000 500
      INDBP INDEP CAP TR I PFD 200 500
      INLD INLAND CASINO CP 500 1000
      INTT INTEST CORPORATION 200 500
      INVA INNOVA CORP 200 500
      IONAY IONA TECHS ADR 500 1000
      IPSW IPSWICH SAV BK 500 1000
      IQST INTELLIQUEST INFO 1000 500
      IRIDF IRIDIUM WORLD COMM 200 500
      ISER INNOSERV TECH INC 500 1000
      ITIC INVESTORS TITLE CO 500 1000
      IWLC IWL COMMUNICATIONS 200 500
      J
      JEFFP J B I CAPITAL TR P 500 200
      JLMI J L M INDS INC 200 500
      JLNY JENNA LANE INC 500 1000
      JLNYW JENNA LANE INC WT 500 1000
      JRJR 800-JR CIGAR INC 200 500
      JSBA JEFFERSON SAV BNCP 500 1000
      JTFX JETFAX INC 200 500
      K
      KLLM K L L M TRANSPORT 1000 500
      KOSP KOS PHARMACEUTCL 500 1000
      KPSQ KAPSON SNR QUARTER 500 1000
      KREG KOLL REAL ESTATE G 200 500
      KTEL K-TEL INTL INC 500 1000
      KTIC KAYNAR TECHS INC 500 1000
      KWIC KENNEDY-WILSON INT 500 200
      L
      LABL MULTI COLOR CP 500 1000
      LACI LATIN AMER CASINOS 500 1000
      LAIX LAMALIE ASSOCIATES 200 500
      LARK LANDMARK BSCHS INC 200 500
      LBFC LONG BEACH FIN CP 500 1000
      LCLD LACLEDE STEEL CO 500 1000
      LEXI LEXINGTON HLTHCARE 200 500
      LEXIW LEXINGTON HLTHCR W 200 500
      LFCO LIFE FINANCIAL COR 200 500
      LFED LEEDS FED SAV BANK 200 500
      LGNDW LIGAND PHARMA WTS 200 500
      LHSG L H S GROUP INC 500 1000
      LIHRY LIHIR GOLD LTD ADR 1000 500
      LIND LINDBERG CP 500 1000
      LION FIDELITY NATL CP 1000 500
      LIQB LIQUI BOX CP 1000 500
      LKFNP LAKELAND FINL TR P 200 500
      LKST LEUKOSITE INC 200 500
      LOFSY LONDON & OVERSEA A 200 500
      LOGIY LOGITECH INTL ADR 500 1000
      LPWR LASER POWER CORP 200 500
      LSBI LSB FINANCIAL CP 200 500
      LZRCF TLC THE LASER CTR 200 500
      M
      MAHI MONARCH AVALON INC 200 500
      MARN MARION CAP HLDGS I 500 1000
      MARSA MARSH SUPERMARKETS 1000 500
      MASB MASSBANK CP 500 1000
      MASSY MAS TECH LTD ADR 200 500
      MBBC MONTEREY BAY BANCO 500 1000
      MBLF M B L A FINL CORP 500 200
      MCBS MID CONT BCSHS INC 500 1000
      MCSC MIAMI COMPUTER SUP 500 1000
      MDDS MONARCH DENTAL CP 200 500
      MEAD MEADE INSTRUMENTS 500 1000
      MELI MELITA INTL CORP 200 500
      MFLR MAYFLOWER CO OP BK 500 200
      MHCO MOORE HANDLEY INC 200 500
      MINT MICRO-INTEGRATION 500 1000
      MIZR MIZAR INC 1000 500
      MMAN MINUTEMAN INTL INC 200 500
      MMGC MEGO MORTGAGE CP 500 1000
      MODA MODACAD INC 500 1000
      MPTBS MERIDIAN PT RLTY T 500 1000
      MRCF MARTIN COLOR-FI IN 500 1000
      MRCM MARCAM SOLUTIONS 200 500
      MRET MERIT HOLDING CP 1000 500
      MRTN MARTEN TRANSPORT L 200 500
      MSDX MASON-DIXON BCSHS 1000 500
      MSDXP MASON-DIX CAP TR P 200 500
      MTIX MICRO THERAPEUTICS 500 1000
      MTLI M T L INC 500 1000
      MTSLF M E R TELEMGT SOL 200 500
      MUEL MUELLER PAUL CO 500 200
      MVBI MISSISSIPPI VALLEY 1000 500
      MVII MARK VII INC 500 1000
      MVSN MACROVISION CORP 500 1000
      MXBIF MFC BANCORP LTD 500 1000
      N
      NACT NACT TELECOMM INC 500 1000
      NBSC NEW BRUNSWICK SCI 500 1000
      NBSI NORTH BSCHS INC 200 500
      NCEN NEW CENTURY FINANC 200 500
      NECSY NETCOM SYSTEMS ADR 1000 500
      NEIB NORTHEAST IND BNCP 1000 500
      NEON NEW ERA OF NTWKS I 200 500
      NERIF NEWSTAR RESOURCES 200 500
      NERXW NEORX CP WTS 500 200
      NEWH NEW HORIZONS WORLD 1000 500
      NEXR NEXAR TECHS INC 500 1000
      NHCI NATL HOME CENTERS 500 1000
      NHPI N H P INC 1000 500
      NMCOF NAMIBIAN MINERALS 500 1000
      NMGC NEOMAGIC CORP 500 1000
      NMTXW NOVAMETRIX WTS A 500 1000
      NMTXZ NOVAMETRIX WTS B 200 500
      NORPF NORD PACIFIC LTD 200 500
      NPBCP NPB CAPITAL TR PFD 200 500
      NRGG NRG GENERATING U.S 500 1000
      NRTI NOONEY REALTY TRUS 200 500
      NSAI N S A INTL INC 500 1000
      NSBC NEWSOUTH BANCORP I 500 1000
      NSPK NETSPEAK CORP 200 500
      NTWK NETWORK LONG DIST 500 1000
      NVLDF NOVEL DENIM HLDGS 200 500
      NWSS NETWORK SIX INC 500 1000
      O
      OAIC OCWEN ASSET INV 500 1000
      OCLR OCULAR SCIENCES IN 200 500
      OCOM OBJECTIVE COMMUN I 500 1000
      OGGI OLD GUARD GROUP IN 500 1000
      OGLE OGLEBAY NORTON CO 500 1000
      OKSB SOUTHWEST BNCP INC 500 1000
      OKSBP SOUTHWEST BNCP PFD 500 200
      OLCWF OLICOM A/S WTS 200 500
      OLGR OILGEAR CO 200 500
      OMQP OMNIQUIP INTL INC 500 1000
      OMTL OMTOOL LTD 200 500
      ONSL ONSALE INC 500 1000
      OPTLF OPTISYSTEMS SOLUTI 200 500
      OPTWF OPTISYSTEMS SOL WT 200 500
      ORFR ORBIT/FR INC 200 500
      OROA OROAMERICA INC 1000 500
      OSBC OLD SECOND BNCP IN 200 500
      OSKY MAHASKA INV CO 500 1000
      OVRL OVERLAND DATA INC 500 1000
      OXGNW OXIGENE INC WTS 1000 500
      OZRK BANK OF THE OZARKS 200 500
      P
      PABN PACIFIC CAP BNCP 500 200
      PALX PALEX INC 500 1000
      PAMX PANCHO S MEXICAN I 500 1000
      PBKBP PEOPLES CAP TR PFD 200 500
      PEAKF PEAK INTL LTD S3 200 500
      PEEK PEEKSKILL FIN CP 500 1000
      PEGS PEGASUS SYSTEMS IN 200 500
      PERM PERMANENT BNCP INC 1000 500
      PFACP PRO-FAC COOP PFD A 1000 500
      PFBIP PFBI CAP TR PFD 200 500
      PFDC PEOPLES BANCORP 200 500
      PGEN PROGENITOR INC 200 500
      PGENW PROGENITOR INC WTS 200 500
      PHFC PITTSBURGH HOME FI 500 1000
      PHSB PEOPLES HOME SVGS 200 500
      PHSYP PACIFICARE CV PFD 500 200
      PLEN PLENUM PUBLISHING 500 1000
      PMCO PROMEDCO MGMT CO 500 1000
      PMFG PEERLESS MFG CO 500 1000
      PMFI PERPETUAL MIDWEST 500 1000
      PPOD PEAPOD INC 200 500
      PRGN PEREGRINE SYSTEMS 500 1000
      PSNRY P T PASIFIK SATL A 500 1000
      PSWT PSW TECHNOLOGIES I 200 500
      PTUS PERITUS SOFTWARE S 200 500
      PVSA PARKVALE FINL CP 500 1000
      PWCC POINT WEST CAP CP 500 200
      PXXI PROPHET 21 INC 500 1000
      Q
      QADI Q A D INC 200 500
      QMDC QUADRAMED CP 500 1000
      QWST QWEST COMMUN INTL 200 500
      R
      RACN RACING CHAMPIONS C 200 500
      RARB RARITAN BANCORP IN 200 500
      RBCO RYAN BECK CO INC 1000 500
      RBOT COMPUTER MOTION IN 200 500
      RBPAA ROYAL BSCHS OF PA 1000 500
      REPBP RBI CAP TR I PFD 200 500
      RESR RESEARCH INC 1000 500
      REXI RESOURCE AMER CL A 1000 500
      RFMD RF MICRO DEVICES 200 500
      RGCO ROANOKE GAS CO 200 500
      RIMS ROBOCOM SYSTEMS IN 200 500
      RITTF RIT TECHNOLOGIES L 200 500
      RLCO REALCO INC 500 1000
      RLLYW RALLY'S HAMBURGER 500 1000
      RMBS RAMBUS INC 500 1000
      RPCLF REVENUE PROP LTD 200 500
      RTST RIGHT START INC 1000 500
      RWDT RWD TECHS INC 200 500
      RWTIW REDWOOD TRUST WTS 500 200
      RYAAY RYANAIR HLDGS ADR 200 500
      S
      SAGE SAGEBRUSH INC 500 1000
      SBGA SUMMIT BANK CORP 200 500
      SBIBP STERLING CAP TR PF 200 500
      SBIT SUMMIT BCSHS INC T 500 1000
      SCHI SIMIONE CENTRAL HL 200 500
      SCHR SCHERER HEALTHCARE 500 1000
      SDIX STRATEGIC DIAGNOST 500 1000
      SENEA SENECA FOODS CP A 200 500
      SFED S F S BANCORP INC 500 1000
      SFNCP SIMMONS FIRST CAP 200 500
      SFSI SEARCH FIN SVCS 500 1000
      SFSIP SEARCH FIN SVCS PF 500 1000
      SFXBW SFX BROADCAST WTS 200 500
      SGNS SIGNATURE INNS INC 200 500
      SGVB S G V BANCORP INC 500 1000
      SHSE SUMMIT HOLDING SE 200 500
      SHUF SCHUFF STEEL COMPA 200 500
      SILVZ SUNSHINE MINING WT 500 1000
      SJNB S J N B FINANCIAL 500 1000
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    • 97-89 SEC Approves Bank Broker/Dealer Rule

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      97-87 Attachments (PDF Format)

      Effective Date: February 15, 1998

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      Executive Summary

      On November 4, 1997, in Release No. 34-39294, the Securities and Exchange Commission (SEC or Commission) approved new National Association of Securities Dealers, Inc. (NASD®) Rule 2350, which specifies requirements applicable to broker/dealers operating on the premises of financial institutions (Bank Broker/Dealer Rule or Rule).1 The new Rule will be effective on February 15, 1998. This Notice contains questions and answers to assist members in complying with the new Rule. The text of the new Rule and the Federal Register version of the SEC Release are attached.

      Questions concerning this Notice should be directed to R. Clark Hooper, Senior Vice President, Office of Disclosure and Investor Protection, NASD Regulation, Inc., at (202) 728- 8325, or Mary N. Revell, Associate General Counsel, Office of General Counsel, NASD RegulationSM, at (202) 728-8203. Questions concerning the SEC's approval order should be directed to the SEC's Office of Interpretations and Guidance, at (202) 942-0069.

      Background

      The NASD initially published the Bank Broker/Dealer Rule for member comment in NASD Notice to Members 94-94. The proposed Rule was revised substantially in response to the 284 comment letters that were received. The proposed Bank Broker/Dealer Rule was filed for approval with the SEC on December 28, 1995 (original proposal or original proposed Bank Broker/Dealer Rule).2

      The SEC published notice of the proposed Bank Broker/Dealer Rule and three amendments to the Rule in the Federal Register in March, 1996 (March Federal Register Release).3 The SEC received 98 comment letters on the original proposal. About one-third of the comment letters expressed support for the proposal. While a few commenters supported the proposal as published, most were generally supportive of the proposal's goals but suggested modifications to the proposed Rule. More than half of the commenters opposed some or all of the provisions of the original proposal.

      Amendment No. 4, which was filed with the SEC on March 24, 1997, responded to these comments and substantially revised the original proposal. Among other things, Amendment No. 4: (1) deleted the provision restricting the use and release of confidential financial information; (2) deleted the provision governing compensation of unregistered persons; and (3) revised the provisions regarding setting and communications with the public.4 See Notice to Members 97-26 for a complete description of the revisions.

      Amendment No. 5 to the Bank Broker/Dealer Rule was submitted to the SEC on July 17, 1997.5 The purpose of this amendment was to respond to the 11 public comments received by the SEC in response to publication in the Federal Register of Amendment No. 4. Several technical changes were made to the Rule language to make the Rule clearer, less ambiguous, and more in accord with the standards set forth in the 1994 Interagency Statement on Retail Sales of Nondeposit Investment Products issued by the banking regulators.

      The text of the new Rule is set forth below. For a complete description of the new Rule, members should review in detail the attached Federal Register version of the SEC Release.

      Questions And Answers

      Included below are questions and answers to provide guidance to members on compliance with the new Bank Broker/Dealer Rule.

      Applicability

      Question #1: The Rule applies only to "broker/dealer services conducted by members on the premises of financial institutions where retail deposits are taken." What financial institutions are encompassed by the Rule? What is meant by "the premises of a financial institution where retail deposits are taken" within the meaning of paragraph (a) of the Rule?

      Answer: Paragraph (b)(1) of the Rule defines a "financial institution" as a federal or state-chartered bank, a savings and loan association, a savings bank, a credit union, and the required service corporations of such institutions. The phrase "premises ... where retail deposits are taken" generally means an area of a financial institution where the public (or members, in the case of a credit union) can access the deposit services of the institution. It does not, however, include areas of a financial institution that are physically separate from the retail deposit-taking area, e.g., a broker/ dealer operating in separate office space on another floor or in another part of the same building (even if the building is owned or primarily occupied by the financial institution) and having no physical presence on the premises of the financial institution where retail deposits are taken or office space that is not generally accessible to the public without an appointment, such as a location where trust or private banking services are provided. An area may be considered physically separate even though entry through a common building lobby or an exterior entrance is permitted.

      Question #2: What type of presence is required to be deemed to be conducting broker/dealer services on the premises of the financial institution?

      Answer: The Rule applies only where broker/dealer services are conducted either in person, over the telephone, or through any other electronic medium, on the premises of a financial institution where retail deposits are taken, by a broker/dealer that has a physical presence on those premises. Thus, for example, the Rule would apply in the following situations:

      • a broker/dealer opens an account for a customer when both are present on the premises of a financial institution;
      • a financial institution customer places a telephone call from outside the premises to a broker/dealer located on the premises;
      • a customer calls a broker/dealer from a telephone at a broker/dealer's desk located on the premises or from a telephone dedicated to or identified as for use only to contact the broker/ dealer; or the broker/dealer is aware that the customer is contacting the broker/dealer via telephone or other electronic medium on the premises of a financial institution where retail deposits are taken.

      The Rule would not apply, however, when a customer located on the premises of a financial institution calls a broker/dealer located off the premises from a telephone located in the financial institution that is not dedicated to the broker/dealer (i.e., a regular pay phone), and the broker/dealer is not aware that the customer is calling from the premises of a financial institution.

      Question #3: If a member has many branch offices, some of which are located on the premises, and some of which are not, does the Rule apply to all of the firm's branches?

      Answer: No; the Rule applies only to broker/dealer services conducted on the premises of a financial institution where retail deposits are taken. Therefore, the Rule would apply only to those branch offices that meet this description and only to accounts opened at those branches.

      Setting

      Question #4: Paragraph (c)(1) of the Rule requires that sales of nondeposit products should be conducted in a physically distinct location wherever practical. What does that mean with respect to (a) kiosks and (b) Automated Teller Machine (ATM) screens?

      Answer: The Rule recognizes that sales of non-deposit products should be conducted in a physically distinct location wherever practical. In all situations, including those where a physically distinct location is not practical, the location must be identified in a manner that clearly distinguishes the broker/dealer services from the activities of the financial institution, and the member's name must be clearly displayed in the area in which the member conducts its broker/dealer services. Indeed, when a member is unable to achieve ideal physical distinction between member activities and the financial institution's retail deposit-taking area, the member must pay particular attention to signage in order to eliminate customer confusion and misidentification.

      The Rule imposes the same standards on broker/dealers as are imposed on financial institutions by the Interagency Statement on Retail Sales of Nondeposit Investment Products issued by the banking regulators on February 15, 1994 (Interagency Statement). In particular, in regard to setting, the Interagency Statement imposes the following requirements:

      Selling or recommending nondeposit investment products on the premises of a depository institution may give the impression that the products are FDIC-insured or are obligations of the depository institution. To minimize customer confusion with deposit products, sales or recommendations of nondeposit investment products on the premises of a depository institution should be conducted in a physical location distinct from the area where retail deposits are taken. Signs or other means should be used to distinguish the investment sales area from the retail deposit-taking area of the institution. However, in the limited situation where physical considerations prevent sales of nondeposit products from being conducted in a distinct area, the institution has a heightened responsibility to ensure appropriate measures are in place to minimize customer confusion.

      The NASD intends to work closely with the banking regulators to ensure that NASD interpretations and requirements applicable to broker/dealers conducting business on the premises of a financial institution are consistent with interpretations and requirements applied to financial institutions by banking regulators, and will issue interpretations or propose rule amendments to notify members of any changes.

      (a) Kiosks. Kiosks or windows operated by a single person in a public place, such as a supermarket, require very special attention to avoid confusion to the public. The difficulties of operating such settings may be resolved if the member exercises exceptional caution and adopts specific operational and signage controls designed to avoid customer confusion and to distinguish the member's operations from those of the financial institution. Additional training and supervision of personnel at kiosks may be necessary and appropriate to make sure that customer confusion does not occur.
      (b) ATM machines. Paragraph (c)(1) of the Rule requires that the location where the member operates must be identified in a manner that clearly distinguishes the member's services from the activities of the financial institution. While the Rule does not specifically address services provided by computer terminal or ATM, this requirement may be satisfied by displaying the member's name on the first ATM screen after the "investment or securities brokerage" option is chosen by the customer, and, when the customer first enters the "pages" that involve the member's services, by displaying on the screen the disclosures required by paragraph (c)(3)(A) or (c)(4)(C) of the Rule.

      Question #5: May the member use directional signs in the deposit-taking area to help customers find the location where broker/dealer services are provided?

      Answer: There is no prohibition against directional signs regarding broker/dealer services in the deposit-taking area, so long as the signage meets the other requirements of the Rule and other NASD rules requiring accurate information that is not misleading under the circumstances in which it is used. The member should discuss with the bank where directional signage should be placed. If necessary, the bank could consult with the appropriate federal banking regulator regarding location and content.

      Question #6: May a member enter into an arrangement with a financial institution whereby a teller can accept customer deposits into a brokerage account of the member?

      Answer: No. Such an arrangement would violate the requirement that the member's broker/dealer services be conducted in a physical location distinct from the area in which the financial institution's retail deposits are taken. The member may want to address this issue in its agreement with the financial institution, which could contain a provision requiring the financial institution to instruct its tellers to direct customers who want to make such a deposit to the member's location on the premises. A member may enter into an arrangement with a financial institution, however, in which cash deposited into a bank account is automatically swept into a money market fund or a brokerage account.

      Customer Disclosure And Written Acknowledgment

      Question #7: A member is required by paragraph (c)(3)(B) of the Rule to make reasonable efforts to obtain from each customer, during the account opening process, a written acknowledgment of the required disclosures. What is the meaning of "during the account opening process"?

      Answer: The account opening process commences at the time of the first contact between the member and the customer. Written documentation may be sent to the customer by the member after the account is opened. Even in the case of accounts opened in person, a customer may wish to bring the disclosure document home for a careful reading. During this process, the member should make reasonable efforts to obtain the acknowledgment.

      Question #8: What constitutes reasonable efforts to obtain the required acknowledgment?

      Answer: Because some customers may be reluctant to provide the written acknowledgment at the time the account is opened (or, indeed, at any time), the Rule does not mandate that the acknowledgment be obtained; the Rule does, however, require that the member make reasonable efforts to obtain it. Reasonable efforts should include contacting the customer by telephone, mail, or electronic means to encourage the customer to return the written acknowledgment of disclosures. If such efforts are unsuccessful, the member is not required to close the account. (Compare approach in connection with obtaining suitability information under NASD Rules 2310(b) and 3110, where the member is required to make reasonable efforts to obtain a customer's information and is not required to close the account if the information is not obtained.)

      In the order approving the Rule, the SEC specifically addressed this issue. In particular, the Commission stated the following:

      The disclosures required by the rule, and the written acknowledgment of disclosures obtained pursuant to the rule, are intended to assist investors in making investment decisions based on a better understanding of the distinctions between insured deposits and uninsured securities products. Although the rule requires only that members "make reasonable efforts" to obtain written customer acknowledgment of the required disclosures in the account opening process, the Commission expects members to obtain such written acknowledgment in all but rare circumstances (e.g. when a customer refuses to sign the acknowledgment). It is anticipated that, as is the case today, many firms will provide these disclosures in the new account opening form which, when signed by the customer, constitutes written acknowledgment. The Commission believes that in the rare circumstances where acknowledgment is not obtained, heightened supervisory procedures would be necessary. Reasonable supervisory procedures would include procedures for the registered representative receiving approval from the member's compliance department prior to opening the account, and documenting that the customer has refused to sign the written acknowledgment of such disclosure.

      We have confirmed with SEC staff our understanding of the meaning of this language. To the extent the approval order imposes an obligation beyond the requirement in the Rule to make reasonable efforts to obtain written acknowledgment of the required disclosures, the obligation must be enforced as a general failure to establish and maintain supervisory procedures that are designed to achieve compliance with applicable securities laws and NASD rules, including the Bank Broker/Dealer Rule, under NASD Rule 3010, rather than as a violation of the Bank Broker/ Dealer Rule. Examinations wherein member compliance with the Bank Broker/Dealer Rule are reviewed will be conducted, and consideration of potential disciplinary action will be undertaken, consistent with this understanding.

      Question #9: What constitutes a written acknowledgment of the required disclosures?

      Answer: It can be substantially identical to the statement described in the Interagency Statement: a statement, signed by the customer, obtained during the account opening process, acknowledging that the customer has received and understands the disclosure. It does not have to be set forth in a separate document, with a separate signature, but can, for example, be included in the member's account opening documentation as long as the disclosure is conspicuous and near the signature line.

      Communications With The Public

      Question #10: Paragraph (c)(4)(A) requires all member confirmations and account statements to indicate clearly that the broker/dealer services are provided by the member. Would a member be required to provide this disclosure to customers for accounts opened off the premises of a financial institution where retail deposits are taken?

      Answer: No. Paragraph (c)(4)(A) does not apply to customer confirmations or customer statements reflecting transactions in customer accounts opened off the financial institution's premises where retail deposits are taken. If broker/dealer services are conducted by members on the premises of a financial institution where retail deposits are taken, as clarified in answers to Questions #1 and #2, then indication that the investment banking or securities business is provided by the member broker/dealer must be prominently indicated on the face of the customer confirmation and on the face of the customer statement. There is no prescribed language, format or type size, but an investor should be able to clearly view the information on the documents.

      Notifications Of Terminations

      Question #11: Paragraph (c)(5) requires a member to provide prompt notification to the financial institution of the termination for cause of any of its associated persons who are employed by the financial institution. How may this notification be provided?

      Answer: A copy of Form U-5 may be used for the notice of termination.


      Text Of New Rule

      (Note: all language is new.)

      2350. Broker/Dealer Conduct on the Premises of Financial Institutions

      (a) Applicability
      This section shall apply exclusively to those broker/dealer services conducted by members on the premises of a financial institution where retail deposits are taken. This section does not alter or abrogate members' obligations to comply with other applicable NASD rules, regulations, and requirements, nor those of other regulatory authorities that may govern members operating on the premises of financial institutions.
      (b) Definitions

      (1) For purposes of this section, the term "financial institution" shall mean federal and state-chartered banks, savings and loan associations, savings banks, credit unions, and the service corporations of such institutions required by law.
      (2) "Networking arrangement" and "brokerage affiliate arrangement" shall mean a contractual or other arrangement between a member and a financial institution pursuant to which the member conducts broker/dealer services for customers of the financial institution and the general public on the premises of such financial institution where retail deposits are taken.
      (3) "Affiliate" shall mean a company that controls, is controlled by, or is under common control with a member as defined in Rule 2720.
      (4) "Broker/dealer services" shall mean the investment banking or securities business as defined in paragraph (o) of Article I of the By-Laws.
      (c) Standards for Member Conduct
      No member shall conduct broker/dealer services on the premises of a financial institution where retail deposits are taken unless the member complies initially and continuously with the following requirements:

      (1) Setting
      Wherever practical, the member's broker/dealer services shall be conducted in a physical location distinct from the area in which the financial institution's retail deposits are taken. In all situations, members shall identify the member's broker/dealer services in a manner that is clearly distinguished from the financial institution's retail deposit-taking activities. The member's name shall be clearly displayed in the area in which the member conducts its broker/dealer services.
      (2) Networking and Brokerage
      Affiliate Agreements Networking and brokerage affiliate arrangements between a member and a financial institution must be governed by a written agreement that sets forth the responsibilities of the parties and the compensation arrangements. The member must ensure that the agreement stipulates that supervisory personnel of the member and representatives of the Securities and Exchange Commission and the Association will be permitted access to the financial institution's premises where the member conducts broker/dealer services in order to inspect the books and records and other relevant information maintained by the member with respect to its broker/dealer services.
      (3) Customer Disclosure and
      Written Acknowledgment At or prior to the time that a customer account is opened by a member on the premises of a financial institution where retail deposits are taken, the member shall:

      (A) disclose, orally and in writing, that the securities products purchased or sold in a transaction with the member:

      (i) are not insured by the Federal Deposit Insurance Corporation ("FDIC");
      (ii) are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and
      (iii) are subject to investment risks, including possible loss of the principal invested; and
      (B) make reasonable efforts to obtain from each customer during the account opening process a written acknowledgment of the disclosures required by paragraph (c)(3)(A).
      (4) Communications with the Public

      (A) All member confirmations and account statements must indicate clearly that the broker/dealer services are provided by the member.
      (B) Advertisements and sales literature that announce the location of a financial institution where broker/dealer services are provided by the member or that are distributed by the member on the premises of a financial institution must disclose that securities products: are not insured by the FDIC; are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and are subject to investment risks, including NASD Notice to Members 97-89 December 1997 possible loss of the principal invested. The shorter, logo format described in paragraph (c)(4)(C) may be used to provide these disclosures.
      (C) The following shorter, logo format disclosures may be used by members in advertisements and sales literature, including material published, or designed for use, in radio or television broadcasts, Automated Teller Machine ("ATM") screens, billboards, signs, posters, and brochures, to comply with the requirements of paragraph (c)(4)(B),provided that such disclosures are displayed in a conspicuous manner:

      • Not FDIC Insured
      • No Bank Guarantee
      • May Lose Value
      (D) As long as the omission of the disclosures required by paragraph (c)(4)(B) would not cause the advertisement or sales literature to be misleading in light of the context in which the material is presented, such disclosures are not required with respect to messages contained in:

      • radio broadcasts of 30 seconds or less;
      • electronic signs, including billboard-type signs that are electronic, time, and temperature signs and ticker tape signs, but excluding messages contained in such media as television, on-line computer services, or ATMs; and
      • signs, such as banners and posters, when used only as location indicators.
      (5) Notifications of Terminations
      The member must promptly notify the financial institution if any associated person of the member who is employed by the financial institution is terminated for cause by the member.

      Endnotes

      1 See Release No. 34-39294 (November 4, 1997), 62 F.R. 60542 (November 10, 1997) (SEC Release).

      2 See File No. SR-NASD-95-63; NASD Notice to Members 96-3 (January 1996).

      3 See Release No. 34-36980 (March 15, 1996), 61 F.R. 11913 (March 22, 1996).

      4 See Release No. 34-38506 (April 14, 1997), 62 F.R. 19378 (April 21, 1997), requesting comments by May 12, 1997.

      5 See letter from Mary N. Revell, Assistant General Counsel, NASD Regulation, to Belinda Blaine, Associate Director, SEC, dated July 17, 1997.

    • 97-88 SEC Approves Amendment To Three Quote Rule Granting Staff Exemptive Authority

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      Effective: Immediately

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      Executive Summary

      On October 22, 1997, the Securities and Exchange Commission (SEC or Commission) approved an NASD Regulation, Inc. (NASD RegulationSM) proposed amendment to National Association of Securities Dealers, Inc. (NASD®) Rule 2320 (Three Quote Rule) that provides the staff of NASD Regulation's Office of General Counsel authority to grant exemptions, under certain circumstances, from the provisions of the Three Quote Rule (SEC Rel. No. 34-39266).

      Questions concerning this Notice may be directed to David A. Spotts, Senior Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8071.

      Background

      NASD Rule 2320(g) (the Three Quote Rule or Rule) originally was adopted on May 2, 1988,1 as an amendment to the NASD's best execution interpretation ("Interpretation of the Board of Governors—Execution of Retail Transactions in the Over-the-Counter Market") under Article III, Section 1 of the NASD's Rules of Fair Practice (currently NASD Rules).2 The amendment expanded a member's best execution obligation to customers by setting forth additional requirements for customer transactions in non-Nasdaq securities. In particular, the amendment requires members that execute transactions in non-Nasdaq securities on behalf of customers to contact a minimum of three dealers (or all dealers if three or less) and obtain quotations in determining the best inter-dealer market. Under the best execution interpretation, each member is generally required to use reasonable diligence to ascertain the best inter-dealer market for a security, and to buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.3 The Three Quote Rule was adopted in connection with the NASD's efforts to develop a nationwide automated market surveillance program for non-Nasdaq, over-the-counter securities (commonly referred to as "pink sheet" stocks). Concurrent with these activities, the NASD proposed and the Commission approved new Schedule H to the NASD's By-Laws, which established an electronic system of mandatory price and volume reporting for the over-the-counter non-Nasdaq securities.4 The Three Quote Rule was designed to create a standard to help assure that members would fulfill their best execution responsibilities to customers in non-Nasdaq securities, especially transactions involving relatively illiquid securities with non-transparent prices.

      Application Of The Three Quote Rule

      Some members who are active dealers in the non-Nasdaq market have questioned the value of the Three Quote Rule in various situations in which it is claimed that adherence to the requirement may not assure the satisfaction of the best execution obligation and, in fact, may hinder satisfaction of the obligation because of the time delays involved in contacting and collecting quotations from three separate dealers. In particular, questions have been raised about the application of the Three Quote Rule to the execution of customer transactions in securities that are traded on certain foreign exchanges, but not U.S. exchanges. Because the Three Quote Rule applies to transactions in all non-Nasdaq securities,5 which are defined to exclude securities traded only on a "national securities exchange," the rule by its terms applies to transactions effected on any foreign exchange.6 For example, where a member firm's customer places an agency order to buy or sell a foreign security listed on a foreign exchange, the Three Quote Rule would require that the member broker/dealer contact at least three dealers and obtain quotations prior to executing the agency trade.7 In some circumstances, it is argued, the exchange market may constitute the best market for the securities that are listed on that market, and the time delay involved in contacting three dealers in advance of a customer transaction could hinder obtaining the best execution for the customer.

      NASD Regulation believes that general exemptive authority under the Rule may be appropriate to provide some flexibility to respond to changing market conditions and particular fact situations. NASD Regulation has not yet determined, however, whether any particular class of transactions should be exempted. Considerations in determining whether to grant an exemptive request could include: (1) the number of firms publishing firm quotations and the period of time during which such quotations were published; (2) the size of the customer order in relation to the minimum size of the market makers' quotations; (3) the transaction volume of the security in question; and (4) the number of dealers publishing quotations through an electronic quotation medium in comparison to dealers in the security that do not publish such quotes.

      The nature of particular classes of customers may be another factor in determining whether an exemption is appropriate. In some circumstances, for example, an institutional customer may prefer not to inform or broadcast to other intermediaries or market professionals of its particular intent to buy or sell a particular non-Nasdaq security. Under these circumstances, when a member broker/dealer contacts three other dealers in collecting quotations, as required by the Rule, in certain markets this activity may trigger or invite additional market activity by the parties contacted or others that may affect the market price of the subject security.

      Procedures In Exercising Exemptive Authority

      It is important to note that the grant of an exemption to the Three Quote Rule will not limit members' best execution obligation. The staff expects that the range of circumstances in which exemptions may be granted will be limited to those circumstances in which it can be shown that the Three Quote Rule would in fact hinder a member's best execution obligation, and that approval of exemption requests generally would be infrequent.

      The Office of the General Counsel of NASD Regulation will be responsible for strict compliance with discharging this exemptive authority. Member broker/dealers are instructed to submit all requests for exemptions to the Office of General Counsel, NASD Regulation, and will be required to limit the requests to actual contemplated transactions or situations. The staff will not provide exemptions in response to hypothetical situations or transactions. The request should be detailed and include all relevant information necessary for the staff to reach a determination on the request. If a particular exemption involves a particular class of transactions or class of customers that may be relevant to other member broker/dealers, the staff will also publish such results to the membership through a Notice to Members or similar publication or broadcast. Staff determinations will be subject to review by the National Business Conduct Committee.


      Endnotes

      1 See SEC Rel. No. 34-25637 (May 2, 1988).

      2 The Best Execution Interpretation in Article III, Section 1 of the NASD's Rules of Fair Practice was converted to rule form into new NASD Rule 2320 in connection with the NASD's Manual revision project. See SEC Rel. No. 34-36698 (January 11, 1996).

      3 See NASD Rule 2320(a).

      4 New Schedule H of the By-Laws required NASD members executing principal transactions in non-Nasdaq securities to report price and volume data for the days on which their sales or purchases exceeded 50,000 shares or $10,000. In 1993, member obligations under Schedule H were modified or eliminated as a result of the NASD adopting real-time reporting of transactions for non-Nasdaq securities. See SEC Rel. No. 34-32647 (July 16, 1993).

      5 "Non-Nasdaq security" is defined in NASD Rule 6710 as: "any equity security that is neither included in the Nasdaq Stock Market nor traded on any national securities exchange..."

      6 The term "national securities exchange" is not defined in NASD rules, but the requirements to qualify are set forth in Sections 6(a) and 19(a) of the Securities Exchange Act of 1934.

      7 If a transaction is subject to the Three Quote Rule (NASD Rule 2320(g), then for books and records purposes, NASD Rule 3110(b)(2) requires that "a person associated with a member shall indicate on the memorandum for each transaction in a non-Nasdaq security ... the name of each dealer contacted and the quotation received to determine the best interdealer market."

    • 97-87 Treasury Updates List Of Specially Designated Persons And Entities

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      97-87 attachments

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      Internal Audit
      Legal & Compliance
      Operations
      Trading



      Executive Summary

      As requested by the Department of Treasury (Treasury), the National Association of Securities Dealers, Inc. (NASD®) provides members with information from the Office of Foreign Assets Control (OFAC) about persons and entities identified as "Specially Designated Nationals and Blocked1 Persons." On September 9, 1997, OFAC updated its master list, adding one blocked person and one blocked entity who have been determined to act for or on behalf of, or to be owned or controlled by, the Government of Libya. In addition, two individuals were removed from the list.

      Background

      The U.S. government mandates that all financial institutions located in the United States, overseas branches of these institutions and, in certain instances, overseas subsidiaries of the institutions comply with OFAC regulations governing economic sanctions and embargo programs regarding the accounts and other assets of countries identified as threats to national security by the President of the United States. This always involves accounts and assets of the sanctioned countries' governments, and may also involve the accounts and assets of individual nationals of the sanctioned countries. Also, these regulations prohibit unlicensed trade and financial transactions with such countries.

      Under these regulations, financial institutions must block identified assets and accounts when such property is located in the United States, is held by U.S. individuals or entities, or comes into the possession or control of U.S. individuals or entities. The definition of assets and property is very broad and covers direct, indirect, present, future, and contingent interests. In addition, Treasury identifies certain individuals and entities located worldwide that are acting on behalf of sanctioned governments, and that must be treated as if they are part of the sanctioned governments.

      OFAC may impose criminal or civil penalties for violations of these regulations. Criminal violations may result in corporate fines of up to $500,000 and personal fines of up to $250,000 and 10 years in jail; civil penalties of up to $11,000 per violation may also be imposed. To ensure compliance, OFAC enlists the cooperation of various regulatory organizations and recently asked the NASD to remind its members about these regulations.

      Foreign Assets Control Regulations

      OFAC currently administers sanctions and embargo programs against Libya, Iran, Iraq, the Federal Republic of Yugoslavia (Serbia and Montenegro), Serb-controlled areas of Bosnia and Herzegovina, Bosnian Serb military and civilian leaders, North Korea, and Cuba. In addition, OFAC prohibits certain exports to the UNITA faction in Angola and prohibits transactions with terrorists threatening to disrupt the Middle East peace process.

      Broker/dealers cannot deal in securities issued from these target countries and governments and must block or freeze accounts, assets, and obligations of blocked entities and individuals when this property is in their possession or control.

      According to OFAC, broker/dealers need to establish internal compliance programs to monitor these regulations. OFAC urges broker/dealers to review their existing customer accounts and the securities in their custody to ensure that any accounts or securities blocked by existing sanctions are being treated properly. Broker/dealers also should review any other securities that may represent obligations of, or ownership interests in, entities owned or controlled by blocked commercial or government entities identified by OFAC.

      Broker/dealers must report blockings within 10 days by fax to OFAC's Compliance Division at (202) 622-1657. Firms are prohibited from making debits to blocked customer accounts, although credits are authorized. Blocked securities may not be paid, withdrawn, transferred (even by book transfer), endorsed, guaranteed, or otherwise dealt in.

      OFAC has issued general licenses authorizing continued trading on the national securities exchanges on behalf of blocked Cuban and North Korean customer accounts under conditions preserving the blocking of resulting assets and proceeds. Secondary market trading with respect to certain Yugoslav debt securities issued pursuant to the "New Financing Agreement" of September 20, 1988, is also authorized; however, certain restrictions and reporting requirements apply.

      List Of Sanctioned Governments And Individuals

      Whenever there is an update to its regulations, an addition or removal of a specifically designated national, or any other pertinent announcement, OFAC makes the information available electronically on the U.S. Council on International Banking's INTERCOM Bulletin Board in New York and the International Banking Operations Association's Bulletin Board in Miami. The information also is immediately uploaded onto Treasury's Electronic Library (TEL) on the FedWorld Bulletin Board network and is available through several other government services provided free of charge to the general public.

      In addition, members can use the NASD Regulation, Inc., Web site (www.nasdr.com) to link to OFAC's list of individuals and companies subject to economic or trade sanctions. OFAC's Web site contains additional information that may be helpful to members and may be accessed directly (www.ustreas.gov/treasury/services/fac/fac.html). Members may also refer to NASD Notices to Members 97-35, 97-4, 96-23, and 95-97.

      NASD members are urged to review their procedures to ensure compliance with OFAC regulations.

      Questions concerning this Notice may be directed to OFAC, at (202) 622-2490.


      Endnote

      1 Blocking, which also may be called freezing, is a form of controlling assets under U.S. jurisdiction. While title to blocked property remains with the designated country or national, the exercise of the powers and privileges normally associated with ownership is prohibited without authorization from OFAC. Blocking immediately imposes an across-the-board prohibition against transfers or transactions of any kind with respect to the property.

    • For Your Information

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      Clarification Of Special Notice To Members 97-55

      In August 1997, the National Association of Securities Dealers, Inc. (NASD®) published Special Notice to Members 97-55 entitled "New Membership Application Rules, New Code of Procedure and Other New Disciplinary Rules," which described, among other things, the new Code of Procedure and when such Rules would apply to a disciplinary proceeding. Special Notice to Members 97-55 provided in paragraph c):

      c) Appeals, Reviews. The Rule 9300 Series of the new Code will apply to any appeal, call for review, or review of a decision rendered under new Rule 9268 and new Rule 9269 if the decision is: (a) served on a Respondent on or after August 7, 1997, and (b) appealed, called for review, or reviewed. By doing so, all of the new appellate and review procedural enhancements, with one exception, will apply to a completed "trial-level" proceeding that is appealed, subject to a call for review, or review on or after the effective date of the new Code. The one exception is the right of the Department of Enforcement to appeal or crossappeal a case, which will not apply. This provision in the new Rule 9300 Series will not apply to any disciplinary proceeding unless the disciplinary proceeding is based upon a complaint authorized on or after August 7, 1997.

      The NASD intended that the new Code of Procedure, with the exception noted above regarding the Department of Enforcement's right to appeal or cross-appeal, would apply to any appeal or review of a "triallevel" decision served on or after August 7, 1997, so that Respondents would receive the benefits of the procedural enhancements as soon as the new Rules became effective. To clarify that such appeals and reviews shall proceed under the new Code of Procedure, the first sentence of paragraph c) should read:

      The Rule 9300 Series of the new Code will apply to any appeal, call for review, or review of a decision if the decision is: (a) served on a Respondent on or after August 7, 1997, and (b) appealed, called for review, or reviewed.

      Revisions to the original sentence are noted below:

      The Rule 9300 Series of the new Code will apply to any appeal, call for review, or review of a decision rendered under new Rule 9268 and new Rule 9269 if the decision is: (a) served on a Respondent on or after August 7, 1997, and (b) appealed, called for review, or reviewed.

      Questions may be directed to Sharon Zackula, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8985 or Katherine Malfa, Chief Counsel, Department of Enforcement, NASD RegulationSM, at (202) 974-2853.

      Testing & Continuing Education Communication With Members

      Since NASD Regulation's testing and continuing education program delivery began its transition to the Sylvan Technology Center Network, some processes and/or procedures have changed. In an effort to inform NASD Regulation member firms and candidates of changes, along with future events, Testing & Continuing Education will begin publishing information, including an updated Sylvan Technology Center location list, through the following mediums:

      • Regulatory & Compliance Alert


      • CRD/PD Bulletin (formerly Membership On Your Side)


      • NASDR Web Site

      Look for the first Testing & Continuing Education communication to appear in the December issue of the Regulatory & Compliance Alert.

      For comments, questions or suggestions about topics that you may wish to have covered in upcoming issues, contact:

      Linda Christensen
      Phone: (610) 627-0377
      FAX: (610) 627-0383
      E-mail: christel@nasd.com

    • 97-86 Nominees For NASD Board Of Governors

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      National Association of Securities Dealers, Inc. — 1735 K Street, NW — Washington, DC 20006 — 202-728-8000

      November 15, 1997


      Dear Member:

      We are in the process of planning for the 1998 Annual Meeting of Members where Members will be asked to elect 22 Governors. The Members and the SEC just approved changes to the NASD By-Laws designed to improve our corporate governance structure so that we will be able to operate more effectively and efficiently. The National Nominating Committee has developed a slate of well-qualified and diverse Nominees. Enclosed you will find a Notice of Nominees identifying the persons nominated by the Committee as well as brief profiles of those Nominees.

      Each nominee is identified not only as "Industry," "Non-Industry," or "Public," but also by the length of the term for which the person has been proposed. Under the new By-Laws, the different term lengths are necessary this year only, in order to implement a new board with staggered terms.

      We anticipate that the Meeting will be held on or about January, 15, 1998, and that formal notice of the Meeting will be mailed to Members on or about December 15, 1997. The notice will include proxies for those Members who wish to vote by proxy. Since the schedule coincides with the busy holiday season, it is anticipated that a second proxy document will be mailed, followed by telephone reminders, during the period between December 15, 1997, and January 15, 1998. This should ensure that sufficient proxies are received to constitute the quorum required by the By-Laws.

      This new board structure will provide for a more efficient and effective corporate structure, and we look forward to your participation in its implementation.

      Very truly yours,

      Frank G. Zarb
      Chairman, President & CEO



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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 or about January 15, 1998. A notice of meeting, including the precise date, time and location of the Annual Meeting, will follow on or about December 15, 1997. Pursuant to Section 10 of Article VII of the By-Laws of the NASD, 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 30 days of the date of this Notice such person presents to the Secretary of the NASD petitions in support of such nomination duly executed by at least 3 percent of the members of the NASD, 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


      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 of no more than three years or until their successors are duly elected and qualified:

      INDUSTRY

      Name Term
      E. David Coolidge, III
      Chief Executive Officer
      William Blair & Company, L.L.C.
      1998-1999
      James Dimon
      President, COO and Director of Travelers Group
      Chairman & CEO of Smith Barney Inc.
      1998-1999
      Jon S. Corzine
      Chairman & CEO
      Goldman, Sachs & Co.
      1998-2000
      Kenneth J. Wessels
      Chief Executive Officer
      Wessels, Arnold & Henderson, L.L.C.
      1998-2000
      Herbert M. Allison, Jr.
      President & COO
      Merrill Lynch & Co., Inc.
      1998-2001
      Frank E. Baxter
      Chairman, President & CEO
      Jefferies Group & Co., Inc.
      1998-2001
      Donald B. Marron
      Chairman & CEO
      PaineWebber Group, Inc.
      1998-2001
      Todd A. Robinson
      Chairman & CEO
      Linsco/Private Ledger Corporation
      1998-2001

      NON-INDUSTRY

      Name Term
      Bridget A. Macaskill
      President & CEO
      Oppenheimer Funds, Inc.
      1998-1999
      James F. Rothenberg
      President and Director
      Capital Research & Management Company
      1998-1999
      Arvind Sodhani (Issuer Nominee)
      Vice President & Treasurer
      Intel Corporation
      1998-2000
      Michael W. Brown (Issuer Nominee)
      Retired Chief Financial Officer
      Microsoft Corporation
      1998-2001
      Harry P. Kamen (Insurance Affiliated Nominee)
      Chairman & CEO
      Metropolitan Life Insurance Co.
      1998-2001
      James S. Riepe (Investment Co. Nominee)
      Vice Chairman
      T. Rowe Price Associates, Inc.
      1998-2001
      Howard Schultz (Issuer Nominee)
      Chairman & CEO
      Starbucks Coffee Company
      1998-2001

      PUBLIC

      Name Term
      Elaine L. Chao
      Distinguished Fellow
      The Heritage Foundation
      1998-1999
      Donald J. Kirk
      Executive-in-Residence
      Columbia University
      1998-1999
      John D. Markese
      President
      American Assoc. of Individual Investors
      1998-1999
      Nancy Kassebaum Baker
      Former United States Senator
      1998-2000
      Robert R. Glauber
      Adjunct Lecturer
      Kennedy School, Harvard University
      1998-2000
      Philip R. Lochner, Jr.
      Senior Vice President
      Time Warner, Inc.
      1998-2000
      Paul H. O'Neill
      Chairman & CEO
      ALCOA
      1998-2001


      National Association of Securities Dealers, Inc.
      Profiles Of Board Nominees

      Nominees For Industry Governors

      Herbert M. Allison, Jr. is President and Chief Operating Officer of Merrill Lynch & Co., Inc. Mr. Allison began his career with Merrill Lynch in 1971 and was elected President and Chief Operating Officer of the firm in January 1997. Mr. Allison holds a B.A. in Philosophy from Yale and an M.B.A. from Stanford.

      Frank E. Baxter is Chairman, President and Chief Executive Officer of Jefferies & Co., Inc. Mr. Baxter joined Jefferies & Co. in 1974 and was elected Chairman, President and Chief Executive Officer of the firm in 1990. Mr. Baxter is a Director of the Securities Industries Association. Mr. Baxter holds a B.A. from the University of California, Berkeley.

      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, Inc., Board of Governors and is a member of the NASD, Inc., Audit Committee.

      Jon S. Corzine is Chairman and Chief Executive Officer of Goldman, Sachs & Co. Mr. Corzine joined Goldman Sachs in 1975 and was appointed Chairman and Chief Executive Officer of the firm in 1994. Mr. Corzine currently serves as a member of the Federal Reserve Bank of New York's International Capital Markets Advisory Committee, the Public Securities Association, the Board of Trustees of the University of Chicago, and the Institute for International Economics. In March of 1997, Mr. Corzine was appointed Co-Chair of the Presidential Commission to Study Capital Budgeting. Mr. Corzine holds a B.A. from the University of Illinois and an M.B.A. from the University of Chicago. Mr. Corzine currently serves on the NASD, Inc., Board of Governors.

      James (Jamie) Dimon is President, Chief Operating Officer and Director of Travelers Group, and Chairman and Chief Executive Officer of Smith Barney Inc. 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, and the Board of Directors of Tricon Global Restaurants, Inc. 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, Inc., Board of Governors and is Chairman of the NASD, Inc., Management Compensation Committee.

      Donald B. Marron is Chairman and Chief Executive Officer of PaineWebber Group, Inc. Mr. Marron joined PaineWebber in 1977 as President. He was elected Chief Executive Officer in 1980 and Chairman of the Board in 1981. Mr. Marron currently serves as a private sector Co-Chair on the National Commission on Retirement Policy; is Vice Chairman and former President of The Museum of Modern Art; serves on the boards of the Memorial Sloan Kettering Cancer Center and the Dana Foundation; and is a member of the Governor's International Business Development Council. Mr. Marron is a co-founder and former chairman of DRI and a member of the Council on Foreign Relations.

      Todd A. Robinson is Chairman and CEO of Linsco/Private Ledger Corporation (LPL Financial Services). Mr. Robinson became CEO of Linsco Financial Group in 1985 and merged it with Private Ledger Corp. in 1989, creating Linsco/Private Ledger Corporation. Mr. Robinson holds a B.A. from Bates College. He was Chairman of the NASD District 11 Business Conduct Committee, an original member of the Securities Industry Task Force on Continuing Education, and serves on numerous industry committees. Mr. Robinson was elected Chairman of the NASD Regulation, Inc., Board of Directors in 1997 and serves as Chairman of the Executive Committee and the Independent Dealers/Insurance Affiliate Committee.

      Kenneth J. Wessels is Chief Executive Officer of Wessels, Arnold and Henderson. Mr. Wessels co-founded the firm in 1986. Mr. Wessels is a former chairman and member of the NASD, Inc., Board of Governors (1990). He holds a B.A. in Business Administration from the University of Missouri. Mr. Wessels currently serves as a member of The Nasdaq Stock Market, Inc., Board of Directors and Executive Committee.

      Nominees For Non-Industry Governors

      Michael W. Brown is the Retired Chief Financial Officer of Microsoft Corporation. Mr. Brown was appointed Chief Financial Officer of Microsoft Corporation in 1994, having joined the firm as Treasurer in 1989. Prior to that time, Mr. Brown spent 18 years with the public accounting firm of Deloitte and Touche. Mr. Brown currently serves as a Director of Wang Laboratories, Kurzweil Educational Systems, Citrix Systems, Administaff, Inc., and a Trustee of the Financial Executive Research Foundation. He is a member of the Center for Strategic and International Studies, the Financial Executives Institute, the American Institute of Certified Public Accountants, and the University of Washington School of Business Administration Advisory Board. Mr. Brown holds a B.A. in Economics from the University of Washington. Mr. Brown currently serves as Chairman of The Nasdaq Stock Market, Inc., Board of Directors and Executive Committee.

      Harry P. Kamen is Chairman of the Board and Chief Executive Officer of Metropolitan Life Insurance Co. Mr. Kamen has served as Chairman and Chief Executive Officer of Metropolitan Life Insurance Company since 1993, having joined the organization in 1959. Mr. Kamen serves as a Director of the following business corporation Boards: Banco Santander (Spain), Bethlehem Steel Corp., Pfizer, Inc., The New England Life Insurance Co., and New England Investment Companies. Mr. Kamen holds an A.B. from the University of Pennsylvania and an LL.B. from Harvard University Law School.

      Bridget A. Macaskill is President and Chief Executive Officer of Oppenheimer Funds, Inc. Ms. Macaskill was named President of the Oppenheimer Funds, Inc., in 1991 and Chief Executive Officer in 1995, having joined the firm in 1983. Ms. Macaskill serves on the Oppenheimer Funds, Inc., Board of Directors and Executive Committee, and the boards of the Oppenheimer funds. She is also a member of the Board of Directors of Hillsdown Holdings. Ms. Macaskill holds an undergraduate degree from Edinburgh University in Scotland, and pursued post-graduate work at Edinburgh College of Commerce. Ms. Macaskill is currently a member of The Nasdaq Stock Market, Inc., Board of Directors and Finance Committee.

      James S. Riepe is Vice Chairman of the Board of Directors of T. Rowe Price Associates, Inc., and serves as Director/ Officer of all the T. Rowe Price mutual funds. Mr. Riepe has been in the investment management business since 1969, and joined T. Rowe Price in 1982. He is a former Chairman of the Board of Governors of the Investment Company Institute and currently a member of its Executive Committee. He holds a B.S. and an M.B.A. from the University of Pennsylvania's Wharton School. Mr. Riepe currently serves on the NASD Regulation, Inc., Board of Directors and the following NASD Regulation, Inc., Committees: Executive, Finance and Investment Companies (Chair).

      James F. Rothenberg is President and Director 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 Nasdaq Stock Market, Inc., Board of Directors and The Nasdaq Stock Market, Inc., Finance Committee.

      Howard Schultz is Chairman and Chief Executive Officer of Starbucks Coffee Company. Mr. Schultz joined Starbucks Coffee Company in 1982. He serves on the Board of Directors of a number of emerging growth companies. Mr. Schultz holds a B.S. from Northern Michigan University.

      Arvind Sodhani is Vice President and Treasurer of Intel Corporation. Mr. Sodhani was elected Vice President of Intel Corporation in 1990, having joined the corporation in 1981. Mr. Sodhani holds a B.S. and M.S. from the University of London, and an M.B.A. from the University of Michigan. Mr. Sodhani currently serves as a member of The Nasdaq Stock Market, Inc., Board of Directors and Finance Committee.

      Nominees For Public Governors

      Nancy Kassebaum Baker is a former United States Senator. Mrs. Baker served in the United States Senate from December 1978 to January 1997, chairing the Labor and Human Resource Committee, the Foreign Relations Committee's Subcommittee on African Affairs, and the Commerce Committee's Subcommittee on Aviation. Mrs. Baker currently serves on the Robert Wood Johnson Foundation, the Ewing Kauffman Foundation, the NCAA Foundation, and the Kaiser Family Foundation. Mrs. Baker holds a bachelor's degree from the University of Kansas in Political Science and a master's degree in Political History from the University of Michigan. Mrs. Baker currently serves on the NASD, Inc., Board of Governors.

      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, Inc., Board of Governors and Audit Committee.

      Robert R. Glauber is an Adjunct Lecturer at the Center for Business and Government, Kennedy School, Harvard University. Mr. Glauber joined the Kennedy School faculty in 1992, after serving as Undersecretary of the U.S. Treasury for Finance from 1989-1992. Previously, he was a professor at the Harvard Business School for 25 years. Mr. Glauber served as Executive Director of the task force (Brady Commission) appointed by President Reagan to study the 1987 stock market crash. Mr. Glauber is Chairman of The Measurisk Group, a risk advisory and software development firm. He serves as a Director of the Dreyfus Group of mutual funds, Mid-Ocean Reinsurance Co., Ltd., Cooke & Bieler, Inc., the Federal Reserve Bank of Boston, and the Investment Company Institute. Mr. Glauber holds a B.A. from Harvard College in Economics and a doctorate in Finance from Harvard Business School. He currently serves as Vice Chairman of the NASD Regulation, Inc., Board of Directors and on the following NASD Regulation, Inc., Committees: Executive, Finance and Investment Companies.

      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 holds a B.A. from Yale University and an M.B.A. from New York University. Mr. Kirk currently serves on the NASD, Inc., Board of Governors and is Chairman of the NASD, Inc., Audit Committee.

      Philip R. Lochner, Jr. is Senior Vice President of Time Warner, Inc. Mr. Lochner became General Counsel in 1988, departed for an 18-month tenure as a Commissioner of the Securities and Exchange Commission, and was elected Senior Vice President of Time Warner, Inc., in 1991. Mr. Lochner serves as a Director on several non-profit organizations and advisory councils. Mr. Lochner holds a B.A. and LL.B. from Yale University, and a Ph.D. from Stanford University. Mr. Lochner was a Fulbright Fellow, having studied at the University of London from 1967 to 1968. Mr. Lochner currently serves on the NASD Regulation, Inc., Board of Directors and Executive 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 Nasdaq Stock Market, Inc., Board of Directors.

      Paul H. O'Neill is Chairman and Chief Executive Officer of ALCOA. Mr. O'Neill joined ALCOA in 1987 as Chairman and Chief Executive Officer. Prior to joining ALCOA, Mr. O'Neill was President of International Paper Company, having joined that firm as Vice President, Planning, in 1977. Mr. O'Neill serves on several Boards and Advisory Groups, including the RAND Corporation, the Institute for International Economics, Lucent Technologies, Council for Excellence, and the Gerald R. Ford Foundation. Mr. O'Neill holds a B.A. in Economics from Fresno State College and an M.A. in Public Administration from Indiana University.


      Endnotes

      1 NASD National Nominating Committee—Committee Chair: Daniel P. Tully, Merrill Lynch & Co. Members: John W. Bachmann, Edward D. Jones & Co., Thomas Hale Boggs, Jr., Patton Boggs, L.L.P., John S. Chalsty, Donaldson, Lufkin & Jenrette, Inc., Alfred E. Osborne, Jr., UCLA, Bert C. Roberts, Jr., MCI Communications Corporation.

    • 97-85 Fixed Income Pricing System Additions, Changes, And Deletions As Of October 24, 1997

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      Operations
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      As of October 24, 1997, the following bonds were added to the Fixed Income Pricing SystemSM (FIPSSM).

      Symbol Name Coupon Maturity
      FRC.GC First Republic Bancorp Inc. 7.750 09/15/12
      IPX.GA Interpool Capital Trust 9.875 02/15/27
      CPSS.GB Consumer Portfolio Services 10.50 01/15/04
      GBCB.GA GBC Bancorp 8.375 08/01/07
      BEC.GA Beckman Instruments Inc. 7.050 06/01/26
      TOK.GA Tokheim Corp 11.500 08/01/06
      HCN.GA Health Care Reit Inc. 7.570 04/15/00
      HCN.GB Health Care Reit Inc. 7.890 04/15/02
      HCN.GC Health Care Reit Inc. 8.090 04/15/04
      MCCC.GB McCrory Corp 7.500 05/15/94
      MCCC.GC McCrory Corp 7.625 12/15/97
      MCCC.GD McCrory Corp 7.750 09/15/95
      PNPH.GA First Nationwide Parent Hldgs Ltd 10.625 04/15/03
      MTXC.GA Matrix Capital Corp 11.500 09/30/04
      AME.GA Ametek Inc. 9.750 03/15/04
      DIGO.GB Di Giorgio Corp 10.000 06/15/07
      NXLK.GA Nextlink Communications Inc. 9.625 10/01/07
      COHO.GA Coho Energy Inc. 8.875 10/15/07
      KBH.GD Kaufman & Broad Home Corp 7.750 10/15/04
      NTK.GD Nortek Inc. 9.250 03/15/07
      PENT.GA Pen-Tab 10.875 02/01/07

      As of October 24, 1997, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      IVCC.GA Ivac Corp 9.250 12/01/02
      DIGO.GB Di Giorgio Corp 10.000 06/15/07
      CMS.GA CMS Energy Corp 9.500 10/01/97
      RYR.GA Rymer Foods Inc. 11.000 12/15/00
      HRRA.GB Harrahs Operating Inc. 10.875 04/15/02
      MORT.GD Marriott Corp 9.875 11/01/97
      RCL.GA Royal Caribean Cruises Ltd. 11.375 05/15/02
      BUS.GA Greyhound Line Inc. 10.000 07/31/01
      SRV.GA Service Corporation Inc. 10.000 08/15/00
      COT.GB ColTec Industries Inc. 10.245 04/01/02
      OI.GB Owens Ill Inc. 10.250 04/01/99
      OI.GD Owens Ill Inc. 10.500 06/15/02
      ZOS.GB Zapata Corp 10.250 03/15/97
      MGG.GA MGM Grand Hotel Fin Corp 11.750 05/01/99
      MGG.GB MGM Grand Hotel Fin Corp 12.000 05/01/02
      ENRG.GA Dekalb Energy Co 10.000 04/15/98
      SUFD.GA Super Rite Foods Inc. 10.625 04/01/02
      TLLP.GA Toll Corp 10.500 03/15/02
      GRDH.GB Great Dane Hlds Inc. 12.750 08/01/01
      MXM.GB Maxxam Inc. 14.000 05/20/00
      MOIL.GB Marathon Oil Co 8.500 11/01/06
      WOL.GA Wainoco Oil Co 10.750 10/01/98
      CCVS.GB Continental Cablevision Inc. 10.625 06/15/02

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, NASD RegulationSM 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.

    • 97-84 Christmas Day And New Year's Day: Trade Date — Settlement Date Schedule

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

      The Nasdaq Stock MarketSM and the securities exchanges will be closed on Thursday, December 25, 1997, in observance of Christmas Day, and Thursday, January 1, 1998, 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. 19 Dec. 24 Dec. 29
      22 26 30
      23 29 31
      24 30 Jan. 2, 1998
      25 Markets Closed
      26 31 5
      29 Jan. 2, 1998 6
      30 5 7
      31 6 8
      Jan. 1, 1998 Markets Closed
      2 7 9

      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."

    • 97-83 Exemption From SEC Rule 15c2-11 For Certain Securities Delisted From Nasdaq

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      Executive Summary

      In light of the recent approval of the new and increased listing standards for The Nasdaq Stock MarketSM (Nasdaq®), the Securities and Exchange Commission (SEC) has again provided an exemption from the filing requirements of SEC Rule 15c2-11 for certain securities that could be delisted as a result.1 The exemption will permit broker/dealers to immediately publish quotations in the OTC Bulletin Board® (or any other quotation medium including National Quotation Bureau Pink Sheets) for those securities that are delisted from Nasdaq for failure to comply with the new initial listing and maintenance requirements. This Notice outlines the exemption and explains the procedures to be followed.

      Questions concerning this Notice may be directed to Andrew S. Margolin, Senior Attorney, The Nasdaq Stock Market, Inc., at (202) 728-8869. Members seeking the exemption should contact Market Operations at (203) 375-9609, as discussed below.

      Background

      On August 22, 1997, the SEC approved a proposed rule change to revise the initial listing and maintenance criteria for The Nasdaq Stock Market.2 The proposed rule change strengthens both the quantitative and qualitative standards for issuers listing on Nasdaq by: (1) eliminating the alternative to the $1 minimum bid price requirement; (2) extending corporate governance standards to issuers listed on the Nasdaq Small-Cap MarketSM; (3) increasing the quantitative standards for both the SmallCap Market and Nasdaq National Market®; and (4) implementing a "peer review" requirement for auditors of Nasdaq-listed companies.

      The new standards apply retroactively to issuers applying for initial listing on Nasdaq after the March 3, 1997, filing of the rule change. Those issuers will have until November 20, 1997, to meet the new initial listing criteria. In addition, effective February 23, 1998, all issuers on Nasdaq will have to comply with the new maintenance criteria. As a result of the new and increased standards, it is expected that a number of companies listed on the Nasdaq National Market and SmallCap Market may be unable to comply and, thus, may eventually be subject to delisting in accordance with National Association of Securities Dealers, Inc. (NASD®) rules and procedures of Nasdaq.3

      Nasdaq believes it is extremely important that issuers and their shareholders are not unduly disadvantaged in the event that any particular security is delisted for failure to comply with the new initial listing and maintenance standards. NASD member firms may continue to quote in the OTC Bulletin Board a security that is ultimately delisted as a result of a failure to meet the revised listing standards. In this context, the OTC Bulletin Board provides a viable and meaningful alternative ensuring continued liquidity and transparency in the market for a security after it is delisted.

      To facilitate a smooth transition of a delisted security into the OTC Bulletin Board, however, Nasdaq obtained an exemption to Exchange Act Rule 15c2-11 to permit market makers who have been quoting the security while listed on Nasdaq, to continue quoting the security in the OTC Bulletin Board without interruption immediately following delisting. Rule 15c2-11 would otherwise require a broker/dealer to compile and review specified information about the issuer and the security before the firm publishes a quotation, and to demonstrate compliance with Rule 15c2-11 by submitting a Form 211 to the NASD pursuant to NASD Rule 6740 at least three business days before the quotation is published. Hence, a delay of several days would occur between the effectiveness of a Nasdaq delisting and the initiation of quotations for that security in the OTC Bulletin Board or another quotation medium.4 Immediate inclusion in the OTC Bulletin Board continues to be consistent with the views of the SEC and is again necessary to implement the revised listing standards recently adopted by Nasdaq.

      Conditions Of The Exemption

      The exemption is available regardless of when any issuer is ultimately delisted under the new standards, provided that all of the following conditions are satisfied:

      (1) the security's delisting from Nasdaq must be attributable solely to non-compliance with Nasdaq's initial listing or maintenance standards, as revised by the approval of the proposed rule change contained in Exchange Act Release No. 389615;
      (2) the security must have been quoted continuously in Nasdaq during the 30 calendar days preceding its delisting from Nasdaq, exclusive of any trading halt not exceeding one day to permit the dissemination of material news concerning the security's issuer;
      (3) the issuer must not be in bankruptcy;
      (4) the issuer must be current in all of its periodic reporting requirements pursuant to Section 13(a) or 15(d) of the Exchange Act;
      (5) a broker/dealer relying upon this exemption must have been a market maker registered with Nasdaq in the security being delisted during the 30-day period preceding the delisting; and
      (6) the exemption extends only to classes of securities listed on Nasdaq.6

      The foregoing conditions effectively limit the requested exemption to the securities of companies that are not in bankruptcy, that are complying with the SEC's financial disclosure requirements, and that would have remained eligible for listing on Nasdaq under the former standards. If these conditions cannot be satisfied, the security's transfer to a quotation medium such as the OTC Bulletin Board will be conditioned on full compliance with Rule 15c2-11 and NASD Rule 6740.

      Procedures For The Exemption

      The announcement of a delisting of a particular security is made no earlier than the close of trading on the last day it is authorized for quotation on Nasdaq. A market maker seeking this exemption must be registered in the OTC Bulletin Board for the security no later than the next trading day. Market makers cannot register on-line in the OTC Bulletin Board for this exemption and must contact Nasdaq Market Operations. For those securities eligible for the exemption, Market Operations will attempt, where possible, to notify those market makers registered in the delisted security to provide them the opportunity to be registered on a timely basis. The responsibility to seek registration in the OTC Bulletin Board pursuant to this exemption, however, remains with the market maker. Market Operations can be reached at (203) 375-9609.


      Endnotes

      1 See letter from Nancy J. Sanow, Assistant Director, Securities and Exchange Commission, to Robert E. Aber, Vice President and General Counsel, Nasdaq, dated October 23, 1997. This exemption is similar to one obtained when the Nasdaq listing standards were last revised in 1991. See letter from Jonathan G. Katz, Secretary, Securities and Exchange Commission, to T. Grant Callery, Vice President and Deputy General Counsel, National Association of Securities Dealers, Inc., dated February 28, 1992.

      2 See Exchange Act Release No. 38961 (August 22, 1997) 62 FR 45895 (August 29, 1997).

      3 NASD Rule 9700 Series governs the Nasdaq delisting process and sets forth the procedures by which an issuer may appeal a delisting decision.

      4 It should be noted that the effective date of a security's delisting from the Nasdaq market is not announced by Nasdaq until after the close of trading on the last day that the security is quoted in Nasdaq.

      5 See Exchange Act Release No. 38961 (August 22, 1997), 62 FR 45895 (August 29, 1997).

      6 Thus, if an issuer had one class of securities listed on Nasdaq, and another class of securities traded over the counter but not on Nasdaq, only the delisted Nasdaq security would qualify for the exemption.

    • 97-82 SEC Approves Amendments To Conduct Rules 2710 And 2720 Regarding Mergers, Acquisitions, And Exchange Offers

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      Effective Date: December 15, 1997

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      Executive Summary

      On October 29, 1997, the Securities and Exchange Commission (SEC) approved amendments that clarify the application of Rules 2710 and 2720 of the National Association of Securities Dealers, Inc. (NASD®) Conduct Rules to mergers, acquisitions, exchange offers, and similar transactions, and establish limitations on certain "tail fee" arrangements.1 The amendments are effective December 15, 1997, with respect to transactions that have not commenced as of that date.

      Questions regarding this Notice may be directed to Suzanne E. Rothwell, Chief Counsel, Corporate Financing, NASD Regulation, Inc., and Richard J. Fortwengler, Associate Director, Corporate Financing, NASD RegulationSM, at (202) 974-2700.

      Background

      Rule 2710 of the NASD Conduct Rules (Corporate Financing Rule) requires that members file with the Corporate Financing Department of NASD Regulation proposed public offerings of securities for review of the proposed underwriting terms and arrangements, which terms and arrangements must comply with that rule. Rule 2720 of the Conduct Rules (Conflicts Rule) establishes standards in addition to those in Rule 2710 to address the conflicts of interest that occur in connection with a public offering of the securities of a member, the parent of a member, an affiliate of a member, or other issuer with whom the member has a conflict of interest. For an offering to be subject to filing under the Corporate Financing and Conflicts Rules, a member must be considered to be "participating" in the offering and the offering must be one that is subject to the filing requirements.2

      The Corporate Financing and Conflict Rules apply to most "public offerings" of securities, which is defined in Rule 2720(b)(14) to include, among other things, "offerings made pursuant to a merger or acquisition," but neither rule currently identifies the types of mergers and acquisitions subject to filing and compliance with those rules. NASD Regulation has, therefore, amended Rules 2710 and 2720 to clarify the application of the requirements of the Corporate Financing and Conflicts Rules to exchange offers, mergers and acquisitions, and similar corporate reorganizations, and to make other related amendments. In view of the increasing amount of merger and acquisition activity, NASD Regulation believes that these amendments eliminate confusion regarding their application to such transactions.

      Review Procedures For Exchange Offers, Mergers, Acquisitions, And Similar Transactions

      With respect to the time-sensitive nature of many exchange offers, mergers, acquisitions, and similar corporate reorganizations that are subject to filing as a result of SEC approval of amendments to Rules 2710 and 2720, NASD Regulation previously announced in Notice to Members 95-73 (September 1995) a policy to expedite the review of such offerings by the Corporate Financing Department. In general, it is anticipated that a comment letter will be issued by the Corporate Financing Department within 48 hours of receipt of the filing of the documents related to such a transaction, so long as the documentation and related information submitted meet the requirements set forth in subparagraphs (b)(5) and (6) of Rule 2710 and the appropriate filing fee is included.

      Description Of Amendments Summary Of Amendments To Filing Requirements

      NASD Regulation has adopted amendments to the Corporate Financing and Conflicts Rules to limit the application of the rules to narrow situations where pre-offering review under the Corporate Financing Rule or the application of the Conflicts Rule is believed necessary to protect investors. Thus, in general, the amendments require that an exchange offer be filed with the Corporate Financing Department for review only when a member is participating in solicitation activities related to an offer that involves certain unlisted securities or securities that are exempt from registration with the SEC. However, filing of an exchange offer (where a member is participating in distributing activities), that would otherwise not be subject to filing, is required if the offering is subject to the Conflicts Rule because the offering is of securities of a member or its parent, or the offer will result in the direct or indirect public ownership of a member. In addition, exchange offers, merger and acquisition transactions, and other similar corporate reorganizations are subject to the Conflicts Rule, and required to be filed for review, if there is an issuance of securities that results in the direct or indirect public ownership of a member.

      Amendments To Filing Requirements Of Rule 2710

      Paragraph (b)(9) of Rule 2710 provides clarification of certain types of public offerings required to be filed with the Corporate Financing Department of NASD Regulation for review. Paragraph (b)(9) has been amended to add new subparagraph (H) to require the filing of exchange offers exempt from registration under Sections 3(a)(4), 3(a)(9), and 3(a)(11) of the Securities Act of 1933 (Securities Act) where the member engages in active solicitation, and the filing of exchange offers registered with the SEC if a member acts a dealer-manager.3 Active solicitation occurs when a member directly solicits or contacts security holders, acts as dealer-manager, performs tasks that are performed by investor relations firms (i.e., contacts security holders to determine the action they intend to take), contacts security holders to determine whether they have received the offering materials, answers unsolicited contacts, and participates in meetings with security holders or their advisors before or after an exchange offer begins.4 In contrast, active solicitation does not encompass the delivery of a "fairness opinion," advice as to the structure and terms of the exchange offer, assistance in the preparation of the offering documents to be sent to security holders, nor any other functions that do not involve direct solicitation or direct contact with security holders.5

      With respect to exchange offers registered with the SEC on Forms S-4 or F-4, filing is expressly limited to those distributions where the member is engaged by the company to act as dealer-manager and solicit consents on behalf of the company to the proposed reorganization, and to otherwise facilitate the exchange of securities. In such exchange offers, the member generally acts as a financial advisor to help structure the transaction and will receive a fee, as well as distribution-related compensation, for services rendered.

      To the extent an exchange offer exempt under Sections 3(a)(4), 3(a)(9) and 3(a)(11) of the Securities Act or registered with the SEC does not fall within the filing requirement in new subparagraph (b)(9)(H) because the member is not engaging in solicitation activities or is not acting as dealer-manager, respectively, the exchange offer is considered exempt from compliance with the Corporate Financing and Conflicts Rules because the member is not considered to be "participating in the offering."

      However, NASD Regulation has also adopted new subparagraph (b)(7)(F) to exempt from filing exchange offers where the securities to be issued or the securities of the company to be acquired are designated as a Nasdaq National Market security or listed on the New York Stock Exchange (NYSE) or American Stock Exchange (AMEX) or where the company issuing securities qualifies to register securities on SEC Registration Forms S-3, F-3 or F-10. It is believed that the listing standards of the three markets requiring independent directors on the Board of Directors will ensure that the independent directors of the acquirer or target will evaluate the offer and that sufficient information will be distributed to shareholders and to the markets, so that investors can make a decision regarding whether to sell or hold the securities they hold or will receive.

      The exemption for companies qualified to register securities on SEC registration Forms S-3, F-3, or F-10 applies to those companies that meet the standards for the Forms in subparagraphs (C)(i) and (ii) of paragraph (b)(7) of Rule 2710, in order to restrict the exemption to domestic companies that meet the standards for Forms S-3 and F-3 prior to October 21, 1992, and to Canadian-incorporated foreign private issuers that meet the standards for Form F-10 approved in Securities Exchange Act (Act) Release No. 29354 (June 21, 1991).6 This provision requires, in general, that a domestic company have a three-year history as a public reporting company and be in compliance with the current year's periodic reporting requirements of the Act (with respect to the timely filing of form 10-Qs and 10-Ks). In addition, the minimum required market value of a company's common stock must be as follows: Form S-3, $150 million (or $100 million market value of voting stock and three million shares annual trading volume); and Form F-3, $300 million held worldwide. For Form F-10, Canadian private issuers must have (CN) $360 aggregate value of voting stock and a public float of (CN) $754 million.

      Paragraph (b)(7) of the Corporate Financing Rule, which includes the two filing exemptions for exchange offers discussed above, lists those public offerings not required to be filed for review with the Corporate Financing Department. However, the underwriting terms and arrangements of such exempt offerings must be in compliance with the requirements of Rule 2710 or Rule 2810, as applicable. Moreover, any offering exempt from filing under paragraph (b)(7) must nonetheless be filed if the offering is subject to Rule 2720, the Conflicts Rule, and is subject to review by the Corporate Financing Department for compliance with Rules 2710 and 2720.7

      Paragraph (b)(9) of the Corporate Financing Rule has also been amended to add new subparagraph (I) to require the filing of any exchange offer, merger or acquisition transaction, and similar corporate reorganization that involves an issuance of securities that results in the direct or indirect public ownership of a member. This latter filing requirement, therefore, only requires the filing of exchange offers, mergers, acquisitions, and corporate reorganizations involving an offering of securities of a member or its parent or that results in the public ownership of the member or its parent. Such offerings would be subject to compliance with Rules 2710 and 2720.8 The NASD has long held the view that pre-offering review is vital to protect investors when the member and the issuer are in a control relationship that is addressed through the application of Rule 2720. The NASD has previously clarified in Notice to Members 88-100 (December 1988) that mergers or acquisitions involving an issuer and a member or its parent that result in the direct or indirect public ownership of a member are subject to compliance with Rule 2720, regardless of whether the merger or acquisition occurs subsequent to the issuer's initial public offering.9

      Paragraph (b)(8) of Rule 2710 lists those offerings that, although within the definition of "public offering," are exempted from compliance with Rules 2710 and 2720. NASD Regulation has added new subparagraphs (I) and (J) to paragraph (b)(8) to provide an exemption from filing and compliance with Rules 2710 and 2720 for:

      1. spin-off and reverse spin-off transactions involving a subsidiary or affiliate of the issuer, where the securities are issued as a dividend or distribution to current shareholders; and
      2. securities registered with the SEC in connection with a merger or similar form of business combination, except if the offering would be filed under subparagraph (b)(9)(I), described above, because it involves a transaction that results in the direct or indirect public ownership of a member.

      Spin-off transactions to existing security holders as a dividend or other distribution generally do not involve an investment decision by shareholders and, consequently, any member acting as a financial advisor to the parent company is not generally involved in any public solicitation in connection with the transaction.10 Merger transactions and similar business combinations registered with the SEC generally only involve a member in providing financial advice to the Board of Directors of the acquirer or target, that may include an obligation that the member issue a fairness opinion regarding the acquisition price.

      Amendments To Compensation Arrangements Under Rule 2710

      In addition, NASD Regulation has added new subparagraph (c)(6)(B)(v) to Rule 2710 to provide that it is an unreasonable term and arrangement for a member to receive a right to a "tail fee" arrangement that has a duration of more than two years from the date the member's services are terminated, in the event an offering is not completed and the issuer subsequently consummates a similar transaction. Such arrangements are currently only granted by a company to a member in connection with an exchange offer transaction. It is believed that the real benefit derived by a company that grants a "tail fee" arrangement is the creativity of the strategic advice given by the member for the particular transaction that may include, among other things, assisting the company in defining objectives, performing valuation analyses, formulating restructuring alternatives, and structuring the offering. In particular, in the case of an exchange offer, a member providing financial advice will generally have provided considerable ongoing financial advisory services to the company.

      The new "tail fee" prohibition also permits a member to demonstrate on the basis of information satisfactory to the NASD that an arrangement of more than two years is not unfair or unreasonable under the circumstances. The ability of the staff of the Corporate Financing Department to interpret the provision to permit such an arrangement is intended to be used only where the member can demonstrate that the creativity of the strategic advice provided by the member has a potential benefit to the company for more than two years.

      In the case of exchange offers exempt from filing but subject to compliance with the rule under subparagraph (b)(7)(F), where the "tail fee" arrangement is proposed to have a duration of longer than two years, a member is required to request an opinion of the staff as to whether the arrangement is permissible under the rule. In the case of any other offering exempt from filing under subparagraph (b)(7), a member is required to request an opinion of the staff as to whether it has "no objections" as to any proposed "tail fee" arrangement.

      As set forth above, although "tail fee" arrangements are currently granted only in connection with exchange offers, the provision is written to regulate such an arrangement in connection with any type of public offering subject to compliance with the Corporate Financing Rule. Where a "tail fee" arrangement is proposed in connection with public offerings that are not exchange offers, NASD Regulation staff will consider whether such an arrangement is justified by the services provided by the member to the issuer. Where the member does not appear to have provided the type of substantial structuring and/or advisory services to the issuer similar to those that are described above, other than those services traditionally provided in connection with a distribution of a public offering, a proposed "tail fee" arrangement will be considered to be unfair and unreasonable on the basis that the arrangement would violate Rule 2110 (the NASD's basic ethical rule) and Rule 2430 since the member is proposing to be paid for services that the member has not provided to the issuer. This position is consistent with subparagraph (c)(5)(B)(iv) of Rule 2710, which prohibits a member from receiving compensation in connection with an offering of securities that is not completed, except for compensation received in connection with a transaction (i.e., a merger transaction) that occurs in lieu of the proposed offering as a result of the member's efforts and the reimbursement of the member's reasonable out-of-pocket accountable expenses.

      In addition, NASD Regulation has considered whether other types of fees and expense reimbursement arrangements typically negotiated for and received in connection with exchange offers subject to compliance with Rule 2710, are inconsistent with or prohibited by subparagraphs (c)(6)(B)(iii) and (iv) of the Corporate Financing Rule. Subparagraph (c)(6)(B)(iii) of Rule 2710 currently prohibits as unfair and unreasonable any payment of commissions or reimbursement of expenses directly or indirectly to the underwriter and related persons prior to commencement of the public sale of the securities being offered, with certain limited exceptions. As set forth above, subparagraph (c)(6)(B)(iv) of Rule 2710 currently prohibits as unfair and unreasonable the payment of any compensation by an issuer to a member, or person associated with a member, in connection with an offering of securities which is not completed according to the terms of agreement between the issuer and underwriter, except those payments negotiated and paid in connection with a transaction that occurs in lieu of the proposed offering as a result of the efforts of the underwriter and related persons and provided, however, that the reimbursement of out-ofpocket accountable expenses actually incurred by the member, or person associated with a member, is not presumed to be unfair or unreasonable under normal circumstances.

      NASD Regulation has determined that it is not inconsistent with the Corporate Financing Rule for a member acting as financial advisor in an exchange offering to receive a "time and efforts" or similar fee for the services it renders in connection with an exchange offer that is not completed, where the member does not receive the agreed-upon success fee. In addition, it is deemed not inconsistent with the Corporate Financing Rule for a member to receive reimbursement of certain expenses, including, but not limited to, travel costs, document production, and legal fees of the financial advisor, whether or not the transaction is consummated. In Notice to Members 95-73 (September 1995), which published the original version of the proposed rule change for comment, the NASD stated that these and similar types of reimbursement arrangements in exchange offers are not prohibited by the Corporate Financing Rule because such arrangements are not viewed as directly connected to the issuance of securities.

      Amendments To Rule 2720

      NASD Regulation has amended the Conflicts Rule to conform the scope section of the Rule to the amendments to the filing requirements of Rule 2710 and to clarify the responsibilities of a qualified independent underwriter in an exchange offer subject to compliance with Rule 2720. Paragraph (a) of Rule 2720 has been amended to add new subparagraph (3) to provide that in the case of an exchange offer, merger and acquisition transaction, or similar corporate reorganization, compliance with Rule 2720 is required only if the offering comes within subparagraph (b)(9)(H) of Rule 2710, where the issuance of securities is by a member or the parent of a member, or if the offering comes within subparagraph (b)(9)(I). As set forth above, proposed subparagraph (b)(9)(H) would require the filing of exchange offers exempt under Sections 3(a)(4), 3(a)(9), and 3(a)(11) of the Securities Act if the member's participation involves active solicitation activities, and the filing of exchange offers registered with the SEC if the member is acting as dealer-manager. Thus, the exemption from filing for such exchange offers provided by proposed subparagraph (b)(7)(F), where the securities are designated as a Nasdaq National market security or listed on the NYSE or AMEX, or the issuer qualifies to register securities on Forms S-3, F-3, or F-10, is not available if the exchange offer is by a member or parent of a member.11 As further set forth above, proposed subparagraph (b)(9)(I) would require the filing of any exchange offer, merger and acquisition transaction, or similar corporate reorganization involving an issuance of securities that results in the direct or indirect public ownership of a member.12

      NASD Regulation also has amended Rule 2720 to clarify the obligations of a qualified independent underwriter 13 that would be required by subparagraph (c)(3) of Rule 2720 to perform due diligence with respect to the offering document and provide a recommendation with respect to the exchange value of an exchange offer, merger and acquisition transaction, or similar corporate reorganization. Currently, the Conflict Rule requires that the price at which an equity issue or the yield at which a debt issue is to be distributed to the public be established at a price no higher or yield no lower than that recommended by a qualified independent underwriter (who shall also participate in the preparation of the registration statement and shall exercise the usual standards of "due diligence" in respect thereto). NASD Regulation has amended subparagraph (c)(3)(A) by adding a new exception to state that in any exchange offer, merger and acquisition transaction, or corporate reorganization subject to Rule 2720, the provision which requires that the price or yield of the securities be established based on the recommendation of a qualified independent underwriter shall not apply and, instead, the exchange value of the securities being offered in the transaction shall not be less than that recommended by a qualified independent underwriter. Thus, the proposed new provision would clarify that the obligation of the qualified independent underwriter is to ensure that the recipient of the exchange offer, which is the party intended to be protected by the participation of a qualified independent underwriter, shall not receive fewer of the securities being issued in exchange for each security held by the recipient than is recommended by the qualified independent underwriter.

      Finally, in order to make clear that the exemptions in subparagraph (b)(8) of Rule 2710 (that includes exemptions for offerings of securities issued in a spin-off or in a merger registered with the SEC) are also exempt from Rule 2720, paragraph (o) of Rule 2720 is proposed to be amended to reference the exemptions from Rule 2720 that are provided in subparagraph (b)(8) of Rule 2710.

      Implementation Of The Amendments

      NASD Regulation has considered the impact of these amendments on pending transactions that would be required to be filed with the Corporate Financing Department for review as a result of the application of Rule 2710 or Rule 2720, or would be subject to compliance with Rule 2710 even though exempt from filing. In order to provide sufficient time for members to bring their arrangements into compliance, the amendments are applicable to proposed exchange offers, mergers, acquisitions, and similar transactions that have not commenced as of December 15, 1997. Therefore, if subject to filing under Rule 2710 or Rule 2720, such transactions are required to be filed for review with the Corporate Financing Department. Further, such transactions, although exempt from filing under subparagraph (b)(7) of Rule 2710, will be required to be made in compliance with the restrictions on "tail fee" arrangements and other provisions of the Corporate Financing Rule.

      The new restrictions on "tail fee" arrangements are not, however, applicable to any outstanding "tail fee" arrangement for an exchange offer, merger, acquisition, or similar transaction that has commenced prior to effectiveness of these amendments on December 15, 1997.


      Text Of Amendments

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

      Rule 2710. Corporate Financing Rule—Underwriting Terms and Arrangements

      (b) Filing Requirements
      (7) Offerings Exempt from Filing
      Notwithstanding the provisions of subparagraph (1) above, documents and information related to the following public offerings need not be filed with the Association for review, unless subject to the provisions of Rule 2720. However, it shall be deemed a violation of this Rule or Rule 2810, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Rule or Rule 2810, as applicable:
      (A) - (C) - No change.
      (D) securities offered pursuant to a redemption standby "firm commitment" underwriting arrangement registered with the Securities and Exchange Commission on Forms S-3, F-3 or F-10 (only with respect to Canadian issuers); [and]
      (E) financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories; and
      (F) exchange offers of securities where:
      (i) the securities to be issued or the securities of the company being acquired are listed on The Nasdaq National Market, the New York Stock Exchange, or American Stock Exchange; or
      (ii) the company issuing securities qualifies to register securities with the Commission on registration statement Forms S-3, F-3, or F-10, pursuant to the standards for those Forms as set forth in subparagraphs (C)(i) and (ii) of this paragraph.
      (8) Exempt Offerings
      Notwithstanding the provisions of subparagraph (1) above, the following offerings are exempt from this Rule, Rule 2720, and Rule 2810. Documents and information relating to the following offerings need not be filed for review:
      (A) - (F) - No change.
      (G) tender offers made pursuant to Regulation 14D adopted under the Securities Exchange Act of 1934, as amended; [and]
      (H) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act of 1935, as amended[.];
      (I) securities of a subsidiary or other affiliate distributed by a company in a spin-off or reverse spin-off or similar transaction to its existing securityholders exclusively as a dividend or other distribution; and
      (J) securities registered with the Commission in connection with a merger or acquisition transaction or other similar business combination, except for offerings required to be filed pursuant to subparagraph (9)(I) below.
      (9) Offerings Required to be Filed
      Documents and information relating to all other public offerings including, but not limited to, the following must be filed with the NASD for review:
      (A) - (F) - No change.
      (G) securities offered pursuant to Regulation A or Regulation B adopted under the Securities Act of 1933, as amended; [and]
      (H) exchange offers that are exempt from registration with the Commission under Sections 3(a)(4), 3(a)(9), 3(a)(11) of the Securities Act of 1933 (if a member's participation involves active solicitation activities) or registered with the Commission (if a member is acting as dealer-manager) (collectively "exchange offers"), except for exchange offers exempt from filing pursuant to subparagraph (7)(F) above that are not subject to filing by subparagraph (9)(I) below;
      (I) any exchange offer, merger and acquisition transaction, or other similar corporate reorganization involving an issuance of securities that results in the direct or indirect public ownership of the member; and
      (J) any offerings of a similar nature that are not exempt under paragraphs(7) or (8) above.
      (c) Underwriting Compensation and Arrangements
      (6) Unreasonable Terms and Arrangements
      (A) No member or person associated with a member shall participate in any manner in a public offering of securities after any arrangement proposed in connection with the public offering, or the terms and conditions relating thereto, has been determined to be unfair or unreasonable pursuant to this Rule or inconsistent with any By-Law or any Rule or regulation of the NASD.
      (B) Without limiting the foregoing, the following terms and arrangements, when proposed in connection with the distribution of a public offering of securities, shall be unfair and unreasonable:
      (v) any "tail fee" arrangement granted to the underwriter and related persons that has a duration of more than two (2) years from the date the member's services are terminated, in the event that the offering is not completed in accordance with the agreement between the issuer and the underwriter and the issuer subsequently consummates a similar transaction, except that a member may demonstrate on the basis of information satisfactory to the Association that an arrangement of more than two (2) years is not unfair or unreasonable under the circumstances.
      Subparagraphs (v) - (xiii) are renumbered (vi) - (xiv).

      Rule 2720. Distribution of Securities of Members and Affiliates—Conflicts of Interest

      (a) General
      (1) No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by the member, the parent of the member, or an affiliate of the member and no member or parent of a member shall issue securities except in accordance with this Schedule.
      (2) No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by a company if the member and/or its associated persons, parent or affiliates have a conflict of interest with the company, as defined herein, except in accordance with this Schedule.
      (3) In the case of an exchange offer, merger and acquisition transaction, or similar corporate reorganization, this Rule shall only apply if the offering is described in:
      (a) Rule 2710(b)(9)(H) and the issuance of securities is by a member or the parent of a member; or
      (b) Rule 2710(b)(9)(I).
      (c) Participation in Distribution of Securities of Member or Affiliate
      (1) and (2) - No change.
      (3) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of its own or an affiliate's securities, or of securities of a company with which it or its associated persons, parent or affiliates have a conflict of interest, one or more of the following three criteria shall be met:
      (A) the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established at a price no higher or yield no lower than that recommended by a qualified independent underwriter which shall also participate in the preparation of the registration statement and the prospectus, offering circular, or similar document and which shall exercise the usual standards of "due diligence" in respect thereto; provided, however, that:
      (i) an offering of securities by a member which has not been actively engaged in the investment banking or securities business, in its present form or as a predecessor broker/dealer, for at least the five years immediately preceding the filing of the registration statement shall be managed by a qualified independent underwriter; and
      (ii) the provision of this paragraph which requires that the price or yield of the securities be established based on the recommendation of a qualified independent underwriter shall not apply to an offering of equity or debt securities if:
      a. the securities (except for the securities of a broker/dealer or its parent) are issued in an exchange offer or other transaction relating to a recapitalization or restructuring of a company; and
      b. the member that is affiliated with the issuer or with which the member or its associated persons, parent or affiliates have a conflict of interest is not obligated to and does not provide a recommendation with respect to the price, yield, or exchange value of the transaction; or
      (iii) in any exchange offer, merger and acquisition transaction, or similar corporate reorganization subject to this Rule under subparagraph (a)(3) above, the provision of this paragraph which requires that the price or yield of the securities be established based on the recommendation of a qualified independent underwriter shall not apply and, instead, the exchange value of the securities being offered in the transaction shall not be less than that recommended by a qualified independent underwriter; or
      (B) and (C) - No change.
      (o) Predominance of Rule 2720

      If the provisions of this Rule are inconsistent with any other provisions of the Association's By-Laws or Rules, or of any interpretation thereof, the provisions of this Rule shall prevail, except to the extent that subparagraph (b)(8) of Rule 2710 provides an exemption from this Rule for certain offerings.

      Endnotes

      1 Securities Exchange Act Release No. 39284 (October 29, 1997).

      2 Paragraph (a)(5) of Rule 2710 defines "participation or participating in a public offering" to include participation in the preparation of the offering or other documents, participation in the distribution of the offering on an underwritten, non-underwritten, or any other basis, furnishing of customer and/or broker lists for solicitation, or participation in any advisory or consulting capacity to the issuer related to the offering, but not the preparation of an appraisal in a savings and loan conversion or a bank offering, or the preparation of a fairness opinion pursuant to SEC Rule 13e-3.

      3 The term "exchange offer" refers to transactions where one security is issued in exchange for another security of the issuer or another entity, and is distinguished from mergers, acquisitions and other corporate reorganizations (except if accomplished through an exchange offer).

      4 Activities by a broker/dealer that would not come within the concept of "soliciting" for purposes of Section 3(a)(9) may nonetheless come within the concept of "solicitation" for purposes of the requirement to file an offering with NASD Regulation for review under Rules 2710 and 2720. See applicable SEC no-action letters on Section 3(a)(9). Further, the application of the filing requirements of Rule 2710 does not depend upon whether remuneration is paid to the member. Thus, regardless of whether a member is paid for soliciting the exchange, an exchange offer would be subject to filing if the member engages in solicitation activities as described in this Notice.

      5 The NASD is not extending the filing requirement to other public exchange offers exempt from registration because such offerings are either subject to the oversight of a bankruptcy court or of another Federal review authority, such as the Comptroller of the Currency or the Federal Deposit Insurance Corporation. See Sections 3(a)(5), (6), (10), and (12) of the Securities Act.

      6 See Notice to Members 93-88 (December 1993), which includes a copy of Forms S-3 and F-3 as those forms existed prior to October 21, 1992, and Form F-10 as approved by the SEC on June 21, 1991.

      7 See description below of proposed rule change to Rule 2720. See also footnote 8 supra.

      8 Paragraph (n) of Rule 2720 provides that all offerings of securities included within the scope of that rule are also subject to the provisions of Rule 2710, even though an exemption from filing may be available under Rule 2720.

      9 In that Notice, the NASD expressed its special concerns regarding the merger of blank check companies in the penny stock market with privately held holding companies of members, indirectly creating a publicly held NASD member without having to comply with Rule 2720.

      10 It should be noted, however, that when a spin-off is followed by a traditional public offering by the spun-off company to raise capital, the company's initial public offering would be subject to the Corporate Financing Rule's filing requirements and to compliance with Rule 2720. The same analysis would require the filing of any public offering to raise capital that follows a merger, acquisition, exchange offer or other corporate reorganization that would be exempt from filing under Rule 2710 or exempt from compliance with Rules 2710 and 2720. In the latter case, the offering may nonetheless fall within another exemption from filing, such as the filing exemptions provided by subparagraphs (b)(7)(A), (C), or (D) of Rule 2710.

      11 See footnote 6 infra.

      12 This filing requirement is consistent with the position announced in Notice to Members 88-100 (December 1988) and paragraph (i) of Rule 2720 which states: ". . . if an issuer proposes to engage in any offering which results in the public ownership of a member . . . the offering shall be subject to the provisions of this Rule to the same extent as if the transaction had occurred prior to the filing of the offering."

      13 A member must meet a number of requirements in order to be a qualified independent underwriter under subparagraph (b)(15) of Rule 2720, including the requirement that the member "has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 thereof." Participation of a qualified independent underwriter is not required by Rule 2720 if the offering is of equity securities that meet the test of having a "bona fide independent market" or is of debt that is rated investment grade.

    • 97-81 NASD Regulation Requests Comment On Proposed Amendments Relating To Compensation For Sale Of Public Offerings Of Direct Participation Programs

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      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) requests comment on proposed amendments to National Association of Securities Dealers, Inc. (NASD®) Rule 2810 (DPP Rule or Rule) that would modify the compensation that members are permitted to receive in connection with the sale of public offerings of direct participation program (DPP) securities. The proposed amendments would: (1) lower the front-end maximum permissible compensation from 10 percent to 8 percent; (2) permit a member to receive an annual investor service fee of .20 percent, with maximum front-end compensation of 7.5 percent; (3) permit a member to receive a "trail commission," in addition to the service fee, for each one percentage point give-up from front-end compensation of 7.5 percent; and (4) lower the maximum organization and offering expense guideline for large offerings.

      Questions concerning this Request For Comment should be directed to Charles L. Bennett, Director, Corporate Financing, NASD Regulation; Suzanne E. Rothwell, Chief Counsel, Corporate Financing, NASD Regulation; or Carl R. Sperapani, Assistant Director, Corporate Financing, NASD Regulation, at (202) 974-2700.

      Background

      Current NASD Rules

      Rule 2810 sets out the NASD's regulation of the underwriting terms and arrangements of public offerings of DPP securities. The Rule currently permits members to receive underwriting compensation for participating in the distribution of a public DPP offering of up to 10 percent of the offering proceeds received, with an additional 0.5 percent permitted for reimbursement of bona fide due diligence expenses. The Rule also restricts total organization and offering (O&O) expenses for any program sponsored by a member or its affiliate to no more than 15 percent of offering proceeds (or 4.5 percent additional O&O). "Compensation" is broadly defined to include all items of compensation paid directly or indirectly from whatever source to underwriters, broker/dealers and their affiliates. Moreover, the current rule also includes a provision prohibiting the receipt of compensation by members of an indeterminate nature, unless the structure of the indeterminate compensation satisfies certain conditions.1

      The Tully Report

      In May 1994, an industry committee chaired by Merrill Lynch Chairman Daniel P. Tully (the Committee) was formed at the request of Securities and Exchange Commission (SEC) Chairman Arthur Levitt to address concerns regarding conflicts of interest in the brokerage industry. The Committee's mandates were to review industry compensation practices for registered representatives (RRs) and branch managers, identify actual and perceived conflicts of interest for RRs and branch managers, and identify the "best practices" used in the industry to eliminate, reduce or mitigate such conflicts. The Committee issued its report on April 10, 1995 (Tully Report). Among some of the "best practices" identified, the Tully Report recommended that:

      • Compensation policies should be designed to align the interest of all three parties to the relationship—the client, the RR, and the brokerage firm—and to encourage long-term relationships among them.


      • Member policies should encourage representatives to understand their client's objectives, and to educate the clients about markets and risks.2

      Generally, the Tully Report's findings and conclusions reflected a growing concern that the securities industry should more closely align the interests of brokerage firms and RRs to those of their customers and should encourage long-term relationships between firms and RRs and their customers.

      Discussion

      Response To The Tully Report

      NASD Regulation believes that the current compensation structure for the sale of DPPs in Rule 2810 should be amended to better align the interests of the investor, the salesperson, and the member as recommended by the Tully Report. DPPs are a long-term, illiquid security product in which investors need continuing information on the performance of their investment. The current compensation structure in the DPP Rule does not encourage members or their RRs to provide continuing information to their customers regarding the program over its life, nor does it promote members' continued review of the program's activities on behalf of its customers. Importantly, NASD Regulation also believes that amending the current compensation structure will also align the interests of the general partner or sponsor with those of the investor—although the Tully Report does not focus on this relationship.

      Finally, NASD Regulation is concerned that the current compensation structure that assumes the member will obtain its compensation at the time of sale does not properly focus the member and the member's RRs on whether the quality of the investment will provide continuing returns to investors, thus creating an impression on the part of investors that the broker/dealer is significantly rewarded for the sale of DPP products regardless of the subsequent performance of the program. It was, therefore, determined that the compensation structure should be revised to align the interests of the member and the RR with those of the customer on the performance of the program recommended by the member.3

      Description Of Proposed Amendments

      Base Fee

      Under the current guideline in the DPP Rule, members and their RRs are permitted to receive compensation from any source for the sale of DPPs that does not exceed 10 percent of gross offering proceeds (base fee), plus .5 percent of gross offering proceeds, to reimburse the member for its costs related to mandatory due diligence.4 In light of current practices where most programs do not pay members more than 8 percent in front-end commissions, NASD Regulation is proposing to reduce the base compensation from 10 percent to a maximum of 8 percent, while retaining the .5 percent guideline for due diligence. The decrease in the base fee will increase the amount of investors' capital contribution invested in assets acquired by the program.

      Service Fee

      In order to encourage members and their RRs to provide continuing information to customers regarding DPP securities and promote members' review of program activities, NASD Regulation is proposing to amend Rule 2810 to give members the alternative to trade off one-half of 1 percent from the 8 percent base fee to receive annually a service fee of 20 basis points for providing "investor relations" services to their customers (service fee). This alternative fee structure would be comprised of a 7.5 percent maximum base fee, plus a maximum of 0.5 percent for due diligence, plus an additional maximum 0.20 percent of gross offering proceeds sold by the member.

      Although the amount of the fee is determined as a percentage of gross offering proceeds, the source of the payment of the fee is either the program's annual cash available for distribution (i.e., total program cash flow except for amounts held for restoration or reserves) or fees that are paid by the program to the general partner. If the service fee is paid out of annual cash available for distribution, the service fee would be pro-rated against the investor's adjusted capital contribution (investor's original investment, minus cash distributions from sale and refinancing of assets). This has the effect of decreasing the member's payout as the assets of the program are liquidated and sales proceeds are distributed to investors. Finally, to ensure that both the general partner and investors contribute proportionately to the member's service fee, the definition of "cash available for distribution" has been drafted to require that the service fee be deducted from the "program's total funds provided from operations." However, the proposal does not apply the pro-ration requirement in the event that the service fee is paid entirely out of general partner fees.5

      In order to receive the service fee, the member must enter into a written agreement with the program which obligates the member to: (1) provide services to its customers so long as the member receives the annual service fee; and (2) respond to customers' requests for copies of reports and statements of account and to customers' questions regarding the periodic reports and performance of the program. The written agreement must also require that the general partner or sponsor of the program: (1) respond to inquiries by the member regarding the operation of the program; and (2) distribute annually to limited partners, no later than four months after the end of the program's fiscal year, a report on the operation of the program containing audited financial reports for at least a one-year period. NASD Regulation believes that this provision is key to the ability of the member to perform its services and will more closely align the interests of the general partner with those of the member and its customer.

      Trail Fee

      In order to encourage members to share in their customers' investment risk, the proposed amendments would permit a member to negotiate with the general partner to receive a "trail fee" in return for an additional give-up of front-end compensation from the 7.5 percent limitation, but only if the member is also receiving a service fee for providing services to its customers. The trail fee proposal is structured differently for "appreciating asset" and "depleting asset" programs.6

      In each case, the trail commission is proposed to allow members to receive annually a specified percentage of program cash flows in exchange for a one percentage point give-up from the 7.5 percent limitation. This structure results in a payment that will vary annually, depending on the amount of program cash flows, in order to demonstrate that the member is risking current compensation against the receipt of future compensation—thereby more clearly aligning the interests of the member with those of its customers. Thus, if there is insufficient cash flow for payment of the member's trail fee in any year, the program does not accrue an obligation to pay the fee in the next year.7

      In addition, the payment of the trail fee is subject to different subordinations, depending on whether the fee is calculated on the program cash flow from operations or from the sale and refinancing of assets. These subordinations are intended to more clearly align the interests of broker/dealers with those of their customers in recommending programs that the member believes will perform well. However, the subordination requirements only apply if the fee is paid from annual cash available for distribution from the program. Payment of the trail fee from general partner fees is not subject to any subordination.

      Appreciating Asset Programs

      With respect to appreciating asset programs, members would be permitted to receive, for each one percentage point deducted from front-end compensation of 7.5 percent, 1.75 percent of "annual cash distributions from operations" and from "net proceeds remaining from the sale or refinancing of assets," as well as .5 percent for due diligence and a .20 percent service fee. The term "annual cash distributions from operations" essentially refers to the program's operational cash flows, as distinguished from cash provided from sale and refinancing of assets. If the trail fee calculated on annual cash distributions from operations is paid from annual cash available for distribution, then the member's fee is subordinated to a cumulative annual non-compounded return of at least 6 percent on limited partner adjusted capital contribution. The payment of the trail fee calculated on sale and refinancing of assets, if paid from annual cash available for distribution, would be subject to the limited partners receiving at least 100 percent of capital contribution plus a cumulative annual non-compounded return of at least 6 percent on limited partner adjusted capital contribution. No subordination applies, as set forth above, if the fee is entirely paid from general partner fees.

      Depleting Asset Programs

      With respect to depleting asset programs, the structure is similar to that for appreciating asset programs, but uses different percentages because of the different amounts that generally flow to investors from the management of the asset versus the sale of the asset, and uses a different investor capital contribution concept. The proposal would permit members to receive, for each one percentage point deducted from front-end compensation of 7.5 percent, 1.5 percent of annual cash distributions from operations and of net proceeds remaining from the sale and refinancing of assets, as well as .5 percent for due diligence and a .20 percent service fee. If the trail fee calculated on annual cash distributions from operations is paid from annual cash available for distribution, then the member's fee is subordinated to a cumulative annual non-compounded return of at least 8 percent on limited partner "remaining capital contribution and preference." This term applies only in the case of depleting asset programs and means the investor's original capital contribution, less annual cash distributions from cash available for distribution but increased by the annual limited partner preferential return. If the fee calculated on net proceeds remaining from the sale and refinancing of assets is paid from annual cash available for distribution, this fee would be paid only after the limited partners receive at least 100 percent of capital contribution, plus a cumulative annual non-compounded return of at least 8 percent on limited partner remaining capital contribution and preference. No subordination applies, as set forth above, if the fee is entirely paid from general partner fees.

      Organization And Offering Expenses

      Currently, the guideline for O&O expenses for members affiliated with the issuer are limited to 15 percent, which is composed of a maximum 10 percent commission and .5 percent for due diligence, which leaves 4.5 percent for the additional expenses of the affiliated sponsor in structuring the program. Such expenses are required to be paid on an accountable basis. NASD Regulation is proposing that O&O expenses should be permitted at the current rate of 4.5 percent for smaller offerings to cover fixed, up-front expenses of an issuer, but decrease for larger offerings in order to ensure that additional investor capital was applied to the program. Based on anecdotal information as to the amount of fixed expenses for program offerings, it appears that the break-even level occurs in offerings between $30 to $50 million, representing O&O expenses of $1.35 to $2.25 million under the current guideline.

      Therefore, NASD Regulation is proposing that the current 4.5 percent guideline continue to apply to offerings with proceeds up to $50 million; that the next $50 million dollars in offering proceeds be subject to a 4 percent guideline; and offering proceeds above $100 million be subject to a 3.5 percent guideline. In addition, the introductory language of the provision is proposed to be amended to reflect that the affiliated issuer's O&O expenses may only be reimbursed by the program on an accountable basis.

      Solicitation Of Comments With Respect To Other Securities Products

      Comments are requested as to whether the compensation structure proposed for the sale of public offerings of DPPs, or any parts of the proposed compensation structure, should be considered as a permissible structure in the case of any other securities product. In particular, sales of public offerings of real estate investment trust securities (REITs), although not within the definition of DPP in Rule 2810, are currently subject to the 10 percent compensation guideline in Rule 2810. Comment is requested as to whether members' compensation for the sale of REITs should be subject to the proposed new DPP compensation structure since REITs are required by Internal Revenue Service regulations to distribute their income to investors. Alternatively, commenters should address whether REITs should be subject to the compensation guidelines for corporate securities applied pursuant to NASD Rule 2710, or if the current 10 percent guideline continues to be justified for REIT offerings. It is anticipated that the compensation guidelines for corporate securities will generally result in lower compensation for the sale of REIT offerings than is currently permitted under the 10 percent guideline contained in Rule 2810.

      Request For Comment

      NASD Regulation encourages all members and interested parties to respond to the issues raised in this Notice. Comments should be mailed to:

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

      or e-mailed to:
      pubcom@nasd.com

      Comments must be received by January 9, 1998. Before becoming effective, any rule change developed as a result of the comments received must be adopted by the NASD Regulation, Inc., Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.


      Text Of Proposed Amendments to Rule 2810

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

      Rule 2810. Direct Participation Programs

      (a) Definitions
      For the purposes of this Rule, the following terms shall have the stated meanings:

      (1) Adjusted capital contribution—original capital contribution reduced by cash distributions from net proceeds of the sale and refinancing of assets.

      (A) Capital contribution—the gross amount of investment in a program.
      (B) Cash distributions from operations—the portion of cash distributions paid from funds provided by operations, excluding funds provided from net proceeds of the sale and refinancing of assets.
      (2) Cash available for distribution—[cash flow less amount set aside for restoration or creation of reserves.] the program's total funds provided from operations (including net proceeds from the sale and refinancing of assets) reduced by amounts set aside for restoration or creation of reserves.
      (3) [Cash flow—cash funds provided from operations, including lease payments on net leases from builders and sellers, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements and replacements.]
      (A) Remaining capital contribution and preference—original capital contribution reduced by annual cash distributions from cash available for distribution and increased by the annual limited partner preferential return.
      (b) Requirements
      (4) Organization and Offering Expenses
      (A) No member or person associated with a member shall underwrite or participate in a public offering of a direct participation program if the organization and offering expenses are not fair and reasonable, taking into consideration all relevant factors.
      (B) In determining the fairness and reasonableness of organization and offering expenses for purposes of subparagraph (A) hereof, the arrangements shall be presumed to be unfair and unreasonable if:
      (i) the total amount of all items of compensation from whatever source payable to underwriters, broker/dealers, or affiliates thereof, which are deemed to be in connection with or related to the distribution of the public offering, exceeds [currently effective compensation guidelines for direct participation programs published by the Association;*]:
      a. 8 percent of the offering proceeds received ("front-end compensation"), plus 0.5 percent for reimbursement of bona fide due diligence expenses; or
      b. 7.5 percent of front-end compensation, plus 0.5 percent for reimbursement of bonafide due diligence expenses, plus an annual service fee of 0.20 percent of offering proceeds sold by the member (which 0.20 percent is either paid out of annual cash available for distribution and prorated against the limited partner's adjusted capital contribution or paid out of general partner fees), if the member enters into a written agreement with the program which requires that:
      1. the member provide services to its customers that are investors in the program so long as the member may receive the annual service fee compensation, including responding to customers' requests for reports and statements of account, and responding to customers' questions regarding the periodic reports and performance of the program; and
      2. the general partner or sponsor of the program respond to inquiries by the member regarding the operation of the program and distribute annually to limited partners, no later than four months after the end of the program's fiscal year, a report on the operation of the program containing audited financial reports for at least a one-year period; and
      c. for each 1.00 percentage point deducted from front-end compensation of 7.5 percent, a member that provides continuing services under subparagraph (4)(B)(i)b. may receive an amount (which amount must be paid currently either out of annual cash available for distribution and subject to the following subordinations or out of general partner fees and not subject to the following subordinations) that is equal to:
      1. Real Estate, Cable TV, and Other Appreciating Asset Programs
      A. 1.75 percent of annual cash distributions from operations, subordinated to a cumulative annual non-compounded return of at least 6 percent on limited partner adjusted capital contribution; and
      B. 1.75 percent of cash distributions from net proceeds remaining from the sale and refinancing of assets after limited partners have received at least 100 percent of capital contribution plus a cumulative annual non-compounded return of at least 6 percent on limited partner adjusted capital contribution; or
      2. Oil and Gas, Equipment Leasing, and Other Depleting Asset Programs
      A. 1.50 percent of annual cash distributions from operations subordinated to a cumulative annual non-compounded return of at least 8 percent of limited partner remaining capital contribution and preference;
      B. 1.50 percent of cash distributions from net proceeds remaining from the sale and refinancing of assets after limited partners have received at least 100 percent of capital contribution plus a cumulative annual non-compounded return of at least 8 percent on limited partner remaining capital contribution and preference;
      (ii) organization and offering expenses paid by a program on an accountable basis in which a member or an affiliate of a member is a sponsor exceeds the following percent of offering proceeds received in addition to front-end compensation received under paragraph (b)(4)(B)(i) [currently effective guidelines for such expenses published by the Association;**]:
      a. 4.5 percent on the first $50 million of offerings proceeds;
      b. 4.0 percent on the second $50 million of offering proceeds; or
      c. 3.5 percent on offering proceeds that exceed $100 million.
      (iii) any compensation in connection with an offering is to be paid to underwriters, broker/dealers, or affiliates thereof out of the proceeds of the offering prior to the release of such proceeds from escrow, provided, however, that any such payment from sources other than proceeds of the offering shall be made only on the basis of bona fide transactions;
      (iv) commissions or other compensation are to be paid or awarded either directly or indirectly, to any person engaged by a potential investor for investment advice as an inducement to such advisor to advise the purchaser of interests in a particular program, unless such person is a registered broker/dealer or a person associated with such a broker/dealer; or
      (v) except as permitted under paragraph (b)(4)(B)(i), the program provides for compensation of an indeterminate nature to be paid to members or persons associated with members for sales of program units, or for services of any kind rendered in connection with or related to the distribution thereof, including, but not necessarily limited to, the following: a percentage of the management fee, a profit sharing arrangement, brokerage commissions, and overriding royalty interest, a net profits interest, a percentage of revenues, a reversionary interest, a working interest, a security or right to acquire a security having an indeterminate value, or other similar incentive items; provided, however, that an arrangement which provides for continuing compensation to a member or person associated with a member in connection with a public offering shall not be presumed to be unfair and unreasonable if all of the following conditions are satisfied:
      a. the continuing compensation is to be received only after each investor in the program has received cash distributions from the program aggregating an amount equal to his cash investment plus a six percent cumulative annual return on his adjusted investment;
      b. the continuing compensation is to be calculated as a percentage of program cash distributions;
      c. the amount of continuing compensation does not exceed three percent for each one percentage point that the total of all compensation pursuant to subparagraph (B)(i) received at the time of the offering and at the time any installment payment is made fall below nine percent; provided, however, that in no event shall the amount of continuing compensation exceed 12 percent of program cash distributions; and
      d. if any portion of the continuing compensation is to be derived from the limited partners' interest in the program cash distributions, the percentage of the continuing compensation shall be no greater than the percentage of program cash distributions to which limited partners are entitled at the time of the payment.

      Footnotes To Rule Language

      * [A guideline for underwriting compensation of ten percent of proceeds received, plus a maximum of 0.5% for reimbursement of bona fide due diligence expenses, was published in Notice to Members 82-51 (October 19, 1982).]

      ** [A guideline for organization and offering expenses of 15 percent of proceeds received was published in Notice to Members 82-51 (October 19, 1982).]


      Endnotes

      1 Rule 2810 also includes a provision prohibiting the receipt of compensation by members of an indeterminate nature, unless the arrangement is structured to permit members to receive compensation of an indeterminate nature that is no more than 3 percent of program cash distributions for each 1 percent of front-end cash commissions below 9 percent that the member gives up; provided that in no event shall the amount of continuing compensation exceed 12 percent of program cash distributions. This provision is not proposed to be deleted.

      2 See Report of the Committee on Compensation Practices, April 10, 1995, pp. 12-13. Other recommended "best practices" included prohibiting sales contests or permitting such contests only if based on broad measures. The NASD previously adopted amendments to the DPP Rule that prohibit non-cash sales contests for the sale of DPPs.

      3 See also Notice to Members 97-50 (August 1997) requesting comment on the regulation of payment and receipt of cash compensation incentives for the sale and distribution of investment company and variable contract securities.

      4 Members generally receive the entire 10 percent fee in front-end compensation, paid at the time of the offering of securities. However, members are also permitted to receive an interest in back-end cash flow of the program, so long as the aggregate of all compensation paid does exceed the 10 percent guideline. There are several public programs structured in this fashion.

      5 Permissible arrangements under this provision include payment of the member's service fee: (1) solely from annual cash available for distribution, subject to the pro-ration requirement; (2) solely from general partner fees; or (3) a combination of these two sources.

      6 Appreciating asset programs are those, like real estate and cable TV, where it is anticipated that the program asset will increase in value. While there are returns to investors that occur from the program's operations, it is the eventual sale of the asset that provides the major returns to the investor. Depleting asset programs are those, like oil and gas and equipment leasing, where the program's operations deplete the value of the asset. The major returns to investors occur on a continuing basis as the asset is used, and the sale of the asset recovers only its residual or salvage value. It is anticipated that the staff will issue interpretations from time to time as to whether a particular type of program is considered an appreciating or depleting asset program in order to provide guidance to the membership as to which trail fee structure should be followed under Rule 2810.

      7 The rule language requires that the trail fee be paid "currently" in order to prevent accrual of the fee obligation. In comparison, the service fee is a mandatory annual payment of a smaller amount that does not vary annually, as the fee is received for ongoing services provided by the member to its customers.

    • 97-80 SEC Approves Amendments To Syndicate Short Covering Requirements And Other Related Amendments

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      Executive Summary

      On October 3, 1997, the Securities and Exchange Commission (SEC) approved, on an accelerated basis, amendments to National Association of Securities Dealers, Inc. (NASD®) Rules 2710, 4624, and 6540 that replace the requirement that members provide the NASD with information on the amount of the syndicate short position with a requirement that members maintain this information in their files.1 In addition, the amendments clarify that members are required to request an Underwriting Activity Report (UAR) with respect to a security that is considered "actively-traded" under Rule 101 of SEC Regulation M and excludes all exchange-listed securities from the obligation to request a UAR. Finally, the amendments clarify that members are required to submit pricing information with respect to any security that is considered "actively-traded" under Rule 101, regardless of whether listed on a national securities exchange. The amendments are immediately effective. The text of the amendments is attached to this Notice.

      Questions regarding this Notice may be directed to Suzanne E. Rothwell, Chief Counsel, Corporate Financing, NASD Regulation, Inc., and Richard J. Fortwengler, Associate Director, Corporate Financing, NASD RegulationSM, at (202) 974-2700.

      Background And Description Of Amendments

      On April 1, 1997, NASD rules designed to facilitate compliance with the SEC's Regulation M became effective.2 Rule 104 of Regulation M requires members acting as managing underwriters to notify the appropriate regulator of the market for the security in distribution of a member's intention to engage in syndicate short covering transactions. To allow NASD members to comply with their notification obligations under Rule 104, the NASD adopted Rule 4624 of The Nasdaq Stock MarketSM and Rule 6540 of the OTC Bulletin Board® Service to require that members provide the requisite notification to the NASD, but also to require that members include the amount of the syndicate short position on the Regulation M Trading Notification. This latter information is not required to be provided under SEC Regulation M.

      Members of the industry have expressed concern regarding the ability of member firms to provide accurate data on the amount of a syndicate short position at the time the Regulation M Trading Notification is required. In order to address the concerns of the industry, Rule 4624 of The Nasdaq Stock Market and Rule 6540 of the OTC Bulletin Board Service have been amended to delete the current requirement to provide immediate information on the amount of syndicate short positions. In its place, Rule 2710 has been amended to establish a new requirement in subparagraph (b)(13) that, no later than 30 days after the effective date of the offering, the managing underwriter shall retain information, as required by the Corporate Financing Department of NASD Regulation, on the amount of the syndicate short position and that such information be retained in the same manner as the underwriter's syndicate covering transaction records under SEC Rule 17a-2.

      Rule 17a-2 requires that a managing underwriter separately maintain information on stabilizing transactions and syndicate covering transactions. It is anticipated that the managing underwriter will maintain with its records of syndicate covering transactions, as required by Rule 17a-2, a record of the amount of the syndicate short position. We intend to require that the information to be retained by the managing underwriter consist of whether the syndicate short position was no greater than the overallotment option, or whether a naked short position was less than 1 percent, between 1 percent and 5 percent, between 5 percent and 10 percent, or over 10 percent of the offering size. The rule change to Rule 2710 includes a sunset provision to eliminate the requirement to retain information on the amount of short positions at the conclusion of the study of syndicate short covering practices, but no later than January 1, 2000.

      In addition, Subparagraph (b)(11) of Rule 2710 has been amended to conform its rule language to that of Subparagraph (b)(12) and to the NASD's original intent regarding the scope of that provision. This change clarifies that the managing underwriter is required to request a UAR with respect to a distribution of a security that is considered an "actively-traded" security under SEC Rule 101.3 Currently, the language of Subparagraph (b)(11) is misleading in that it only imposes this requirement with respect to securities that are "subject to SEC Rule 101."

      Moreover, subparagraph (b)(11) of Rule 2710 has been amended to exclude exchange-listed securities from the requirement that managing underwriters obtain a UAR. The managing underwriter of an offering of exchange-listed securities will, nonetheless, continue to be responsible under subparagraph (b)(12) to advise the Market Regulation Department of information regarding the pricing and termination of the offering. Conforming amendments are made to subparagraph (b)(12) in light of this proposed rule change to subparagraph (b)(11). Finally, subparagraph (b)(12) is also revised to clarify that the managing underwriter of any offering of securities considered "actively-traded" under SEC Rule 101, must also advise the Market Regulation Department of information on pricing and termination.

      The amendments are effective as of the date of SEC approval.


      Text Of Amendments

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

      2710. Corporate Financing Rule—Underwriting Terms And Arrangements

      (a) No change.
      (b) Filing Requirements
      (1) through (10) No change.
      (11) Request for Underwriting Activity Report
      Notwithstanding the availability of an exemption from filing under subparagraph (b)(7) of this Rule, a member acting as a manager (or in a similar capacity) of a distribution of a publicly traded subject security or reference security that is subject to SEC Rule 101 or an "actively-traded" security under SEC Rule 101 (except for a security listed on a national securities exchange) shall submit a request to the Corporate Financing Department for an Underwriting Activity Report with respect to the subject and/or reference security in order to facilitate compliance with SEC Rules 101, 103, or 104, and other distribution-related Rules of the Association. The request shall be submitted at the time a registration statement or similar offering document is filed with the Department, the SEC, or other regulatory agency or, if not filed with any regulatory agency, at least two (2) business days prior to the commencement of the restricted period under SEC Rule 101. The request shall include a copy of the registration statement or similar offering document (if not previously submitted pursuant to subparagraph (b)(5) of this Rule). If no member is acting as managing underwriter of such distribution, each member that is a distribution participant or an affiliated purchaser shall submit a request for an Underwriting Activity Report, unless another member has assumed responsibility for compliance with this subparagraph. For purposes of subparagraphs (b)(11) and (12), SEC Rules 100, 101, 103, and 104 are rules of the Commission adopted under Regulation M and the following terms shall have the meanings as defined in SEC Rule 100: "distribution," "distribution participant," "reference security," "restricted period," and "subject security."
      (12) Submission of Pricing Information
      A member acting as a manager (or in a similar capacity) of a distribution [subject to subparagraph (b)(11)] of securities that are listed on a national securities exchange and considered a subject security or reference security that is subject to SEC Rule 101 or an "actively-traded" security under SEC Rule 101 or a distribution of any other securities that are considered "actively-traded" under SEC Rule 101 shall provide written notice to the Market Regulation Department of NASD Regulation, Inc., no later than the close of business the day the offering terminates, that includes the date and time of the pricing of the offering, the offering price, and the time the offering terminated, which notice may be submitted on the Underwriting Activity Report.
      (13) Submission of Information on Syndicate Covering Transactions
      A member acting as a manager (or in a similar capacity) of a distribution of a publicly traded subject security or NASD Notice to Members 97-80 November 1997 reference security that is subject to SEC Rule 101 or an "actively-traded" security under SEC Rule 101 shall, no later than thirty (30) days after the effective date of the offering, maintain information as required by the Corporate Financing Department of NASD Regulation, Inc. on the amount of the syndicate short position in a manner consistent with SEC Rule 17a-2.*
      (c) and (d) No change.

      4000. The Nasdaq Stock Market

      4624. Penalty Bids and Syndicate Covering Transactions

      (a) A market maker acting as a manager (or in a similar capacity) of a distribution of a Nasdaq security that is a subject or reference security under SEC Rule 101 shall provide written notice to the Corporate Financing Department of NASD Regulation, Inc. of its intention to impose a penalty bid on syndicate members or to conduct syndicate covering transactions pursuant to SEC Rule 104 prior to imposing the penalty bid or engaging in the first syndicate covering transaction. A market maker that intends to impose a penalty bid on syndicate members may request that its quotation be identified as a penalty bid on Nasdaq pursuant to paragraph (c) below.
      (b) The notice required by paragraph (a) shall include:
      (1) the identity of the security and its Nasdaq symbol; and
      (2) the date the member is intending to impose the penalty bid and/or conduct syndicate covering transaction]; and
      (3) the amount of the syndicate short position, in the case of syndicate covering transactions].
      (c) Notwithstanding paragraph (a), a market maker may request that its quotation be identified as a penalty bid on Nasdaq [display] by providing notice to Nasdaq Market Operations, which notice shall include the date and time that the penalty bid identifier should be entered on Nasdaq and, if not in writing, shall be confirmed in writing no later than the close of business the day the penalty bid identifier is entered on Nasdaq.
      (d) The written notice required by [paragraphs (a) and (c) of] this Rule may be submitted on the Underwriting Activity Report [by including the information required by subparagraphs (b)(1) and (b)(2) or paragraph (c)].

      6500. OTC Bulletin Board Service

      6540. Requirements Applicable to Market Makers

      (a) and (b) - No change.
      (1) Permissible Quotation Entries
      (A) - (C) - No change.
      (D) Any member that intends to be a distribution participant in a distribution of securities subject to SEC Rule 101, or is an affiliated purchaser in such distribution, and is entering quotations in an OTCBB-eligible security that is the subject security or reference security of such distribution shall, unless another member has assumed responsibility for compliance with this paragraph:
      (i) No change
      (ii) No change
      (iii) provide written notice to the Corporate Financing Department of NASD Regulation, Inc. of its intention to impose a penalty bid or to conduct syndicate covering transactions pursuant to SEC Rule 104 prior to imposing the penalty bid or engaging in the first syndicate covering transaction. Such notice shall include information as to the date the penalty bid or first syndicate covering transaction will occur [and the amount of the syndicate short position]; and
      (iv) No change
      (E) The written notice required by subparagraphs (b)(1)(D)(I), (iii) and (iv) of this rule may be submitted on the Underwriting Activity Report provided by the Corporate Financing Department of NASD Regulation, Inc. [by including the information required by those subparagraphs].
      (F) No change.
      (2) through (4) No change.

      Footnote To Rule Language

      * This rule will expire no later than January 1, 2000.


      Endnotes

      1 Securities Exchange Act Release No. 39197 (October 3, 1997).

      2 Securities Act Release No. 38360 (March 4, 1997), and amended Securities Act Release No. 38399 (March 14, 1997).

      3 An "actively-traded" security is a subject or reference security with a value of average daily trading volume of at least $1 million, which is issued by an issuer whose common equity securities have a public float of at least $150 million.

    • 97-79 NASD Regulation Requests Comment On Proposed Amendment To Rule Governing Clearing Agreements

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      Executive Summary

      At its September 1997 meeting, the NASD Regulation, Inc., Board of Directors (Board) approved a proposed amendment to the National Association of Securities Dealers, Inc. (NASD®) rule governing clearing agreements (Rule 3230) in response to problems that occurred recently with certain failed introducing firms. The problems that the amendment is designed to address relate to the lack of a regulatory early warning of trouble at the introducing firms, gaps in the introducing firms' supervisory procedures, and potential risks associated with introducing firm check writing privileges. The proposed amendment would: (1) establish standards for the disposition of written customer complaints about member introducing firms relating to their functions and responsibilities under the clearing agreements received by their clearing firms; (2) govern how exception reports are made available to introducing firms and retained by clearing firms; and (3) permit introducing firms to write checks on their clearing firm's account. The proposed amendment has been submitted to the Securities and Exchange Commission (SEC) for approval.1

      However, in connection with approving the proposed amendment, the Board directed the staff to publish the proposed amendment for the information of the membership and to advise the membership that the rule proposal has been filed with the SEC. The text of the proposed amendment follows this Notice.

      Questions regarding this Request For Comment may be directed to Elliott R. Curzon, Assistant General Counsel, Office of General Counsel, NASD RegulationSM, at (202) 728-8451, or Robert J. Smith, Senior Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Background

      Recent concerns about questionable sales practices and potentially fraudulent activity by certain introducing firms, and the handling of customer complaints about those firms by their clearing firms, caused the staffs of NASD Regulation and the New York Stock Exchange (NYSE) to examine the relationship between clearing firms and their client introducing firms. The examination resulted in proposals to amend NASD and NYSE rules relating to the content and approval of clearing agreements to specify requirements for handling customer complaints, for providing, requesting and retaining exception reports, and for issuing checks.

      The NYSE's proposal to amend its Rule 382 has been filed with the SEC and published for comment by the SEC in the Federal Register.2 The NASD's proposal to amend Rule 3230 (discussed below) is consistent with the current NYSE proposal to amend NYSE Rule 382 and achieves the regulatory goals identified by the SEC, the NASD, the NYSE and the Securities Industry Association (SIA) without unduly burdening the clearing firms.

      While the Board of Directors of NASD Regulation approved the proposed rule in recognition of the importance of maintaining consistency with the NYSE's proposal, the Board expressed strong concerns regarding the proposal, including those relating to two particular issues. First, the Board expressed concern that the proposed rules not change or be interpreted as changing the fundamental nature of the relationship between introducing and clearing firms, or otherwise affect rights, responsibilities or liabilities of the introducing or clearing firm under law or contract. Other than to establish limited requirements to enable the introducing member to carry out its responsibilities under its clearing or carrying agreement with the clearing member, the proposals are not intended to change the fundamental nature of the relationship between introducing and clearing firms, or otherwise affect any existing rights, responsibilities or liabilities under law or contract.

      Second, the Board expressed concern that the requirement that the customer be notified by the clearing firm that he or she has the right to transfer his or her account to another firm may unfairly single out a particular category of complaints, create an unfair implication that each such complaint would warrant the customer's transferring his or her account, or otherwise operate inappropriately to distinguish this class of complaints from others. The NASD is specifically soliciting comments on these and other issues, as discussed more fully below.

      Description Of Proposed Rule Change

      Customer Complaints. It is generally the practice of clearing firms to forward to introducing firms customer complaints they receive relating to matters that are the responsibility of the introducing firm. Under NASD Rule 3070, a member is required to report to the NASD any written customer complaint against it involving allegations of theft, misappropriation of funds or securities, or forgery. Recently, however, there have been instances where introducing firms may not have complied in a timely manner with the requirements of Rule 3070 when their clearing firms forwarded customer complaints to them, thus delaying receipt of these reports by the NASD. Since there is no mechanism other than Rule 3070 designed to provide this information to NASD Regulation, such late reporting may undermine the purpose of Rule 3070, which is to provide NASD Regulation with early warning indicators to generate a regulatory response to problems. In addition, receipt by clearing firms of large numbers of complaints regarding introducing firms may be indicative of sales practice problems requiring prompt regulatory attention.

      To address this concern, proposed new paragraph (b) states that when a clearing firm receives a customer complaint about an introducing firm relating to the functions and responsibilities of the introducing firm, the clearing firm must forward the complaint to the introducing firm and send a copy of the complaint to the introducing firm's Designated Examining Authority (DEA). The requirement may provide an early warning to the DEA of potential problems at introducing firms. The proposed amendment also provides that the clearing agreement must expressly direct and authorize the clearing firm to forward the complaint to the introducing firm and send a copy of the complaint to the introducing firm's DEA.

      The requirement that the complaints be forwarded to the appropriate DEA is intended to provide notice to the DEAs of the types of complaints that are being received and to provide information that may be useful for examining or investigating particular conduct. It is not intended, however, to result in an investigation of each complaint that is received by the DEA.

      In addition, the proposed rule provides that the clearing firm must notify the customer in writing that the complaint was received, and was forwarded to the introducing firm and to the introducing firm's DEA. This requirement will serve to alert the customer that the complaint has been received and forwarded to the appropriate entity (the introducing firm) for a response, and that the introducing firm's regulator has also been made aware of the customer's complaint. This written notice to the customer must also contain a statement that reads substantially as follows: "Please be aware that you retain the right, at your discretion, to transfer your account to another broker/dealer of your choice."

      Exception Reports. All NASD member firms are required under NASD and federal regulations to establish, maintain and enforce supervisory systems and procedures that are designed to address all areas of a member's business. A key aspect of these supervisory procedures is exception and other compliance reports that a member creates to help meet these supervisory responsibilities. In a fully disclosed clearing arrangement, the clearing member generally provides exception reports to assist the introducing member in carrying out its supervisory obligations. In addition, officers and managers of introducing members should be notified of the reports and information available to them in meeting their supervisory and monitoring obligations. Paragraph (c) of the proposed amendment addresses these issues.

      Proposed new paragraph (c)(1) requires the clearing firm to provide its introducing firm, both at the commencement of the introducing/clearing arrangement and annually thereafter, a list or description of all exception or other reports which it offers to introducing firms to assist the introducing firm in supervising its activities, monitoring its accounts and carrying out its functions and responsibilities under the clearing agreement.

      Even though the language of the proposed amendment requires the clearing firm to provide the introducing firm with a list or description of reports that it will provide, the staff recognizes that some clearing firms do not create such reports, but rather provide data and data formatting software to their introducing clients that allow the introducing firms to prepare their own reports. The proposal would permit compliance with this provision in instances where clearing firms inform their introducing firms about available data and data formatting so the introducing firms can determine which reports to create in order to meet their supervisory and monitoring needs.

      Paragraph(c)(2) requires the clearing firm to retain, as part of its books and records, copies of any reports requested or provided to the introducing firm. The provision permits a clearing firm to meet the requirement if it retains the data that was used to prepare the report, but only if the clearing member, at the request of the DEA, can recreate the report or provide the data and data formatting that was used to prepare the report. Similarly, if the clearing firm provided data and data formatting to the introducing firm, the clearing firm could provide that same data and data formatting to the DEA to fulfill this requirement.

      Paragraph (c)(3) requires the clearing member, immediately after entering into the clearing agreement, to notify the introducing member's chief executive and compliance officers of the reports that it offers to the introducing member, and the reports requested by or supplied to the introducing firm. The clearing member must provide this notice each year thereafter as of June 30, to be provided no later than July 31 of the following year.3

      Finally, paragraph (c)(4) requires the clearing member, at the request of the introducing member's DEA, to provide to the DEA reports that were offered to the introducing member, but which the introducing member did not request. As with the record retention provision in paragraph (c)(2), this requirement may be met if the clearing member retains the data from which the original report was produced, and then either recreates the report or provides the data and data formatting that was used to prepare the report.

      Check Writing. Under proposed new Paragraph (d), the clearing agreement may permit the introducing firm to issue checks to the introducing firm's customers that are drawn on the clearing member's account upon written representation from the introducing firm that it has established, and will maintain and enforce, supervisory procedures with respect to the issuance of negotiable instruments. This rule is intended to protect customers by clearly establishing that the clearing member will be the maker or drawer of such instruments and, therefore, liable for any mistakes or fraud by the introducing firm in the making or drawing of the check. This provision is intended to establish that clearing firms are liable to the introducing firm's customer if the introducing firm misuses the authority, thereby protecting the customer with the clearing member's funds.

      Solicitation Of Comments

      The rule proposals of the NASD and the NYSE may raise important issues for both clearing and introducing member firms. In addition to any other issues that members may wish to address, NASD Regulation specifically solicits comment on the following questions.

      General

      Will the respective obligations imposed on clearing and introducing firms by the proposal help introducing firms and regulators better address sales practice problems? To what extent would they permit such problems to be addressed in a more timely way? To what extent would they act to deter sales practice abuses?

      To what extent would the proposal discourage members from agreeing to enter into new clearing relationships, or to renew existing ones, or affect the degree of care employed when entering into such a relationship? Would the result that is identified be positive or negative for the markets overall?

      Customer Complaints

      How quickly are customer complaints that are directed to clearing members and that concern introducing firms or their associated persons forwarded to introducing firms? What proportion of these complaints concerns matters identified in NASD Rule 3070(a)(2), i.e., allegations of theft, misappropriation of funds or securities, or forgery? What other types of complaints typically are received?

      Why, in general, are complaint letters addressed to clearing firms rather than introducing firms, when they concern conduct of the introducing firms? Please address the extent to which this occurs because of confusion by customers over the relative responsibilities of the firms, or for other reasons, e.g., the failure to receive a response from the introducing firm.

      Should the requirements of the proposed rule regarding customer complaints apply equally to complaints against a clearing firm sent by a customer to an introducing firm with whom the clearing firm has a clearing agreement?

      Presently, copies of customer complaints received by securities firms are not required to be forwarded to the SEC or any self-regulatory organization. To the extent that this requirement is imposed, does it make sense to distinguish letters concerning introducing firms, or their associated persons addressed to clearing firms, from other types of customer complaints?

      Does the requirement that, upon the clearing firm's receipt of a customer complaint, the customer be notified by the clearing firm that he or she has the right to transfer his or her account to another firm, serve a useful purpose, unfairly single out a particular category of complaints, or otherwise operate inappropriately? Does it create an unfair implication that each such complaint would warrant the customer's transferring his or her account, or otherwise unfairly tarnish the introducing firm? To the extent that this type of information is useful to investors, does it make sense to provide this notice only in the circumstances identified?

      Exception Reports

      What compliance or cost burdens would result from the requirement that clearing firms retain copies of exception reports or data that is provided to introducing firms? To what extent is this data now stored, and for how long?

      What are the relative costs and benefits of the requirements for annual reports to the executive officers of introducing firms as to the exception reports that were offered and supplied, and for reports to the DEAs as to reports that the introducing firm did not request?

      Request For Comment

      NASD Regulation encourages all members and interested parties to respond to the issues raised in this Notice. Comments should be mailed to:

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

      or e-mailed to:
      pubcom@nasd.com

      Comments must be received by December 1, 1997. Before becoming effective, any rule change developed as a result of the comments received must be adopted by the NASD Regulation, Inc., Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.

      We have filed this proposed rule change with the SEC and anticipate that, by the time of publication of this Notice, the SEC will have published the rule filing for comment. Because we anticipate the SEC comment period to run, in part, concurrently with the NASD comment period, we are limiting our comment period to December 1, 1997. Notice of publication of the rule change in the Federal Register will be provided on the NASD Regulation Web Site, and members may at that time direct their comments to the SEC.


      Text of Proposed Amendment To Rule 3230 Of The NASD Conduct Rules

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

      3230. Clearing Agreements

      (a) All clearing or carrying agreements entered into by a member, except where any party to the agreement is also subject to a comparable rule of a national securities exchange, shall specify the respective functions and responsibilities of each party to the agreement and shall, at a minimum, specify the responsibility of each party with respect to each of the following matters:
      (1) opening, approving and monitoring customer accounts;
      (2) extension of credit;
      (3) maintenance of books and records;
      (4) receipt and delivery of funds and securities;
      (5) safeguarding of funds and securities;
      (6) confirmations and statements;
      (7) acceptance of orders and execution of transactions;
      (8) whether, for purposes of the Commission's financial responsibility rules adopted under the Act, and the Securities Investor Protection Act, as amended, and regulations adopted thereunder, customers are customers of the clearing member; and
      (9) the requirement to provide customer notification under paragraph [(d)] (g) of this Rule.
      (b)
      (1) In order for the introducing member to carry out its functions and responsibilities under the agreement, each clearing member must forward promptly any written customer complaint received by the clearing member regarding the introducing member or its associated persons relating to functions and responsibilities allocated to the introducing member under the agreement directly to: (A) the introducing member; and (B) the introducing member's examining authority designated under Section 17 of the Act ("DEA") (or, if none, to its appropriate regulatory agency or authority). The clearing or carrying agreement must specifically direct and authorize the clearing member to do so.
      (2) The clearing member must also notify the customer, in writing, that it has received the complaint, and that the complaint has been forwarded to the introducing member and to the introducing member's DEA (or, if none, to its appropriate regulatory agency or authority). This written notice to the customer must also contain a statement that reads substantially as follows: "Please be aware that you retain the right, at your discretion, to transfer your account to another broker/dealer of your choice."
      (c)
      (1) A clearing member, when it enters into a clearing agreement, must immediately, and annually thereafter, provide the introducing member a list or description of all reports (exception and other types of reports) which it offers to the introducing member to assist the introducing member in supervising its activities, monitoring its customer accounts, and carrying out its functions and responsibilities under the clearing agreement.
      (2) The clearing member must retain as part of its books and records required to be maintained under the Act and the Association's rules, copies of the reports requested by or provided to the introducing member. For purposes of this Rule, the clearing member will be in compliance with the requirements of this paragraph if it retains the data from which the original report was produced, provided, the clearing member can, at the request of the DEA, either (1) recreate the report; or (2) provide the data and the data formatting that was used to prepare the report.
      (3) Each year, no later than July 31, the clearing member must notify in writing the introducing member's chief executive and compliance officers of the reports offered to the introducing member and the reports requested by or supplied to the introducing member during the previous year ending June 30. The clearing member must also provide a copy of the notice to the introducing member's DEA.
      (4) The clearing member must provide, at the request of the introducing member's DEA, any reports (or, if the reports are not available, information or data from which the reports could have been prepared) that were offered to the introducing member but which the introducing member did not request.
      (d) The clearing or carrying agreement may permit the introducing member to issue negotiable instruments directly to the introducing member's customers using instruments for which the clearing member is the maker or drawer. The clearing member may not grant the introducing member the authority to issue negotiable instruments until the introducing member has notified the clearing member in writing that it has established, and will maintain and enforce, supervisory procedures with respect to the issuance of such instruments.
      [(b)] (e) Whenever a clearing member designated to the Association for oversight pursuant to Section 17 of the Act, or a rule of the Commission adopted thereunder, amends any of its clearing or carrying agreements with respect to any item enumerated in subparagraphs (a)(1) through (a)(9) or enters into a new clearing or carrying agreement with an introducing member, the clearing member shall submit the agreement to the Association for review and approval.
      [(c)] (f) Whenever an introducing member designated to the Association for oversight pursuant to Section 17 of the Act, or a rule of the Commission adopted thereunder, amends its clearing or carrying agreement with a clearing member designated to another self-regulatory organization for oversight with respect to any item enumerated in subparagraphs (a)(1) through (a)(9) enters into a new clearing agreement with another clearing member, the introducing member shall submit the agreement to its local Association district office for review.
      [(d)] (g) Each customer whose account is introduced on a fully disclosed basis shall be notified in writing upon the opening of his account of the existence of the clearing or carrying agreement.

      Endnotes

      1 See File No. SR-NASD-97-76 (October 14, 1997).

      2 See File No. SR-NYSE-97-25 (September 12, 1997); Securities Exchange Act Release No. 39200 (October 3, 1997); 62 FR 53369 (October 14, 1997).

      3 The clearing member must also provide a copy of the notice to the introducing firm's DEA. This provision is designed to make the responsible principals of the introducing firm aware of the reports and dates available from the clearing firm to assist the introducing firm in meeting supervisory and other functions and responsibilities under the clearing agreement, and to alert the DEA.

    • 97-78 SEC Approves Rule Relating To Distribution Of Information Concerning NASD Regulation's Public Disclosure Program

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      Executive Summary

      On September 10,1997, the Securities and Exchange Commission (SEC) approved new National Association of Securities Dealers, Inc. (NASD® Conduct Rule 2280, Investor Education and Protection, which requires certain NASD members to provide customers with the following information in writing not less than once every calendar year: (1)the NASD Regulation, Inc., Public Disclosure Program hotline number; (2)the NASD RegulationSM Web Site address; and (3)a statement regarding the availability of an investor brochure that includes information describing the Public Disclosure Program. The new rule is effective January 1, 1998.

      Questions concerning this Notice should be directed to Gary L. Goldsholle, Senior Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8104.

      Background And Discussion

      Under the Public Disclosure Program (Program), NASD Regulation provides certain information regarding the disciplinary history of NASD members and their associated persons in response to written inquiries, electronic inquiries, or telephonic inquiries via NASD Regulation's toll-free telephone listing (1-800- 289-9999). In 1995, at the request of Rep. Edward J. Markey (D-MA), the General Accounting Office (GAO) reviewed the effectiveness of the toll-free telephone information service used by NASD Regulation to disseminate information under the Program. The GAO recommended that NASD Regulation publicize and educate investors about the availability of information through the Program. Specifically, the GAO recommended that NASD Regulation "explore other ways of publicizing the hotline to a wider audience of investors, such as including the hotline number on account-opening documents or account statements, and making disciplinary-related information directly available to investors through the Internet."1 Pursuant to these recommendations and to enhance public awareness of the Program, NASD Regulation adopted Rule 2280.

      NASD Rule 2280 (a)requires NASD members that carry customer accounts to provide customers with the following items of information in writing not less than once every calendar year: (1)the NASD Regulation Program hotline number; (2)the NASD Regulation Web Site address; and (3)a statement regarding the availability to the customer of an investor brochure that includes information describing the Program. NASD members may include the required information on customer account statements or in another type of publication. Under NASD Rule 2280 (b),members that do not carry customer accounts and do not hold customer funds or securities are exempt from the requirements of NASD Rule 2280 (a)because the information required to be furnished under the rule will be provided by the customer's clearing or carrying broker.

      The original effective date of Rule 2280 was September 10, 1997. On October 16, 1997, NASD Regulation filed an immediately effective proposed rule change with the SEC postponing the effective date until January 1, 1998, to provide members with sufficient time to comply with the new rule, which operates on a calendar year basis.2


      Text Of New Rule

      (Note: All rule language is new.)

      2280.   Investor Education and Protection

      (a) Each member shall, with a frequency of not less than once every calendar year, provide in writing to each customer the following items of information.
      (1) NASD Regulation Public Disclosure Program Hotline Number
      (2) NASD Regulation Web Site Address
      (3) A statement as to the availability to the customer of an investor brochure that includes information describing the Public Disclosure Program
      (b) Notwithstanding the requirement in paragraph (a) above, any member that does not carry customer accounts and does not hold customer funds or securities is exempt from the provisions of this rule.

      Endnotes

      1 GAO, NASD Telephone Hotline: Enhancements Could Help Investors Be Better Informed About Brokers' Disciplinary Records (August 1996), at 18.

      2 62 FR 55295 (October 23, 1997).

    • 97-77 NASD Regulation Requests Comment On Proposed Rule Regarding Forms U-4 and U-5, Qualified Immunity, And Advance Employee Notice

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      Comment Period Expires: December 31, 1997

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      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) requests comment on a proposed new rule, National Association of Securities Dealers, Inc. (NASD®) Rule 1150 (Rule), which would provide NASD members with a qualified immunity in arbitration proceedings for statements made in good faith in certain disclosures filed with the NASD on Forms U-4 and U-5. The Rule would also require that member firms give notice of the contents of a Form U-5 (and amendments) to the subject of the form at least 10 days prior to filing the form with the NASD. Members would also be required to provide immediate notification to employees of material revisions to be filed on Form U-5.1

      The purpose of the Rule is to encourage more candid and accurate disclosure by member firms on Forms U-4 and U-5 concerning the reasons for terminating employees, while affording employees an opportunity to review the Form U-5 prior to filing with the NASD. The Rule would be implemented on a four-year pilot basis, during which time NASD Regulation would assess the impact of the Rule on the nature and quality of disclosure by member firms.

      Questions concerning this Request For Comment should be directed to Jean Feeney, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6959, or Laura Gansler, Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8275.

      Background

      The NASD By-Laws (Article IV, Sections 2 and 3) require that members make certain disclosures concerning registered persons, and certain other employees associated with them, in order to help the NASD and its members fulfill their statutory mandate to register, qualify and oversee securities industry personnel. In particular, the Form U-5 provides information about disciplinary or regulatory problems in an employee's work history. Candid and accurate disclosure of a regulatory or disciplinary problem that contributed to an employee's termination is critical to ensuring that prospective broker/dealer employers make informed hiring decisions and establish appropriate supervisory systems.

      For purposes of the proposed Rule, the most important of these disclosures are those required by Form U- 5, the "Uniform Termination Notice for Securities Industry Registration." Members are required to file a Form U-5 with the NASD within 30 days of the termination of certain employees, and simultaneously to provide a copy of the filed form to the employee. The By-Laws also require that the member notify the NASD in writing, and send a copy to the registered person, within 30 days if the member learns of facts or circumstances causing any information in the prior notice to become inaccurate or incomplete. Members are also required to disclose certain information about employees on Form U-4, the "Uniform Application for Securities Industry Registration or Transfer."

      In recent years, registered persons have brought a number of defamation2 claims for allegedly untrue or misleading statements made on Form U-5. The claims are primarily brought in arbitration; at present, the number of defamation cases relative to the NASD's overall arbitration caseload is small.3 However, because of the personal and financial interests at issue, the members' potential exposure to liability as a result of such claims may be substantial.

      At common law, courts have generally found that employers are entitled to a qualified privilege for statements made about former employees to prospective employers.4 This qualified privilege has been codified in many state statutes. However, the privilege is not absolute, and may be overcome by proof that the employer knew or was reckless in not knowing that the statement was false. State law varies with respect to the standard of proof required to overcome a qualified privilege: some states require clear and convincing evidence, while others apply a preponderance of the evidence standard.

      The potential liability for statements made on Forms U-5 has created a disincentive for member firms to provide full disclosure. Members have also questioned the fairness of exposure to potentially significant liability for disclosures they are required by the NASD to make.

      At the same time, registered representatives are concerned that unless they are able to pursue an action against an employer in a particular case, member firms will be free to unfairly penalize them for their decisions to seek employment at another firm, or otherwise unfairly injure or tarnish their reputation.

      As noted above, full disclosure of disciplinary problems on Forms U-4 and U-5 is in the public interest. Accordingly, NASD Regulation believes it is appropriate to provide some degree of protection for members for statements made on required forms in order to encourage full disclosure. Inadequate disclosure has the potential to compromise the integrity of the Central Registration Depository, and hinders regulatory enforcement action by the NASD and other regulators. At the same time, NASD Regulation recognizes that employees must have recourse for untruthful statements designed, for example, to penalize a departing employee, or to prevent him or her from obtaining new employment or attracting existing customers to another member firm. NASD Regulation and other regulators have worked with representatives of NASD member firms and employees in an effort to formulate a fair and workable solution to this problem.

      The proposed Rule is designed to strike a balance between the interests of the member firms, the employees, and the public by providing qualified immunity for statements made in good faith by member firms on certain required forms, and by providing employees with an opportunity to seek changes to disclosures contained in Forms U-5 prior to their filing. NASD Regulation seeks comment on all aspects of the proposed Rule from all interested persons and their representatives, including members, registered persons, other employees and employee groups, industry groups, and customers. In particular, NASD seeks comment on the specific issues raised below.

      Description

      Disclosure Obligations

      NASD members are currently required to make truthful and accurate disclosures to the NASD regarding securities industry personnel, and are currently subject to disciplinary proceedings for failure to do so. Paragraph (a)(1) of the proposed Rule would reaffirm the current disclosure obligations of NASD members. It is not intended to impose any additional or higher disclosure obligations on NASD members than that which currently exists under NASD rules. NASD Regulation seeks comment regarding whether the reiteration of NASD members' current disclosure obligations in paragraph (a)(1) should be included in the proposed Rule.

      Qualified Immunity

      The proposed rule would create a uniform qualified immunity standard for statements made in good faith by members in "covered forms." The qualified immunity would apply in all arbitrations between employees and members arising out of disclosures contained in "covered forms" instead of the various immunity standards that currently apply under state law.

      Under the qualified immunity, a defending party would not be liable to a "covered person" for any defamation claim related to an alleged untrue statement contained in a "covered form" unless the covered person showed by clear and convincing evidence that the defending party either knew or was reckless in not knowing that the statement was materially false at the time it was made.

      Definitions And Scope Of Qualified Immunity

      The qualified immunity would apply to statements contained in a covered form that is filed with a regulatory agency or self-regulatory organization, or that is disseminated by reason of such filing, or otherwise disseminated orally, in writing, or through any electronic medium to an "appropriate person." The Rule defines "covered forms" as those forms required to be filed pursuant to Article IV, Sections 2 and 3, of the NASD By-Laws, which include both Forms U-4 and U-5. Although defamation claims against members for statements contained in required filings generally have involved disclosures made on Form U-5 in connection with employee terminations, members of the industry have indicated that required disclosures pertaining to employees on Form U-4 provide the same potential for defamation liability, and NASD Regulation believes that the same regulatory interests in complete disclosure apply to statements on that form.

      The Rule defines "appropriate person" as "any federal or state government or regulatory authority, any self-regulatory organization, any employer or prospective employer of a covered person, any person who requests information concerning the covered person from the defending party and as to whom the defending party has a legal obligation to provide such information, or any person who has a legal obligation to obtain such information." Accordingly, the Rule would apply to a request made, for example, by a pension fund if legal requirements imposed an obligation to obtain information concerning persons investing on behalf of the fund.

      The Rule would apply to statements made by a member on a covered form with respect to a "covered person," defined as any present or former registered person or employee of the member who is party to a proceeding relating to a dispute within the scope of the Rule. The Rule would also apply to the liability of both member firms and associated persons, and accordingly would protect the signatory of the form or other persons involved in the preparation of the form as well as the member itself.

      NASD Regulation seeks comment regarding the scope of the qualified immunity. In particular, is the definition of "appropriate persons" too broad? Too narrow? Should disclosures to customers be explicitly included? Should disclosures to the media be included?

      Standard Of Proof

      Most states recognize a qualified immunity for required disclosures, although at least one New York court has applied absolute immunity with respect to statements contained in Form U-5. In most states, the qualified immunity can be overcome by evidence that the member knew, or was reckless in not knowing, that the information in the required disclosure was false. However, state law varies with respect to the standard of proof required to demonstrate knowledge of, or recklessness with respect to, a statement's falsity. Some states require clear and convincing evidence, while others apply a preponderance of the evidence standard. In still other states, there are conflicting decisions regarding the appropriate standard of proof.

      In light of the variation among state laws regarding the standard of proof required to overcome a qualified immunity for required disclosures, NASD Regulation has considered the regulatory and public policy interests underlying the proposed Rule in determining the appropriate standard of proof. As discussed above, the purpose of the proposed Rule is to enhance disclosure of information concerning matters of public interest. A preponderance of the evidence standard might not provide sufficient protection to members to ensure full disclosure. On the other hand, absolute immunity might not enhance the quality of disclosure because of its potential to immunize defamatory statements. Because the clear and convincing standard provides significant protection to member firms for required disclosures without depriving employees of recourse for false statements made knowingly or recklessly, NASD Regulation preliminarily believes that a qualified immunity that may be overcome by clear and convincing standard may be more consistent with the purpose of the Rule, and represent a reasonable balance between the competing interests involved.5

      NASD Regulation seeks comment as to whether a uniform qualified privilege should be applied in arbitration proceedings, and whether the clear and convincing evidence standard is an appropriate standard of proof.

      Signatory Requirement

      The proposed Rule does not require that the person signing the covered form on behalf of a member firm be a registered person, a compliance officer, or an attorney in order for the qualified immunity to apply. Nonetheless, such a requirement could enhance the quality of disclosure on the covered form by raising the level of accountability within the member firm. Those opposed to such a requirement argue that it would unduly interfere with current industry practice without enhancing the quality of disclosure.

      NASD Regulation specifically requests comment regarding whether the Rule should include a provision requiring that the person signing a covered form be either a registered person or lawyer in order for the qualified immunity to apply to statements contained in the form. In particular, commenters are asked to consider the effect of such a requirement on current industry practice, the additional burdens, if any, such a requirement would place on member firms, and the benefits of such a requirement.

      Applicability Of Qualified Immunity To Statements Made Prior To Filing Of Covered Forms

      Another issue involves whether immunity would attach to statements made prior to filing of covered forms. In some cases, members may be asked by prospective employers to verify the reasons for a registered person's termination prior to the time the Form U-5 is submitted to the NASD. The Rule provides that the qualified immunity would attach to statements made prior to the filing of a Form U-4 or U-5 that are subsequently included in a filed form in the same language that is provided to an appropriate person.

      NASD Regulation requests comment regarding whether the qualified immunity should attach to statements that are subsequently filed in a covered form in the same language.

      Ten-Day Advance Review Period

      In addition to the qualified immunity provisions, the proposed Rule would require members to provide employees with copies of Forms U-5 or amendments to Forms U-5 at least 10 days before the form or amendment is filed with the NASD. Further, members would be required to provide material revisions to the employee immediately. The purpose of these provisions is to provide an employee with an opportunity to seek amended disclosure language prior to filing where he or she can demonstrate that the proposed language is inaccurate. The Rule explicitly states, however, that failure by an employee to respond during the 10-day period would not constitute a waiver of any rights of the employee.

      NASD Regulation seeks comment concerning the appropriateness of the 10-day advance review period. In particular, commenters are asked to consider the impact of this provision on the nature of the disclosure contained in the filing. Would this provision encourage "negotiated disclosure" prior to filing that would lead to less complete and accurate information or limit its usefulness for regulatory purposes? Would it be likely to lead to delays in filing? Is the requirement that firms notify employees immediately of material revisions to Forms U-5 practicable?

      Where commenters believe that the requirement is appropriate, they are asked to consider whether it provides adequate opportunity for employees to make additional disclosure or to propose changes. Does it provide a member firm sufficient time to prepare the filing? Should the time period be shorter? Longer? How should notice be delivered, and should the method be specified in the Rule? Should there be a provision for extending the 30-day period in some cases? If so, what form should it take, and under what circumstances would extension be appropriate?

      Expedited Mediation Or Arbitration

      Another issue is whether the proposed Rule should provide an expedited arbitration or mediation procedure for resolving disputes concerning disclosures contained in Forms U-5 before the forms are filed with the NASD. It is arguable that such a procedure could help to avoid or minimize post-filing disputes. While one difficulty of such a procedure is that the NASD's By-Laws currently require that Forms U-5 be filed within 30 days of termination, NASD Regulation would be able to provide qualified mediators on an expedited basis. Because timely reporting of the information required by Form U-5 is important for regulatory purposes, extension of the 30-day filing period could arguably undermine the goal of enhanced disclosure underlying the proposed Rule. Moreover, pre-filing mediation or arbitration could ultimately produce less, rather than more, candid disclosure than is currently the case.

      NASD Regulation solicits comments regarding whether the proposed rule should include a procedure for expedited pre-filing mediation or arbitration. Commenters are asked to consider how such a procedure would work, whether it would be effective, and how it would be funded. Should there be an option to obtain pre-filing mediation or arbitration, or should it be mandatory on the demand of either party? Is mediation appropriate in the instance where the question is a member firm's response to a regulatory requirement? Would there be enough time to complete mediation before the 30-day filing period expired? Who would pay for the procedure?

      Pilot Program

      The Rule would be implemented on a four-year pilot basis, during which time NASD Regulation would assess the impact of the Rule on the nature and quality of disclosure by member firms. If NASD Regulation determines at the end of the pilot period that the Rule has had little or no positive impact on the nature and quality of the disclosures made on Forms U-4 and U-5, it will not seek to renew the Rule.

      NASD Regulation seeks comment regarding the pilot program. Should the Rule be implemented on a pilot basis? Is four years a sufficient amount of time to assess the impact of the Rule on the nature and quality of the disclosure by members? Should it be shorter, or longer? Are there particular measures NASD Regulation should use in determining whether the Rule has had a positive impact on the nature and quality of disclosures?

      Request For Comment

      NASD Regulation encourages all members and interested parties to respond to the issues raised in this Notice. Comments should be mailed to:

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

      or e-mailed to:
      pubcom@nasd.com

      Comments must be received by December 31, 1997. Before becoming effective, any rule change developed as a result of the comments received must be adopted by the NASD Regulation, Inc., Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.


      Text Of Proposed Rule 1150

      (Note: All language is new.)

      Rule 1150.   Regulatory Form Disclosures

      (a) Mandatory Disclosures
      (1) A member must make truthful, accurate, and complete statements on the covered forms required under Article IV, Sections 2 and 3 of the By-Laws ("mandatory disclosures").
      (2) A notice of termination (Form U-5) and any amendment to the notice required to be provided to an associated person pursuant to Article IV, Section 3 of the By-Laws shall be delivered to such associated person at least 10 days before the notice or amendment is filed with the Association.
      (3) If a member makes a material revision to a notice of termination or amendment delivered to an associated person pursuant to subparagraph (2), the member must deliver the revision to the associated person immediately.
      (4) An associated person's failure to respond to a notice delivered pursuant to subparagraph (2) or (3) shall not constitute a waiver of any rights of the associated person.
      (b) Qualified Immunity
      (1) This paragraph shall apply to any arbitration proceeding between a member or other party and a covered person relating to statements made in response to an information requirement of a covered form with respect to such covered person, to the extent that such statements are contained in a covered form that has been or, at a subsequent point in time, is (A) filed with a regulatory authority or self-regulatory organization, and (B) disseminated by reason of such filing, or otherwise disseminated orally, in writing, or through any electronic medium to an appropriate person.
      (2) A defending party shall not be liable in a proceeding to a covered person for any defamation claim related to an alleged untrue statement that is contained in a covered form if the statement was true at the time that the statement was made.
      (3) A defending party shall not be liable in a proceeding to a covered person for any defamation claim related to an alleged untrue statement that is contained in a covered form unless the covered person shows by clear and convincing evidence that:
      (A) the defending party knew at the time that the statement was made that it was false in any material respect; or
      (B) the defending party acted in reckless disregard as to the statement's truth or falsity.
      (c) Definitions
      For purposes of this Rule:
      (1) The term "appropriate person" means any federal or state governmental or regulatory authority, any self-regulatory organization, any employer or prospective employer of a covered person, any person who requests information concerning the covered person from the defending party and as to whom the defending party has a legal obligation to provide such information, or any person who has a legal obligation to obtain such information.
      (2) The term "claim" means any claim, counterclaim, third-party claim, or cross-claim.
      (3) The term "covered form" means any form or notice required under Article IV, Sections 2 and 3 of the By-Laws, including Forms U-4 and U-5, Disclosure Reporting Pages, and related explanatory materials.
      (4) The term "covered person" means any present or former registered person or other employee of a member who is a party to a proceeding relating to a dispute within the scope of this Rule.
      (5) The term "defending party" means any member who is a party to a proceeding and who is adverse to a covered person who is a party, and any associated person of such member.

      (Rule 1150 is effective beginning on [Date] 1998 and ending on [Date] 2002, and applies to claims relating to any covered forms, as defined in Rule 1150, that are filed during that period.)


      Endnotes

      1 The proposed Rule would require related changes to Article IV, Sections 3(a) and 3(b), of the NASD's By-Laws.

      2 "Defamation" has been defined as an "intentional false communication, either published or publicly spoken, that injures another's reputation or good name." Black's Law Dictionary 417 (6th ed. 1990). "Libel" (written defamation) and "slander" (spoken defamation) are both forms of defamation. Id. at 1388.

      3 In 1996, approximately 3 percent of the arbitrations filed with NASD Regulation involved defamation claims.

      4 For example, states with large numbers of registered representatives which recognize some degree of immunity for statements contained in required disclosures include New York, New Jersey, Florida, California, Illinois, Texas and Pennsylvania.

      5 The standard of proof has no bearing on what evidence is admissible under the Code of Arbitration Procedure. NASD Rule 10323 provides that admissibility of evidence shall be determined by arbitrators based on materiality and relevance. Arbitrators are instructed that, although the Federal Rules of Evidence do not strictly govern the admissibility of evidence in arbitration proceedings, they may provide guidance on what evidence is probative.

    • 97-76 Nasdaq Eliminates Excess Spread Rule For Nasdaq Securities

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      Executive Summary

      The Nasdaq Stock Market, Inc. (Nasdaq®) Board of Directors approved, and the National Association of Securities Dealers, Inc. (NASD®) Board of Governors rati- fied, a decision to allow NASD Rule 4613(d)—the "excess spread" rule for Nasdaq securities—to lapse as of October 13, 1997. Accordingly,NASD member firms are no longer required to comply with excess spread parameters for Nasdaq securities, as of October 13, 1997.

      Questions regarding this rule change should be directed to John F. Malitzis, Senior Attorney, Office of General Counsel, The Nasdaq Stock Market, Inc., at (202) 728-8245.

      Background And Summary

      Prior to January 20, 1997, the NASD's excess spread rule (the Rule or the Excess Spread Rule) provided that registered market makers in Nasdaq securities could not enter quotations that exceeded 125 percent of the average of the three narrowest market maker spreads in that issue, provided, however, that the maximum allowable spread could never be less than 1/4 of a point (125 Percent Rule). The Rule originally was designed to enhance the quality of the Nasdaq market by preventing firms from holding themselves out as market makers without having a meaningful quote in the system. Despite the regulatory objectives underlying the Rule, however, certain market participants believed that the Rule produced a variety of unintended consequences that undermined the integrity of Nasdaq. Most notably, the Securities and Exchange Commission (SEC) found in its 21(a) Report on the NASD and Nasdaq that the then-current Excess Spread Rule posed the potential for discouraging, rather than encouraging, the narrowing of spreads.1 Accordingly,the SEC requested that the NASD "modify the rule to eliminate it undesirable effects, or to repeal it."2

      In response to the SEC's 21(a) Report, the NASD submitted a proposal, which was approved by the SEC and which amended the Excess Spread Rule on a pilot basis.3 Under the revised Excess Spread Rule, a registered market maker in a Nasdaq security was precluded from being a registered market maker in that issue for 20 business days if its average spread in the security over the course of any full calendar month exceeded 150 percent of the average of all dealer spreads in such issue for the month (150 Percent Rule). While the Commission approved the 150 Percent Rule on a pilot basis, in its approval order for the new rule, the SEC stated that "[a]lthough the amended excess spread rule may reduce some of the anticompetitive concerns outlined in the 21(a) Report, the Commission believes that the amendment . . . may not completely satisfy the NASD's obligations under the Commission's Order with regard to the excess spread rule. Specifically, it may not remove completely the anticompetitive incentives for market makers to refrain from narrowing quotes because the market makers' quotation obligation continues to be dependent to some extent upon quotations of other market makers in the stock."4

      Furthermore, almost simultaneous th the implementation of the Excess Spread Rule, the SEC's Order Handling Rules were implemented in a specified number of Nasdaq securities, and thereafter in the remaining Nasdaq securities on a rolling basis.5 The rollout schedule for the implementation of these rules was recently amended, so that all Nasdaq securities will be subject to the Order Handling Rules (i.e., the Limit Order Display Rule and the Electronic Communications Network (ECN) Amendments to the Quote Rule) by October 13, 1997.6 Under these rules, market maker spreads are ffected by both customer limit orders and market maker quotes, adding a new dimension to the Nasdaq market which previously did not exist. In addition, studies by the NASD's Economic Research Department have shown that the Order Handling Rules have narrowed dealer spreads in stock in which these rules have been implemented—a primary aim of the Excess Spread Rule.7

      In light of the foregoing, the Nasdaq Board of Directors and the NASD Board of Governors determined to allow NASD Rule 4613(d) to lapse as of October 13, 1997. The NASD and Nasdaq determined this appropriate because: (1) the need for the Rule is obviated by the implementation of the Order Handling Rules in all Nasdaq-listed securities as of October 13; and (2) the SEC has continuing concerns with the Excess Spread Rule. Accordingly, NASD member firms are no longer required to comply with excess spread parameters for Nasdaq securities as of October 13, 1997.


      Endnotes

      1 See Appendix to Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and The Nasdaq Stock Market at p. 98 (21(a) Report) (SEC, Aug. 8, 1996).

      2 Id. at 99.

      3 See Exchange Act Rel. No. 38180 (Jan. 16, 1997), 62 FR 3725 (Pilot Program Approval Order). The pilot originally was set to expire on July 1, 1997, but was extended through September 30, 1997, and again through October 13, 1997. See Securities Exchange Act Rel. No. 38804 (July 1, 1997); Securities Exchange Act Rel. No. 39120 (Sept. 23, 1997).

      4 Pilot Program Approval Order, supra note 4.

      5 See Securities Exchange Act Rel. No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (Order Handling Rule Adopting Release). Among other things, the SEC in the Order Handling Rule Adopting Release amended Rule 11Ac1-1 (ECN Amendments to Quote Rule) to the Securities Exchange Act of 1934 (Exchange Act), and adopted new Rule 11Ac1-4 (Limit Order Display Rule).

      6 See Securities Exchange Act Rel. No. 38870 (July 24, 1997).

      7 See Effects of the Removal of Minimum Sizes for Proprietary Quotes in The Nasdaq Stock Market, Inc., p. 6, NASD Economic Research Department (June 5, 1997).

    • For Your Information

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      New Customer Support Hotline Number

      Those member firms that are enjoying the benefits of the National Association of Securities Dealers, Inc. (NASD® Member Compliance Support System, Training Analysis and Planning Tool, Version 2.0 (MCSS), will soon benefit from enhanced customer service.

      Please note that, as of November 3, 1997, technical questions regarding the MCSS application will be answered by the NASD Regulation, Inc., Customer Support Hotline, at (800) 321-NASD (6273).

      This number is for technical support calls only. Questions related to Continuing Education requirements should be directed to the NASD RegulationSM Membership Department, at (301) 590-6500.

      After November 3, 1997, please discontinue using the current technical support hotline number (800-305-7132).

    • 97-75 Mail Vote — NASD Solicits Member Vote On Amendments To NASD By-Laws To Reconfigure NASD Board

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      97-75 attachments (PDF Format)

      Note: voting by NASD member executive representatives only through mail ballots distributed with print version of this Notice.

      Last Voting Date: November 13, 1997

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      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD® or Association) invites members to vote to approve amendments to the NASD By-Laws intended to provide for a more efficient and effective corporate structure for the Association. The last voting date is November 13, 1997. The text of the proposed amendments follows this Notice. Questions concerning this Notice may be directed to T. Grant Callery, Senior Vice President and General Counsel, NASD, at (202) 728-8285.

      Background

      The proposed amendments are part of a comprehensive revision of the NASD, NASD Regulation, Inc., and The Nasdaq Stock Market, Inc., By-Laws intended to provide for a more efficient and effective corporate structure for the Association, to make the Association's corporate documents more consistent with one another, and to conform the corporate documents to the recently amended Code of Procedure and membership procedures. In particular, the proposed corporate structure is designed to streamline the decisionmaking process to be more responsive to investor interests; improve communication among Board members and the staff; enable the Association to act quickly and decisively when necessary; and preserve the principles set forth in the September 15, 1995, Report of the NASD Select Committee on Structure and Governance to the NASD Board of Governors (Select Committee Report) and undertakings agreed to as part of the Association's settlement with the Securities and Exchange Commission (SEC or Commission).1

      The text of the proposed rule change is attached as Attachment A. Proposed new language is underlined; proposed deletions are in brackets.

      To achieve the corporate objectives set forth above, the Association will retain the current three-corporation structure, but reduce the overall number of board members for the three corporations. The Nasdaq® and NASD RegulationSM Boards will be smaller and become part of an expanded NASD Board.2 As a result, the Association will reduce the overall number of board members from 49 to 27, reduce the number of board meetings from 17 to seven, and reduce the number of board committees from nine to five.

      The NASD Board will consist of 21 to 27 Governors and include a nucleus of Governors who will not serve as directors on either subsidiary board. The subsidiary boards each will have five to eight Directors, all of whom will be NASD Governors. The number of directors on each subsidiary board will be equal, thereby enabling the nucleus of individuals who serve only as NASD Governors to perform a tie-breaking function on the parent board.

      The NASD Board will retain its current authority to review and ratify or reject certain actions of the subsidiaries, although the process of exercising this authority will be expedited by transferring certain functions to new entities under each subsidiary board and changing several meeting schedules. First, the functions of the National Business Conduct Committee, a committee of the NASD Regulation Board composed entirely of Directors, will be transferred to a new entity, the National Adjudicatory Council, which will be appointed by the NASD Regulation Board after nomination by the National Nominating Committee. Similarly, the functions of the Nasdaq Listing and Hearing Review Committee will be transferred to a new Listing Council, whose members will be appointed by the Nasdaq Board after nomination by the National Nominating Committee. Except for the Chair of the National Adjudicatory Council, members of the councils will not serve on any of the Association's boards. These new councils will meet at least 15 days before the subsidiary boards and will provide written reports of their decisions to their respective boards no later than 15 days before the subsidiary board meetings. The subsidiary board meetings then will be scheduled to occur one day before the meetings of the NASD Board. Although matters delegated to each subsidiary will, as a matter of general practice, be considered by the subsidiary boards before proceeding to the NASD Board, the time required for final disposition will be significantly reduced by these structural and scheduling changes. Under the current structure and meeting schedule, the subsidiaries may have to delay issuing disciplinary, listing, and other decisions and filing rule proposals with the Commission until a parent board meeting is held, which may occur several weeks after the subsidiary board takes action. This delay will be eliminated by the new corporate structure and meeting schedule.

      In addition to compressing the time between subsidiary and parent board meetings, the structural refinements will facilitate other efficiencies because members of the revamped subsidiary boards will constitute a subset of NASD Board members. For example, an NASD Regulation rule amendment that clearly warrants consideration by the NASD Board can be taken directly to the NASD Board for action, avoiding the need for duplicative discussions of the same matter. The same will be true of rule amendments that require NASD Board review under the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries (Delegation Plan).3 Thus, action on significant or controversial matters can be accomplished in one step, rather than the two steps that are currently required. Furthermore, because the Directors of both subsidiary boards will be Governors of the NASD Board, the consideration of matters at the NASD Board level always will have the benefit of subsidiary board participation.

      To further expedite decisionmaking, the NASD Board will be specifically authorized by the Delegation Plan to take action on its own initiative. Thus, subsidiary board action on a matter within its sphere of delegated authority will not be a prerequisite to action by the NASD Board.

      These changes are consistent with the core principles of corporate governance outlined in the Select Committee Report: maintaining a balanced governance structure, an independent corporate structure, an independent and autonomous operating structure, and a clear and distinct role for each corporation. The amended By-Laws maintain a balanced governance structure by providing for diversity among Industry Governors and Directors; by providing for a majority of Non-Industry Governors on the parent board, including at least five Public Governors; and by providing for at least 50 percent Non-Industry and Public Directors on the boards of each subsidiary. Maintaining two separate, wholly owned subsidiaries with their own Presidents ensures that independent corporate structures continue to exist. Preserving separate and independent professional staffs and substantial deference to the subsidiaries in their areas of jurisdiction reinforces an independent and autonomous operating structure. Finally, each corporation retains its clear and distinct role under the proposed rule change: the NASD continues to resolve conflicts between the subsidiaries and retain ultimate responsibility for statutory obligations, including its responsibilities as a self-regulatory organization; NASD Regulation continues to regulate broker/dealers and supervise surveillance of Nasdaq and other over-the-counter markets; and Nasdaq continues to own and operate The Nasdaq Stock MarketSM and develop and implement rules governing that market.

      The proposed corporate structure also is consistent with the undertakings set forth in the Association's August 8, 1996, settlement with the Commission. Specifically, the amended By-Laws ensure the balancing of the Association's boards and committees; place primary day-today responsibility for regulatory matters with NASD Regulation; provide for the autonomy and independence of the regulatory staff of the NASD and its subsidiaries; and ensure the existence of a substantial, independent internal audit staff that reports directly to an audit committee of the NASD Board.

      Amendments To The NASD By-Laws

      The expanded NASD Board will function much as it does today, with ultimate responsibility for the regulatory and market operation functions that are delegated to the subsidiary boards. Substantive changes to the NASD By-Laws are set forth below. Key changes related to the corporate restructuring are found in Article VII, Sections 4, 5, 9, 10, and 13; Article VIII, Section 1; Article IX, Sections 3 through 6; Article XV, Section 4(b); Article XVI, Section 1; and Articles XX and XXI. Stylistic changes and other minor, non-substantive changes are not described.

      Article I.   Definitions

      Several substantive amendments have been made to Article I, which sets forth definitions for the NASD By-Laws. The following definitions have been moved from the Delegation Plan to the NASD By-Laws: "Industry Director"; "Industry Governor" or "Industry committee member"; "National Nominating Committee"; "Non-Industry Director"; "Non-Industry Governor" or "Non-Industry committee member"; "Public Director"; "Public Governor" or "Public committee member." These changes will be found at Article I (n), (o), (bb), (cc), (dd), (ff), and (gg). Parallel changes have been made to the By-Laws of NASD Regulation and Nasdaq.

      Refinements have been made to the definitions of "Industry Governor," "Industry committee member," "Non-Industry Governor," and "Non-Industry committee member." A person who is or was an outside director of a broker or a dealer, or a director not engaged in the day-to-day management of a broker or dealer, is excluded from the definition of "Industry Governor or committee member." Included in the definition of "Industry Governor, Director, or committee member" is any person who: (1) is an employee of an entity that owns more than five percent of the equity of a broker or dealer, if the broker or dealer accounts for more than 10 percent of the gross revenues received by the consolidated entity; (2) owns more than 10 percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed five percent of his or her net worth, or whose ownership interest otherwise permits him or her to be engaged in the day-to-day management of a broker or dealer; (3) provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the Governor or committee member, or 20 percent or more of the gross revenues received by the Governor's or committee member's firm or partnership; or (4) provides professional services to a director, officer, or employee of a broker, dealer, or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director's, officer's, or employee's professional capacity and constitute 20 percent or more of the professional revenues received by the Governor or committee member, or 20 percent or more of the gross revenues received by the Governor's or committee member's firm or partnership.

      The Association believes that any person engaged in the day-to-day management of any broker/dealer, including a limited purpose broker/dealer, should be considered an Industry Governor or committee member and, therefore, has deleted from the definition of "Non-Industry Governor or committee member" the following specific references because they are unnecessary: (1) persons affiliated with brokers and dealers that operate solely to assist the securities-related activities of the business of non-member affiliates, such as a broker or dealer established to distribute an affiliate's securities which are issued on a continuous or regular basis, or process the limited buy and sell orders of the shares of employee owners of the affiliate; and (2) employees of an entity that is affiliated with a broker or dealer that does not account for a material portion of the revenues of the consolidated entity, and who are primarily engaged in the business of the non-member entity.

      The term "person associated with a member" has been amended by the addition of a clause clarifying that the term includes any natural person registered under the Rules of the Association.

      The definition of "rules of the Corporation" has been deleted to avoid confusion with the more commonly used, but differently defined term, "Rules of the Association." The term "rules of the Corporation" has been used to refer collectively to the NASD Certificate of Incorporation, the NASD By-Laws, and the Rules of the Association, but, with the restructuring of the NASD into three legal entities, such a collective term for all of the corporate documents of the Association is no longer useful. Similarly, the definitions of "Boards" and "Corporations" have been deleted and the By-Laws instead refer to each corporate entity by name, as appropriate. The term "Rules of the Association" or "Rules" is defined to mean the numbered rules set forth in the NASD Manual beginning with the Rule 0100 Series, as adopted by the NASD Board pursuant to the NASD By-Laws, as amended or supplemented. A cross-reference from the Rules of the Association to the NASD By-Laws is included in Rule 0121.

      Article II.   Offices

      A new Article II states the location of the registered corporate office of the NASD. This change makes the NASD By-Laws consistent with the NASD Regulation and the Nasdaq By-Laws, which both include such a provision.

      Article III.   Qualifications of Members and Associated Persons

      Current Article II, Qualifications of Members and Associated Persons, is renumbered as Article III. Section 3, which addresses ineligibility of certain persons for membership or association, has been conformed to the Rule 9520 Series, which sets forth rules for the Association's eligibility proceedings. Specifically, Section 3(d) as amended clarifies that members, but not applicants for membership, may use eligibility proceedings to obtain relief from the Association's eligibility requirements, e.g., to resolve a statutory disqualification problem.

      Section 3(d)(2), which addresses the status of members or persons engaged in eligibility proceedings, has been deleted because that subject is addressed in the Rule 9520 Series. This change does not result in a substantive change in the Association's practice. Specifically, if a person is already associated with a member at the time a statutory disqualification is discovered, the person may remain associated with the member until final action is taken under the Rules of the Association. If the person is a prospective employee, the person may not become associated with the member until the Association takes final action under the Rule 9520 Series.

      A new Section 3(g) clarifies that the Board may delegate its authority under Section 3 in a manner not inconsistent with the Delegation Plan.

      Finally, Section 4(h) has been amended to conform it to the Securities Exchange Act of 1934.

      Article IV.   Membership

      Current Article III, Membership, has been renumbered as Article IV. Section 1(a)(3), which requires members to release the Association from liability except for willful malfeasance, has been deleted. Section 7 has been conformed to changes in the Rule 1010 Series, which sets forth procedures for membership applications and changes in a member's operations.

      Article V.   Registered Representatives and Associated Persons

      Current Article IV, Registered Representatives and Associated Persons, has been renumbered as Article V. Section 2(a)(2), which requires registered representatives to release the Association from liability except for willful malfeasance, has been deleted.

      Article VI.   Dues, Assessments, and Other Charges

      Current Article V, Dues, Assessments, and Other Charges, has been renumbered as Article VI. A new Section 5 states that the NASD may delegate its authority regarding dues, assessments, and other charges in a manner not inconsistent with the Delegation Plan.

      Article VII.   Board of Governors

      Current Article VI, Board of Governors, has been renumbered as Article VII. Section 1(c) has been amended to make clear that to the fullest extent permitted by applicable law, the Restated Certificate of Incorporation, and the By-Laws, the NASD may delegate any power of the NASD or the Board to a committee appointed pursuant to Article IX, Section 1, to the NASD Regulation Board, to the Nasdaq Board, or to NASD staff, in a manner not inconsistent with the Delegation Plan. Parallel provisions have been added to the NASD Regulation and the Nasdaq By-Laws.

      Section 2, which authorizes the Board to cancel or suspend the membership of a member or suspend the association of a person associated with a member for failure to provide requested information, has been amended to provide for reinstatement pursuant to the Rules of the Association. See, e.g., Rules 8225 and 9516. The delegation to the Chief Executive Officer has been replaced with a delegation provision consistent with other provisions set forth in the proposed NASD By-Laws: that the Board be permitted to delegate its authority under this section in a manner not inconsistent with the Delegation Plan and otherwise in accordance with the Rules of the Association.

      Section 4, which addresses the composition and qualifications of the Board, has been amended to conform to the new corporate structure. The NASD Board will consist of the Chief Executive Officer and the Chief Operating Officer of the NASD, the Presidents of NASD Regulation and Nasdaq, the Chair of the National Adjudicatory Council, and t least 16 and not more than 22 Governors elected by the members of the NASD. Thus, the By-Laws authorize a Board of 21 to 27 Governors in total. Section 4(a) further provides that the Governors elected by the members will include a representative of an issuer of investment company shares or an affiliate of such an issuer, a representative of an insurance company, and a Nasdaq issuer. A majority of the Governors will be Non-Industry Governors, and the Non-Industry Governors will include five or six Public Governors, depending on the size of the Board. Section 4(b) has been amended to prohibit the Chair of the National Adjudicatory Council from serving as Chair of the Board. The Association believes that the responsibilities of each chairmanship require the attention of one individual.

      Section 5, Term of Office of Governors, has also been amended to reflect the Board structure. The Chief Executive Officer and the Chief Operating Officer of the NASD and the Presidents of NASD Regulation and Nasdaq will serve as Governors until a successor is selected, or until death, resignation, or removal. The Chair of the National Adjudicatory Council will serve as a Governor for a term of one year, and will generally not serve more than two consecutive terms.4 Section 5 also provides that a former Chair of the National Adjudicatory Council may serve as a Governor elected by the members of the NASD. The Governors elected by the members of the NASD will be divided into three classes and serve three-year terms. Such Governors generally may not serve more than two consecutive terms.

      A new Section 6 addresses the disqualification of a Board member and states that a Governor's term of office immediately terminates if the Board determines that: (a) the Governor no longer satisfies the classification (Industry, Non-Industry or Public Governor) for which the Governor was elected; and (b) failure to remove the Governor would violate the compositional requirements of the Board set forth in Section 4. If a Governor's term of office terminates under this Section and the remaining term of office of such Governor was not more than six months, then during the period of vacancy, the Board would not be deemed to be in violation of its compositional requirements by virtue of such vacancy. Section 6 replaces a provision currently in the Delegation Plan that provides for "automatic removal" if a Governor no longer satisfies the classification for which he or she was elected without describing any process for such removal. This change eliminates any potential for the Board to take an ultra vires action in the event that a Governor fails to notify the Board promptly of a change in his or her classification and continues to sit on the Board and cast votes before such removal takes place.

      Current Section 6, which addresses the filling of vacancies on the Board, has been renumbered as Section 7. In addition, the current provisions of the Delegation Plan that address the filling of vacancies have been moved to this Section. The Section provides further that, if the remaining term of office of the governorship to be filled is more than one year, then the replacement Governor must stand for election in the next annual election.

      Current Section 7, which describes nomination and election procedures, has been expanded and renumbered as Sections 9 through 14. Section 9 sets forth the powers of the National Nominating Committee. The National Nominating Committee nominates Industry, Non-Industry, and Public Governors for each vacant or new Governor position on the NASD Board; Industry, Non-Industry, and Public Directors for each vacant or new position on the NASD Regulation Board and the Nasdaq Board; Industry, Non-Industry, and Public members for each vacant or new position on the National Adjudicatory Council; and Industry and Non-Industry members for the Nasdaq Listing and Hearing Review Council.

      Section 9 also includes and clarifies the compositional requirements for the National Nominating Committee previously set forth in the Delegation Plan. Under the amended provision, a National Nominating Committee member may be removed for cause (specifically, refusal, failure, neglect, or inability to discharge such member's duties) by a majority vote of the NASD Board. This same standard for removal is used throughout the Association's corporate documents for committee and council members.

      Section 9 also includes a new provision that requires the Secretary of the NASD to collect from each nominee for Governor such information as is reasonably necessary to serve as the basis for a determination of the nominee's classification as an Industry, Non-Industry, or Public Governor. The Secretary will certify to the National Nominating Committee each nominee's classification to ensure that the compositional requirements of each Board are met.

      Section 10 replaces current Section 7(c) and adds provisions regarding contested elections currently located in the Delegation Plan. Conforming references also have been made to Article XXI, a new article that provides for meetings of the membership. Section 10 clarifies the procedures for contested elections and changes the number of members that must sign a petition to support adding a candidate to the ballot for NASD Board elections from two percent of the members of the NASD to three percent. As is currently the case, a petition may be signed only by a member's Executive Representative. Section 10 also transfers the authority to certify the additional candidate from the National Nominating Committee to the Secretary, since the Secretary maintains the records of Executive Representatives and will be charged with reviewing information regarding the classification (Industry, Non-Industry, or Public) for each governorship.

      Sections 11, 12, and 15 are new provisions that parallel new provisions added to the NASD Regulation and the Nasdaq By-Laws. Section 11 prohibits the NASD, the Board, the National Nominating Committees, other committees, and NASD staff from taking any official position regarding a contested nomination or election under the proposed NASD or NASD Regulation By-Laws. Section 11 permits Board and committee members to communicate their views with respect to a candidate in a contested election only if the Board or committee member acts solely in his or her individual capacity and disclaims any intention to communicate in any official capacity. Section 12 limits administrative support to the candidates in a contested NASD election to two mailings; any other administrative support in any NASD or NASD Regulation contested election or nomination is prohibited. Section 15 adds resignation provisions.

      Section 13, Election of Governors, is largely parallel to current Section 7(a), with conforming amendments to Sections 9 through 12 and a new cross-reference to Article XXI, which sets forth procedures for membership meetings.

      Section 14 is a new procedure that requires each Governor to update the information submitted to the NASD Secretary under Section 9(e) regarding his or her classification as an Industry, Non-Industry, or Public Governor at least annually and upon request of the Secretary, and to report immediately to the Secretary any change in such classification. There are parallel provisions in the NASD Regulation and the Nasdaq By-Laws. These submissions and reports will help the Association ensure that the compositional requirements of the Board and its committees are maintained.

      Section 8, which addresses meetings, quorums, and voting of the Board, has been amended to provide that a quorum consists of a majority of the Board then in office, including not less than 50 percent of the Non- Industry Governors. This change ensures that Industry Governors alone can not constitute or dominate a quorum of the Board.

      Article VIII.   Officers, Agents, and Employees

      Current Article VII, Officers, Agents, and Employees, has been renumbered as Article VIII. Section 1 has been amended to require that the Board elect a Secretary and a Chief Operating Officer. These changes have been made in recognition of the number of responsibilities assigned to the Secretary under the By-Laws, the Board's practice of always electing a person to such position, and the fact that the Chief Operating Officer serves on the Board pursuant to Article VII, Section 4.

      Section 3 has been amended to specify that agents and employees shall be under the supervision and control of the officers, unless the Board, by resolution, provides that an agent or employee shall be under the supervision and control of the Board. Generally, agents and employees are under the supervision and control of the officers, but the Board may wish in certain circumstances to retain control over an employee or agent, as in Section 4, when the Board determines that it wishes to retain counsel.

      Current Section 5, which provides for compensation of Board and committee members, has been moved to its own Article, Article X, Compensation of Board and Committee Members.

      New Sections 5, 6, and 7 have been added to Article VIII to conform it to Article VII of the NASD Regulation By-Laws and Article VI of the Nasdaq By-Laws. Section 5 permits the Board to delegate the duties and powers of any officer to any other officer. Section 6 provides for the resignation and removal of officers. Section 7 permits the NASD to secure the fidelity of its officers, agents, and employees by bond or otherwise.

      Article IX.   Committees

      Current Article VIII, Committees, which addresses the formation and powers of committees, is renumbered as Article IX. Section 1 has been amended to cross-reference Article VII, Section 1(c), which limits the Board's authority to delegate its powers and authority.

      A new Section 2 is designed to help the Association maintain the compositional requirements of certain committees. Undertakings 1 and 6 under the SEC Settlement require certain committees5 to have a particular balance of Industry, Non-Industry, and Public committee members. The compositional requirements for the National Nominating Committee and the Audit Committee are found in the NASD By-Laws. The compositional requirements of the National Adjudicatory Council are found in the NASD Regulation By-Laws. The compositional requirements for the remaining committees are found in the Delegation Plan. To help ensure that compositional requirements are maintained for committees appointed by the NASD Board, Section 2 authorizes the Secretary to collect from each prospective member of a committee that must be balanced such information as is reasonably necessary to serve as the basis for a determination of the prospective committee member's classification as an Industry, Non-Industry, or Public committee member. The Secretary must certify to the Board each prospective committee member's classification. Each committee member must update the information submitted at least annually and upon request of the Secretary of the NASD, and must report immediately to the Secretary any change in such classification. Parallel provisions are set forth in the NASD Regulation and the Nasdaq By-Laws.

      Current Section 2, which addresses removal of a committee member, has been renumbered as Section 3 and amended to clarify that a committee member can only be removed for refusal, failure, neglect, or inability to discharge his or her duties by majority vote of the whole Board.

      New sections have been added specifically to authorize the appointment of an Executive Committee and a Finance Committee and to require, consistent with Undertaking 6, the appointment of an Audit Committee. Section 4 authorizes the NASD Board to appoint an Executive Committee composed of five to nine members of the NASD Board, with a Non-Industry majority. The Executive Committee will include the NASD CEO/Chairman, at least one member each of the NASD Regulation and Nasdaq Boards, and at least two Governors who are not Directors of NASD Regulation or Nasdaq. A quorum for the transaction of business at Executive Committee meetings will be a majority of Committee members then in office, including at least 50 percent of the Non-Industry Committee members.6

      Section 5 contains the provisions relating to the Audit Committee currently found in the Delegation Plan, except that the compositional provisions have been amended to require two (rather than one) Public Governors to serve on the Committee.

      Section 6 authorizes the Board to appoint a Finance Committee composed of at least four Governors, including the Chief Executive Officer of the NASD. The Finance Committee will be balanced, with the number of Non-Industry Governors equaling or exceeding the Industry Governors plus the Chief Executive Officer.

      If any officer of the NASD, NASD Regulation, or Nasdaq serves as a member (other than as an ex officio member) of a committee appointed under the By-Laws of any of the three corporations, that officer will be counted among the Industry committee members for the purpose of any compositional or quorum requirements.

      Article X.   Compensation of Board and Committee Members

      As noted previously, current Article VII, Section 5, which addresses compensation of Board and committee members, has been renumbered as Article X, Compensation of Board and Committee Members.

      Article XI.   Rules

      Current Article IX, Rules, which authorizes the NASD to adopt rules, has been renumbered as Article XI.

      Article XII.   Disciplinary Proceedings

      Current Article X, Disciplinary Proceedings, which authorizes disciplinary proceedings, has been renumbered as Article XII.

      Article XIII.   Powers of Board to Impose Sanctions

      Current Article XI, Powers of Board to Prescribe Sanctions, which authorizes the Board to impose sanctions, has been renumbered as Article XIII. Section 1(e) has been amended and a new Section (2) added to clarify that any delegation under the Article must be in conformity with the Delegation Plan.

      Article XIV.   Uniform Practice Code

      Current Article XII, Uniform Practice Code, has been renumbered as Article XIV. Section 2 has been amended to provide that the Board may delegate its authority with respect to administering the Uniform Practice Code to the NASD Regulation Board and Nasdaq Board in accordance with the Delegation Plan.

      Article XV.   Limitation of Powers

      Current Article XIII, Limitation of Powers, has been renumbered as Article XV.

      Section 4 addresses conflicts of interest and has been amended by redesignating it as Section 4(a), and therein prohibiting any Governor or committee member from directly or indirectly participating in any adjudication of the interests of any party if the Governor or committee member has a conflict of interest or bias, or if circumstances otherwise exist where his or her fairness might reasonably be questioned. Section 4(a) further requires the Governor or committee member to recuse himself or herself or be disqualified in accordance with the Rules of the Association (e.g., Rule 9160). Current Section 4 simply references the Rules of the Association. The standard set forth in Section 4(a) is consistent with the conflict of interest standard in Rule 9160.

      In addition, a new Section 4(b) has been added to address conflicts of interests in non-adjudicatory matters in a manner consistent with the By-Laws of the NASD Regulation Board and the Nasdaq Board. Section 4(b) provides that a contract or transaction between the NASD and a Governor or officer, or between the NASD and any entity in which a Governor or officer is a director or officer, or has a financial interest, is not void or voidable solely for this reason, or solely because the Governor or officer is present at the meeting of the Board or committee that authorizes the contract or transaction, or solely because the Governor's or officer's vote is counted for such purposes if: (1) the material facts pertaining to such relationship or interest are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Governors; or (2) the contract or transaction is fair to the NASD as of the time it is authorized, approved, or ratified by the Board or committee. Section 4(b) provides that only disinterested Governors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. A contract or transaction between the NASD and one of its subsidiaries would not be subject to Section 4(b).

      Finally, Section 6, which limits the Association's rulemaking authority over government securities activities, has been deleted to conform the By-Laws to changes previously made to the Association's authority over the government securities activities of its members.

      Article XVI.   Procedure for Adopting Amendments to By-Laws

      Current Article XIV, Procedure for Adopting Amendments to By-Laws, has been renumbered as Article XVI and amended to provide that committees appointed by the Board may propose By-Law amendments.

      Article XVII.   Corporate Seal

      Current Article XV, Corporate Seal, has been renumbered as Article XVII.

      Article XVIII.   Checks

      Current Article XVI, Checks, has been renumbered as Article XVIII.

      Article XIX.   Annual Financial Statement

      Current Article XVII, Annual Financial Statement, has been renumbered as Article XIX.

      Article XX

      A new Article XX, Record Dates, has been added. Section 1 permits the Board to fix a record date to determine the members that are entitled to notice of, or to vote at, member meetings. Section 2 provides for a default record date if the Board does not fix such a date. Section 3 provides that a determination of members of record also applies to an adjournment of a member meeting.

      Article XXI

      A new Article XXI, Meetings of Members, has been added. Section 1 authorizes the Board to designate a time and place and set an agenda for annual meetings of members. Section 2 sets forth procedures for setting the agenda of special meetings. Section 3 sets forth notice requirements for meetings. Section 4 describes voting procedures. Section 5 states that the Chief Executive Officer of the NASD acts as Chair of the meeting and authorizes the Board to adopt rules and regulations for the conduct of meetings.


      Endnotes

      1 Securities Exchange Act Rel. No. 37538 (August 8, 1996), 62 S.E.C. Docket 1346, Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions, In the Matter of National Association of Securities Dealers, Inc., Administrative Proceeding File No. 3-9056.

      2 Currently, the NASD Board has 11 Governors, the NASD Regulation Board has 24 Directors, and the Nasdaq Board has 14 Directors.

      3 The Delegation Plan is the blueprint for the coordinated efforts of NASD, NASD Regulation, and Nasdaq, and sets forth the purposes, functions, and governance procedures of the three corporations working together.

      4 The Chair of the National Adjudicatory Council, who serves a term of one year, simultaneously will serve as a Governor of the NASD Board and a Director of the NASD Regulation Board. This change ensures that the terms for each of these positions run concurrently.

      5 Undertaking 1 sets forth compositional requirements for "the National Nominating Committee, the Trading/Quality of Markets Committee, the Arbitration Committee, the Market Surveillance Committee, the National Business Conduct Committee, the Management Compensation Committee, and all successors thereto." Undertaking 6 sets forth compositional requirements for an audit committee. The current names of such committees are the National Nominating Committee, the Quality of Markets Committee, the National Arbitration and Mediation Committee, the Market Regulation Committee, the National Business Conduct Committee, the Management Compensation Committee, and the Audit Committee.

      6 This quorum requirement has been applied also to the Audit, Finance, and National Nominating Committees.

    • 97-74 SEC Approves Amendments To Legal Definition Of Short Sale

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      Executive Summary

      On September 26, 1997, the Securities and Exchange Commission (SEC) approved an amendment to the National Association of Securities Dealers, Inc. (NASD®) short sale rule to provide that a "legal" short sale can be effected at a price equal to or greater than the offer price when the inside spread is less than 1/16th. The rule change has been approved on a temporary basis effective immediately through January 15, 1998, at which time the SEC will consider permanent approval of the rule change as well as permanent approval of the NASD's short sale rule.

      Questions regarding this rule change should be directed to Andrew S. Margolin, Senior Attorney, The Nasdaq Stock Market, Inc., at (202) 728-8869.

      Background And Summary

      The NASD's short sale rule1 prohibits member firms from effecting short sales2 at or below the current inside bid, as disseminated by The Nasdaq Stock MarketSM (Nasdaq®) whenever that bid is lower than the previous inside bid.3 Previously, the rule provided that a short sale is a "legal" short sale in a "down" bid situation if it is effected at a price at least 1/16th above the inside bid ("Minimum Increment Rule"). The Minimum Increment Rule was implemented to ensure that short sales were not effected at prices so close to the inside bid during down markets that they were inconsistent with the underlying purposes of the short sale rule (i.e., to prohibit market destabilizing and abusive short sales in declining markets).

      Now that all Nasdaq stocks can potentially trade with a 1/16th spread or less due to, among other things, the new SEC Order Execution Rules, and in light of the movement toward smaller minimum quotation variations generally, consideration was given to modifying the Minimum Increment Rule for stocks with an inside spread less than 1/16th.

      Accordingly, the NASD has amended the Minimum Increment Rule to provide that a "legal" short sale must be effected at a price equal to or greater than the offer price when the inside spread is less than 1/16th. There would be no change to the current definition for stocks with a spread of 1/16th or greater. For example, if the inside market for ABCD is 10 1/4 - 10 5/16, a legal short sale in a down market would have to be effected at a price equal to or greater than 10 5/16 (i.e., 1/16th above the current inside bid). However, if the inside market is 5 1/32 - 5 2/32, a legal short sale in a down market could be effected at a price of 5 2/32.

      In addition, to help ensure that market participants do not adjust their quotations to circumvent the short sale rule, the NASD is proposing an amendment to the Minimum Increment Rule to provide that a market maker or customer could not bring about or cause the inside spread for a stock to narrow in a declining market (e.g., lowering its offer to create an inside spread less than 1/16th) for the purpose of facilitating the execution of a short sale at a price less than 1/16th above the inside bid.


      Text Of Amendments

      (Note: New language is underlined.)

      IM-3350 Short Sale Rule

      (a) No Change
      (b)
      (1) Rule 3350 requires that no member shall effect a short sale for the account of a customer or for its own account in a Nasdaq National Market security at or below the current best (inside) bid when the current best (inside) bid as displayed by The Nasdaq Stock Market is below the preceding best (inside) bid in the security. The Association has determined that in order to effect a "legal" short sale when the current best bid is lower than the preceding best bid the short sale must be executed at a price of at least 1/16th point above the current inside bid when the current inside spread is 1/16th point or greater. The last sale report for such a trade would, therefore, be above the inside bid by at least 1/16th of a point. If the current spread is less than 1/16th of a point, however, the short sale must be executed at a price equal to or greater than the current inside offer price.
      (2) Moreover, the Association believes that requiring short sales to be a minimum increment of 1/16th point above the bid when the current spread is 1/16th or greater and equal to or greater than the offer when the current spread is less than 1/16th ensures that transactions are not effected at prices inconsistent with the underlying purpose of the Rule. It would be inconsistent with Rule 3350 for a member or customer to cause the inside spread for an issue to narrow when the current best bid is lower than the preceding best bid (e.g., lowering its offer to create an inside spread less than 1/16th) for the purpose of facilitating the execution of a short sale at a price less than 1/16th above the inside bid.
      (c) No Change

      Endnotes

      1 The short sale rule was originally adopted in June of 1994 for Nasdaq National Market securities on a pilot basis with a termination date of March 5, 1996. See Exchange Act Release No. 34277 (June 29, 1994), 59 FR 34885 (July 7, 1994). The pilot has been extended several times, most recently through January 15, 1998. See Exchange Act Release No. 39140 (September 26, 1997). On August 11, 1997, the NASD filed a proposed rule change with the Commission to implement the short sale rule on a permanent basis. See Exchange Act Release No. 38979 (August 26, 1997), 62 FR 46537 (September 3, 1997).

      2 A short sale is a sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. To determine whether a sale is a short sale, members must adhere to the definition of a "short sale" contained in Exchange Act Rule 3b-3, 17 CFR 240.3b-3, which rule is incorporated into Nasdaq's short sale rule as NASD Rule 3350(k)(1).

      3 Nasdaq calculates the inside bid or best bid from all market makers in the security (including bids on behalf of exchanges trading Nasdaq securities on an unlisted trading privileges basis), and disseminates symbols to denote whether the current inside bid is an "up bid" or a "down bid." Specifically, an "up bid" is denoted by a green "up" arrow and a "down bid" is denoted by a red "down" arrow. Accordingly, absent an exemption from the rule, a member can not effect a short sale at or below the inside bid for a security in its proprietary account or a customer's account if there is a red arrow next to the security's symbol on the screen.

    • 97-73 Fixed Income Pricing System Additions, Changes, And Deletions As Of September 23, 1997

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      As of September 23, 1997, the following bonds were added to the Fixed Income Pricing SystemSM (FIPSSM).

      Symbol Name Coupon Maturity
      UH.GC U.S. Home Corp 8.250 08/15/04
      UH.GD U.S. Home Corp 8.880 08/15/07
      HU.GA Huntsman Polymers Corp 11.750 12/01/04

      As of September 23, 1997, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      FXTL.GA Forstmann Textiles Inc. 14.750 04/15/99
      ALLY.GA Alliance Gaming Corp. 12.875 06/30/03
      SFXB.GA SFX Broadcasting Inc. 11.375 10/01/00
      NMEP.GA National Medical Enterprise Corp 7.375 09/01/97

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, NASD RegulationSM 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.

    • 97-72 Veteran's Day And Thanksgiving Day: Trade Date — Settlement Date Schedule

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      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, Tuesday, November 11, 1997, and Thanksgiving Day, Thursday, November 27, 1997. On Tuesday, November 11, The Nasdaq Stock MarketSM and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veterans' Day. All securities markets will be closed on Thursday, November 27, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg.T Date*
      Nov. 4 Nov. 7 Nov. 11
      5 10 12
      6 12 13
      7 13 14
      10 14 17
      11 14 18
      21 26 Dec. 1
      24 28 2
      25 Dec.1 3
      26 2 4
      27 Markets Closed
      28 3 5

      Note: November 11, 1997, 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 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 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."

    • 97-71 NASD To Deduct Unpaid Arbitration Fees From Member Deposit Accounts

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      Training



    Executive Summary

    Effective January 1, 1998, the National Association of Securities Dealers, Inc. (NASD®) will deduct delinquent unpaid arbitration fees from member funds maintained in member Central Registration Depository (CRDSM) accounts. Members will receive at least two notices that arbitration fees are due and payable as part of the normal billing and collections process. If a payment is received prior to the established deadline, the NASD will not deduct funds from the member's CRD account. Members are responsible for replenishing the funds on deposit to ensure that there are no delays in processing registration applications or any other CRD-related obligation.

    Questions regarding this Notice may be directed to Deborah Masucci, Vice President and Director, Office of Dispute Resolution, NASD Regulation, Inc., at (212) 858-4400; Todd Diganci, Vice President and Controller, Finance Department, NASD, at (301) 590-6203; or Elliott R. Curzon, Assistant General Counsel, Office of General Counsel, NASD RegulationSM, at (202) 728-8451.

    Background

    The Office of Dispute Resolution has a substantial and growing problem with unpaid member surcharges and arbitration forum fees owed by members who are or have been involved in arbitration proceedings. Examples of these types of fees are member surcharges assessed to member firms that are named in an arbitration proceeding or to member firms that employed an associated person named in an arbitration proceeding. Another example is a forum fee, which is the hearing cost assessed to a party in an arbitration award.

    Member surcharges are assessed and become due and payable when an arbitration complaint is served on the member. Forum fees are assessed and become payable when a case is completed and the award is served. In the award, the arbitrators will specify how much each party must pay in forum fees. The NASD provides a statement of account to each party showing the fees that are owed.

    Many members maintain funds on deposit with the NASD in order to expedite processing of employee registrations, examinations, and fingerprint processing. Increasingly, however, members are asking that on-deposit funds be reallocated for payment of other NASD/NASD Regulation obligations such as Advertising Fees and Gross Assessment Fees, and for purchasing MediaSourceSM materials such as fingerprint cards or other reference materials. It is appropriate, therefore, for member on-deposit funds to be used for other obligations owed to the NASD.

    Accordingly, for cases filed on or after January 1, 1998, the NASD will deduct member surcharges that are more than 60 days past due from the funds that the member maintains on deposit. In addition, beginning with cases that are closed on or after January 1, 1998, the NASD will deduct forum fees that are more than 60 days past due from the funds that the member maintains on deposit. Under the current invoicing and dunning procedures, members will be given sufficient notice of their obligation to permit them to pay or dispute the resulting charge with the Dispute Resolution Department prior to the deduction of funds from their CRD account. Written confirmation of each reallocation will be provided to the member's compliance officer. Members whose account balances are insufficient to cover an unpaid debt, and who do not make other payment arrangements, may have their membership and registration suspended or cancelled pursuant to Article VI, Sec. 3 of the NASD By-Laws.

  • 97-70 Broker/Dealer And Agent Renewals For 1998

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    Executive Summary

    The 1997-98 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 office fees, and American Stock Exchange (ASE), Chicago Board Options Exchange (CBOE), New York Stock Exchange (NYSE), Pacific Stock 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 instructional materials to be sent with the November invoice package to ensure continued eligibility to do business in their respective states, effective January 1, 1998.

    Questions concerning this Notice may be directed to your firm's assigned Quality and Service Team or NASD's Gateway, at (301) 590-6500.

    Initial Renewal Invoices

    In early November, initial renewal invoices will be mailed to all member firms. The invoices will include fees for NASD personnel assessments, NASD branch office fees, ASE, CBOE, NYSE, 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 15, 1997.

    NASD personnel assessments for 1998 will be based on the number of registered personnel with an approved NASD license as of December 31, 1997. That personnel assessment is $10 per person. NASD branch office assessments are $75 per branch, based on the number of active branches as of December 31, 1997.

    Agent renewal fees for ASE, CBOE, NYSE, 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. ASE, CBOE, NYSE, 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 ASE-, CBOE-, NYSE-, 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 by check, made payable to NASD Regulation, Inc., 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 provided with the invoice. All payments should be mailed to: NASD, Finance Department, 15201 Diamondback Drive, Rockville, MD 20850-3389. To ensure prompt processing, the renewal invoice payment should not be included with other forms or fee submissions. Members should be advised that failure to return payment to the NASD by the December 15, 1997 deadline could result in an immediate ineligibility to do business in their states, effective January 1, 1998.

    Filing Forms U-5

    Members may avoid paying unnecessary renewal fees by filing Forms U-5 for agents terminating in one or more jurisdictions. Due to the positive feedback received by the NASD from 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 1 to December 15, 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, 1997, 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 15, 997. Also, post-dated Forms U-5 cannot be processed if the date of termination indicated is after December 31, 1997.

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

    The NASD encourages members having access to the Firm Access Query System (FAQS) to utilize electronic filings for the submission of all Forms U-5 and page 1 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 1997. 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 eighth 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 five jurisdictions that are not participating in Phase II. They are:

    Michigan
    Puerto Rico
    American Stock Exchange
    New York Stock Exchange
    Pacific Stock Exchange

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

    The deadline for receipt of Forms BDW by the CRD for firms desiring to terminate an affiliation before year end 1997 is December 15, 1997. 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 end. Firms may terminate obsolete state registrations through the submission of Form U-5 or reinstate the NASD licenses through the filing of page 1 of Form U-4. No roster will be included if a firm does not have agents within this category.

    Final Adjusted Invoices

    Beginning January 15, 1998, 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, 1997. 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 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 end than it did in November, a credit/refund will be issued.

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

    Firms then will have a two-month period in which to reconcile any discrepancies on the rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final adjusted invoice package will appear in the January 1998 issue of Notice to Members, as well as on the inside cover of the renewal roster. Firms may also refer to their Renewal Edition of "Membership on Your Side" for details concerning the renewal process.

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

  • 97-68 SEC Approves Amendment To Definition Of Qualified Independent Underwriter In Conduct Rule 2720

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    Effective Date: September 4, 1997

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    Corporate Finance
    Legal & Compliance
    Syndicate



    Executive Summary

    On September 4, 1997, the Securities and Exchange Commission (SEC) approved an amendment to the definition of "qualified independent underwriter" in Rule 2720 of the National Association of Securities Dealers, Inc. (NASD®) Conduct Rules that eliminates the requirement that a member intending to act as a qualified independent underwriter in a public offering record net income in three of the five years immediately preceding the offering.1 The net income requirement was found to be an unreliable indicator of a member's ability to fulfill the responsibilities of a qualified independent underwriter. The amendment is effective as of the date of SEC approval with respect to all offerings of securities that have not, as yet, commenced sales of securities.

    Questions concerning this Notice may be directed to Richard J. Fortwengler, Associate Director, Corporate Financing, NASD Regulation, Inc., at (202) 974-2700.

    Background

    When a member proposes to participate in the distribution of a public offering of its own or an affiliate's securities, or of securities of a company with which it otherwise has a conflict of interest, NASD Rule 2720 requires that the price at which an equity issue or the yield at which a debt issue is to be distributed to the public must be established at a price no higher or a yield no lower than that recommended by a member acting as a "qualified independent underwriter." The qualified independent underwriter must also participate in the preparation of the offering document and is expected to exercise the usual standards of due diligence in respect thereto. The participation of a qualified independent underwriter assures the public of the independence of the pricing and due diligence functions in a situation where a member is participating in an offering where the member has an affiliation or conflict of interest.

    Because of the important investor protections provided by qualified independent underwriters, they must meet certain standards as prescribed in Rule 2720 of the Conduct Rules. Qualified independent underwriters must have a certain level of experience as demonstrated by having been engaged in the investment banking and securities business for at least five years; by recording net income in three of the five years immediately preceding the offering (net income requirement); by a majority of directors (or general partners) having been actively engaged in the investment banking and securities business for five years; and by acting as manager or co-manager in the underwriting of offerings of a similar size and type for a five-year period prior to the offering. Further, qualified independent underwriters may not be affiliates or own more than five percent of certain securities of the issuing company; are subject to provisions ensuring that associated persons of the member have not been convicted, suspended, barred or otherwise disciplined for actions related to an offering; and must agree to accept the legal responsibilities and liabilities of an underwriter under Section 11 of the Securities Act of 1933.

    The net income requirement referenced above was adopted in 1972 as part of the original provisions of Rule 2720, and was viewed as a gauge for monitoring a member's ability to act as a qualified independent underwriter. In the ensuing years, however, amendments to the definition of qualified independent underwriter have imposed more specific requirements that are more pertinent to ensuring that members have the experience and ability to be effective qualified independent underwriters.

    In particular, the definition of qualified independent underwriter was amended in 1988 to preclude a member from acting as a qualified independent underwriter if, within the previous five-year period, any of its associated persons having supervisory responsibility for organizing, structuring, or performing due diligence with respect to corporate public offerings of securities have been convicted, enjoined, suspended, barred, or otherwise subject to disciplinary action by the NASD, SEC or other self-regulatory organizations for violation of the anti-fraud provisions of the federal or state securities laws for distribution-related activities. 2 In addition, the 1988 amendments require a qualified independent underwriter to have experience in managing or co-managing public offerings of a size and type similar to the proposed offering. This latter requirement is the most pertinent, since it most directly measures the member's experience in performing the duties and responsibilities necessary of a qualified independent underwriter.

    Finally, the 1988 amendments restrict the beneficial ownership of the issuer's voting equity securities by the qualified independent underwriter to less than five percent. Later amendments in 1994 extended these ownership restrictions to non-voting equity securities, preferred equity, and subordinated debt. Taken together, these modifications to the definition of "qualified independent underwriter" have significantly improved confidence in the ability, quality, and integrity of qualified independent underwriters.

    Adoption of Amendment

    NASD RegulationSM believes that the net income requirement now operates as an arbitrary standard for assessing the abilities of potential qualified independent underwriters, particularly where members intentionally avoid experiencing net income for tax reasons. This occurs where a member is organized as either a sole proprietorship, partnership, or subchapter S corporation that routinely distributes its net income to the owner, partners, or shareholders to minimize taxes. The application of a net income requirement is not appropriate in these cases, as the legal structure of the member is a business decision within the discretion of the member that is unrelated to the firm's underwriting activities.

    In addition, a lack of net income may not be directly connected to the profitability of the member's underwriting activities and, thus, not a reliable indicia of underwriting experience, since the overall profitability of a member can be impacted by the performance of other business lines within multi-functional members. Losses in one or more departments of a member can unnecessarily disqualify the firm from acting as a qualified independent underwriter. The lack of net income can also reflect accounting anomalies related to infrequent events that result in charges against earnings for mergers, consolidations, restructurings, or divestitures.

    Finally, net income is also subject to the vagaries of the market, when a decline in income is often attributable to trading activities rather than underwriting. This was apparent during the five-year periods following the market breaks that occurred in October 1987 and October 1989, when a number of members failed to meet the net income requirement.

    In light of the foregoing, NASD Regulation has amended Rule 2720 to eliminate the net income requirement from the definition of "qualified independent underwriter," as it may operate as an unfair barrier or restraint that disqualifies otherwise qualified firms from acting as qualified independent underwriters. The elimination of the net income requirement allows the staff of NASD's Corporate Financing Department to focus on these more substantive requirements when approving members to be qualified independent underwriters.

    The amendment was approved by the SEC on September 4, 1997, and is effective as of that date with respect to public offerings to be filed after that date with the Corporate Financing Department for review, and with respect to public offerings that have been filed with the Corporate Financing Department but have not, as yet, commenced sales of securities.


    Text Of Amendment

    (Note: Deletions are bracketed.)

    CONDUCT RULES

    Rule 2720.   Distribution of Securities of Members and Affiliates—Conflicts of Interest

    (a) No change.
    (b) Definitions
    (15) Qualified independent underwriter3—a member which:
    (A) is actively engaged in the investment banking or securities business and which has been so engaged, in its present form or through predecessor broker/dealer entities, for at least five years immediately preceding the filing of the registration statement;
    [(B) in at least three of the five years immediately preceding the filing of the registration statement has had net income from operations of the broker/dealer entity or from the pro forma combined operations of predecessor broker/dealer entities, exclusive of extraordinary items, as computed in accordance with generally accepted accounting principles;] Paragraphs(C) through(G) redesignated as (B) through (F).

    Endnotes

    1 Securities Exchange Act Release No. 39021 (September 4, 1997).

    2 NASD Notice to Members 88-89 (November 1988).

    3 In the opinion of the Association and the Commission the full responsibilities and liabilities of an underwriter under the Securities Act of 1933 attach to a "qualified independent underwriter" performing the functions called for by the provisions of paragraph (c) hereof.

  • 97-67 NASD Regulation Institutes Firm Quote Compliance

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    97-67 Attachments (PDF Format)

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    To ensure that members fully comply with Securities and Exchange Commission (SEC) Rule 11Ac1-1 (Rule 11Ac1-1 or the firm quote rule), NASD Regulation, Inc., has developed an automated surveillance system (the Firm Quote Compliance System or FQCS) to permit the resolution of backing-away complaints on a real-time basis. FQCS will also, in the absence of complaints, identify firms that demonstrate a pattern of non-response to SelectNetSM liability orders. By utilizing the Firm Quote Compliance System, NASD RegulationSM is able to address backingaway complaints on a real-time basis with the intent of resolving such complaints with a contemporaneous trade execution, if warranted, and will look, on a historical basis, for patterns of behavior indicative of potential violations of Rule 11Ac1-1.

    A backing-away occurs when a member firm is not complying with its obligations under Rule 11Ac1-1(c). This rule requires a market maker to execute an order "presented" to it at a price at least as favorable as its published quotation up to its published quotation size. A market maker's obligation to fill an order begins at the time the order is "presented," regardless of how the order is transmitted to the market maker. Exceptions to Rule 11Ac1-1 exist only if: (i) the market maker revises its quoted price or size to The Nasdaq Stock MarketSM prior to presentation of an order; or (ii) the market maker has effected or is in the process of effecting a transaction at the time an order is presented and, immediately upon completion of that transaction, communicates a revised quotation to The Nasdaq Stock Market. Violations of Rule 11Ac1-1 may also violate Conduct Rule 3320 and Marketplace Rule 4613(b), which require a market maker to trade at its quotation and up to its quotation size when presented with an order.

    In light of the establishment of the Firm Quote Compliance System, NASD Regulation's Market Regulation Department has instituted procedures to immediately address complaints during the trading day. Any potential backing-away complaint should be brought to the attention of the Market Regulation Department within five (5) minutes of the alleged backing-away by calling (800) 925-8156. If a complaining firm does not contact the staff within five (5) minutes, it will be difficult for the staff to obtain a contemporaneous trade execution, if warranted, from the market maker. Firms also are encouraged, but not required, to contact the other firm to seek resolution of their complaint. Firms that contact the other side first will not be held to the five- (5) minute time period of contacting the Market Regulation Department. However, they must contact the other side within five minutes and, if there is no resolution, they must contact the Market Regulation Department immediately after their contact with the other firm. Also, although the staff will review and investigate complaints which are faxed or received by telephone after the five- (5) minute period, the staff may not be able to assist in obtaining a contemporaneous trade execution for those complaints. Failure of the complaining firm to contact the market maker or the staff within five (5) minutes of the alleged backing-away is not, and has never been interpreted by NASD Regulation as, a defense to a backing-away violation.

    In processing the alleged backingaway complaints and other potential rule violations identified by the Firm Quote Compliance System, NASD Regulation will not pursue immediate disciplinary action for an individual backing-away complaint in which a contemporaneous trade execution is obtained or offered. However, the staff will keep a record of, and gather information concerning, such incidents to determine if a firm has demonstrated a pattern of non-compliance with the firm quote rule. Thus, these violations could result in disciplinary action. The staff will investigate individual instances of backing-away and consider disciplinary action if the staff believes that a contemporaneous execution is warranted, but the market maker refuses to provide the fill upon the staff's request.

    Members are also encouraged to carefully read the applicable sections of the SEC Section 21(a) report, which contains a discussion of a market maker's obligations under Rule 11Ac1-1 as well as specific situations which the SEC considers to be violations of the firm quote rule. Following are some guidelines that market makers should be aware of:

    1. Cancellation of Preferenced SelectNet Liability Orders. The fact that a preferenced SelectNet order is canceled by the order entry firm before the three-minute time period does not eliminate a firm's firm quote obligation with respect to that order while it was "live." Patterns of delay in filling liability orders may indicate non-compliance with Rule 11Ac1-1. A market maker's obligation to fill an order begins when the order is presented, not upon expiration of the three-minute time period.
    2. Failure to Act on a Preferenced SelectNet Liability Order. The fact that preferenced SelectNet liability orders may have scrolled off the screen on the Nasdaq Workstation terminal is not an exception to Rule 11Ac1-1. Members should take whatever steps they deem appropriate to ensure that preferenced liability orders received through SelectNet are monitored and responded to in conformance with the firm quote rule.
    3. No Trade-Ahead Exception for SOES Executions Received After a Preferenced SelectNet Liability Order. A trade-ahead exception will not be permitted for Small Order Execution SystemSM (SOESSM) executions received after presentment of a preferenced SelectNet liability order. As stated in the SEC's Section 21(a) report, "[b]ecause SOES executions are automatic and instantaneous, a market maker could not have been in the process of executing a SOES order that was received after a Select-Net order."
    4. No Automatic Trade-Ahead Exception. A trade-ahead exception for trades that are reported after the presentment of a liability order will not be permitted if a market maker executes a trade absent proof, such as the time of order entry, that the market maker was in the process of executing the order prior to presentment of the preferenced SelectNet liability. Additionally, the market maker must immediately update its published quotation subsequent to the execution.
    5. Late quote update. A quote update without any accompanying trade report must occur prior to, or simultaneous with, the presentment of a SelectNet liability order or telephone order to be considered an exception to Rule 11Ac1-1.
    6. System Problems, Extreme Weather, Flood of SelectNet Liability Orders. Situations such as firm system problems, extreme weather conditions, and a flood of other SelectNet orders surrounding a SelectNet liability order may be viewed as mitigating factors, but not exceptions, to Rule 11Ac1-1.

    On July 16, 1997, the SEC sent a letter to the National Association of Securities Dealers, Inc. (NASD®) and NASD Regulation providing guidance on a variety of firm quote compliance issues. (The NASD's July 7, 1997 inquiry and the SEC's July 16, 1997 letter in response are attached to this Notice.) Based on the guidance provided in the SEC's letter dated July 16, 1997, the staff will continue to analyze the SOES/Select-Net "double-hit" issue on a factsand-circumstances basis and will continue to review firms that demonstrate a pattern of non-responsiveness to SelectNet liability orders after presentment. In addition, the SEC's letter implicitly reiterates the SEC staff's position that a preferenced SelectNet order is deemed to be presented to the recipient of that order for purposes of Rule 11Ac1-1 upon delivery of that order to the firm. Indeed, the SEC's letter reaffirms statements made in the SEC's Section 21(a) report that, "[t]he firm quote rule is triggered when an order is ‘presented’ to the market maker. Because all directed Select-Net orders are delivered electronically to a particular market maker, the presentment of an order is readily ascertainable."

    Member firms should discuss the items set forth in this Notice and the SEC's letter dated July 16, 1997, with their traders and remind them of their obligations under Rule 11Ac1-1. Member firms should also implement adequate written supervisory procedures to detect and deter potential firm quote violations. Failure to have an adequate supervisory system in place may result in disciplinary action. In addition, firms should ensure that they have adequate staff and/or systems technology to immediately respond to SelectNet orders. In the near future, NASD Regulation will publish a Notice to Members to provide firms with general guidance on implementing supervisory procedures relating to the firm quote rule and other areas.

    Questions regarding this Notice may be directed to NASD Regulation's Market Regulation Department, at (800) 925-8156.

  • For Your Information

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    SEC Extends Arbitration Rules

    On September 5, 1997, the Securities and Exchange Commission (SEC) approved a five-year extension of the rules governing large and complex cases in National Association of Securities Dealers, Inc. (NASD®) arbitration—Rule 10334 of the NASD Code of Arbitration Procedure (Code)—to August 1, 2002. In addition to extending the rules for five years, the rule was amended to make its application entirely voluntary. Prior to the change, the parties in any case involving more than $1 million in dispute were required to participate in an Administrative Conference to discuss whether the case would be administered under the Procedures for Large and Complex Cases or under the regular procedures of the Code. Under the amended rule, participation in the Administrative Conference will be voluntary.

  • 97-66 Industry/Regulatory Council On Continuing Education Publishes Firm Element Practices And Council Commentary

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    Continuing Education
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    Executive Summary

    On February 8, 1995, the Securities and Exchange Commission (SEC) approved Rule 1120 (formerly Schedule C, Part XII of the National Association of Securities Dealers, Inc., By-Laws) of the NASD® Membership and Registration Rules, which prescribes requirements for the Securities Industry Continuing Education Program (Program). The Program has two elements—a Regulatory Element and a Firm Element—and became effective July 1, 1995.

    The Securities Industry/Regulatory Council on Continuing Education (Council) includes 13 members representing a cross-section of securities firms and six self-regulatory organizations (SROs).1 Both the SEC and the North American Securities Administrators Association have appointed liaisons to the Council.

    The Council facilitates industry/regulatory coordination of the administration and future development of the Program. Council duties include recommending and helping to develop specific content and questions for the Regulatory Element, and minimum core curricula for the Firm Element. The Council also periodically reports on the Program's progress, and issues guidelines to help broker/dealers comply with the requirements of the Firm Element (see Notice to Members 96-69, October 1996).

    The Council has now published Firm Element Practices and Council Commentary (Firm Element Practices), which contains the needs analyses and Firm Element training plans of eight broker/dealers. Firm Element Practices illustrates approaches to Firm Element compliance from three general securities firms, one investment banking firm, two insurance affiliated broker/dealers, and two independent contractor broker/dealers, all ranging in size from small to large. In accompanying commentary on each firm's plan, the Council discusses what it considers the plan's strong and weak aspects.

    The NASD joins the Council in recommending that every firm review Firm Element Practices for useful ideas and approaches to the continuing education requirements. Both the NASD and the Council caution, however, that the training plans contained in Firm Element Practices do not constitute a "safe harbor" of any kind. Specifically, every firm has unique needs and characteristics that should be identified and addressed in the firm's own Firm Element training plan. It is the unique features of each firm's needs analysis and training plan that SRO examiners focus on during the examination process.

    The NASD encourages member firms to complete the Reader Survey included in Firm Element Practices so the Council can ensure that future editions of Firm Element Practices will address member firm needs.

    Copies of Firm Element Practices are available for $10 from NASD MediaSource, at (301) 590-6142. The document will also be available on the NASD RegulationSM Web Site, www.nasdr.com, on November 1, 1997.

    Questions about this Notice may be directed to the following NASD Regulation staff: John Linnehan, Director, Continuing Education, at (301) 208-2932 or Daniel M. Sibears, Vice President, Member Regulation, at (202) 728-6911 for compliance or examination inquiries.


    Endnotes

    1 The American Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., the Municipal Securities Rulemaking Board, the National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc., and the Philadelphia Stock Exchange, Inc.

  • 97-65 Administrative Termination Of Registrations Inactive For Two Years For Failing To Comply With Continuing Education Regulatory Element Requirements; CRD To Provide Firms With Advisory Messages

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    Registration



    Executive Summary

    This Notice is to remind firms that registered persons whose registrations become inactive as defined in Rule 1120 of the National Association of Securities Dealers, Inc. (NASD®) Membership and Registration Rules (Continuing Education Requirements), and who remain inactive for two years, will be administratively terminated and can re-register only by reapplying for registration and requalifying by examination.

    Beginning August 29, 1997, the Central Registration Depository (CRDSM) will provide firms with advisory messages approximately 60 days before the effective date of an administration termination for being inactive for two years (see Exhibit 1), and when the administrative termination occurs (see Exhibit 2).

    Questions about this Notice may be directed to John Linnehan, Director, Continuing Education, NASD RegulationSM, at (301) 208-2932 or to the following CRD Quality & Service Teams:

    Team 1 (301) 921-9499
    Team 2 (301) 921-9444
    Team 3 (301) 921-9445
    Team 4 (301) 921-6664
    Team 5 (301) 921-6665

    Background

    NASD Membership and Registration Rule 1120 (Continuing Education Requirements) (Rule) requires persons registered 10 years or less to take the Regulatory Element computer-based training within 120 days after the occurrence of the second, fifth, and tenth anniversaries of their initial registration date. Persons who are the subject of a significant disciplinary action, as defined by the Rule, must take the Regulatory Element training within 120 days after the effective date of the significant disciplinary action and then within 120 days after the occurrence of the second, fifth, and tenth anniversaries of the disciplinary action. Any registered person who has not completed the Regulatory Element within the prescribed time frames will have his or her registration deemed inactive until the requirements of the program have been satisfied. Any person whose registration has been deemed inactive must cease all activities as a registered person and is prohibited from performing, or being compensated for, any duties requiring a securities registration. The Rule also stipulates that a registration that is inactive for a period of two years will be administratively terminated. A person whose registration is administratively terminated must reapply for registration and requalify by examination.


    EXHIBIT 1

    CENTRAL REGISTRATION DEPOSITORY

    P.O.BOX 9401 * GAITHERSBURG, MARYLAND 20898-9401 * (301)590-6500

    CONTINUING EDUCATION PROGRAM ADVISORY MESSAGE
    REGISTERED REPRESENTATIVE NAME REPORT DATE 8/29/97
    CRD # SS #  
    CE TWO YEAR TERMINATION WARNING NOTICE
    The individual listed above is subject to the Continuing Education Program. The individual has not completed the Continuing Education Session listed below and is currently INACTIVE. If the session is not completed by 10/29/97, the individual's securities registrations will be TERMINATED, and the individual will have to reapply for registration and requalify by examination.
    BEGIN DATE: 7/1/95 END DATE: 10/29/95
    *** Avoid surprises! Always determine a new-hire's CE status ***
      BD #

    BD NAME
    BD STREET ADDRESS
    CITY, STATE POSTAL CODE

    ATTN : BD CONTACT


    EXHIBIT 2

    CENTRAL REGISTRATION DEPOSITORY

    P.O.BOX 9401 * GAITHERSBURG, MARYLAND 20898-9401 * (301)590-6500

    CONTINUING EDUCATION PROGRAM ADVISORY MESSAGE
    REGISTERED REPRESENTATIVE NAME REPORT DATE 10/30/97
    CRD # SS #  
    CE TWO YEAR TERMINATION NOTICE
    The individual listed above was subject to the Continuing Education Program. The individual did not complete the Continuing Education Session listed below and has been INACTIVE for two years. As of 10/30/97 the individual's securities registrations have been TERMINATED. The individual must now reapply for registration and requalify by examination.
    BEGIN DATE: 7/1/95 END DATE: 10/29/95
    *** Avoid surprises! Always determine a new-hire's CE status ***
      BD #

    BD NAME
    BD STREET ADDRESS
    CITY, STATE POSTAL CODE

    ATTN : BD CONTACT

  • 97-64 Fixed Income Pricing System Additions, Changes, And Deletions As Of August 22, 1997

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    Institutional
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    Operations
    Systems
    Trading



    As of August 22, 1997, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

    Symbol Name Coupon Maturity
    BOR.GB Borg-Warner Security Corp 9.625 03/15/07
    FNWH.GA First Nationwide Holdings Inc 10.625 10/01/04
    PRTL.GA Primus Telecommunication 11.750 08/01/04
    WMAS.GF Western Mass Electric Co 7.375 07/01/01
    TCIC.GA TCI Communications Inc 9.650 03/31/27
    DSIO.GA DecisionOne Corp 9.750 08/01/07
    GIDL.GA Giddings & Lewis Inc. Wis 7.500 10/01/05
    HDS.GB Hills Stores Company 12.500 07/01/03

    As of August 22, 1997, the following bonds were deleted from the Fixed Income Pricing System.

    Symbol Name Coupon Maturity
    CVC.GA Cablevision Systems Corp 10.750 04/01/04
    BGLV.GA Bally's Grand Inc 10.375 12/15/03
    BPPF.GA Bally's Park Place Funding Inc 9.250 03/15/04
    NMK.GB Niagara Mohawk Power Corp 6.350 08/01/97
    TEDP.GA Toledo Edison Company 6.125 08/01/97
    HAY.GA Hayes Whells International Inc 9.250 11/15/02

    As of August 22, 1997, changes were made to the names and symbols of the following FIPS bonds:

    New Symbol Name Coupon Maturity Old Symbol
    TFIP.GA TCI Communications Fing III 9.650 03/31/27 TCIC.GA

    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.

  • 97-63 Columbus Day: Trade Date — Settlement Date Schedule

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    Operations

    Syndicate
    Systems
    Trading



    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 13, 1997. On this day, The Nasdaq Stock MarketSM and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

    Trade Date Settlement Date Reg. T Date*
    Oct. 6 Oct. 9 Oct. 13
    7 10 14
    8 14 15
    9 15 16
    10 16 17
    13 16 20
    14 17 21

    Note: October 13, 1997, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

    Transactions made on Monday, October 13, will be combined with transactions made on the previous business day, October 10, for settlement on October 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 October 13.


    * 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."

  • 97-62 SEC Transaction Fees For Off-Exchange Transactions In Exchange-Registered Securities; Refinement Of SEC Fee Rate Algorithm

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    Corporate Finance
    Institutional
    Legal & Compliance

    Operations
    Systems
    Trading



    Executive Summary

    The National Association of Securities Dealers, Inc. (NASD®) is reminding member firms that, effective October 1, 1997, the Securities and Exchange Commission (SEC) Transaction Fees for transactions in exchange-registered securities traded off an exchange will be collected by the NASD. Currently, NASD members remit these fees directly to the SEC.

    Questions regarding this Notice should be directed to James Shelton, Billing Manager, NASD Regulation, Inc., at (301) 590-6757.

    SEC Transaction Fees

    In Special Notice to Members 96-81 (December 3, 1996), the NASD published detailed information concerning the SEC Transaction Fee (SEC fee) as outlined in the National Securities Market Improvement Act of 1996. Effective January 1, 1997, the SEC fee applies to transactions by or through any member other than on a securities exchange for securities subject to prompt last-sale reporting. This included securities listed on The Nasdaq Stock MarketSM (Nasdaq®), as well as other non-Nasdaq OTC Equity Securities.

    As previously reported in NTM 96-81, the National Securities Market Improvement Act also provides that off-exchange transactions in exchange-registered securities (thirdmarket transactions), currently paid directly to the SEC, will be paid through the NASD beginning October 1, 1997.

    Covered Securities/Fee Rate

    The SEC fee will apply to all thirdmarket transactions in exchange-registered securities other than bonds, debentures and other evidences of indebtedness.

    The rate for the SEC fee for third-market transactions is 1/300th of one percent of the aggregate dollar amount of sales. This rate will remain fixed through fiscal year 2006. In fiscal year 2007, the rate will decline to 1/800th of one percent.

    Covered Transactions

    The SEC fee for third-market transactions applies generally to all transactions by or through any member of the NASD otherwise than on a national securities exchange of securities registered on such an exchange. For transactions between two NASD members, the charge will apply to the member on the sell side. For transactions between a member and a nonmember or customer, the charge will apply to the member.

    Collection Mechanism — Automated Trading Reports

    The SEC fee for third-market transactions will be collected in the same manner as the SEC fee for transactions in Nasdaq securities and OTC Equity Securities. Payment will be the responsibility of the NASD member clearing firms. The NASD will calculate the SEC fee based on transaction data submitted into the Automated Confirmation Transaction ServiceSM (ACTSM) for reporting purposes. NASD member clearing firms with primary clearing relationships with the National Securities Clearing Corporation (NSCC) or the Stock Clearing Corporation of Philadelphia (SCCP) will have the SEC fees deducted from their respective NSCC or SCCP settlement accounts on a monthly basis. An NASD-generated invoice will be forwarded to the firm as a confirmation of the deduction from their respective settlement accounts. Member clearing firms that are considered self-clearing (i.e., that have no relationship with NSCC or SCCP) will be billed directly, with payment terms due upon receipt.

    Collection Mechanism — Odd-Lot/Exercised Options Report

    Member firms that conduct odd-lot transactions (i.e., less than 100-share trading units) for third-market securities that are not trade reported to ACT, or that process exercised options that are not reported to the secondary market, will be required to submit transaction information on a monthly basis on the NASD's "SEC Fee Odd-Lot & Exercised Options Report" to pay the required fee on SEC fee-eligible securities. Member firms that do not conduct these types of transactions may request a filing exemption in writing.

    SEC Fee Rate Refinement

    The NASD currently uses a seven digit decimal rate (0.0000333) for the SEC fee that is applied to all SEC fee-eligible transactions. At the request of the SEC, the billing algorithm will be refined to more clearly reflect the requirements of the National Securities Market Improvement Act. Effective for all SEC feeeligible trades beginning January 1, 1998, the formula will be applied as follows: (contract amount times one percent times 1/300th). Please reflect this change in your business processes accordingly.

  • 97-61 SOES Tier Size Levels Set To Change October 1, 1997

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    Trading



    Executive Summary

    Effective October 1, 1997, tier sizes for 537 Nasdaq National Market® securities will be revised in accordance with NASD® Rule 4710(g).

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

    Description

    Under Rule 4710, the maximum Small Order Execution SystemSM (SOESSM) order size for a Nasdaq National Market security is 1,000, 500, or 200 shares depending on the trading characteristics of the security. The Nasdaq Workstation IITM indicates the maximum SOES order size for each Nasdaq National Market security in its bid/offer quotation display. The indicator "NM10," "NM5," or "NM2" is displayed to the right of the security name, corresponding to a maximum SOES order size of 1,000, 500, or 200 shares, respectively.

    The criteria for establishing SOES tier sizes are as follows:

    • A 1,000-share tier size was applied to those Nasdaq National Market securities that had an average daily non-block volume of 3,000 shares or more a day, a bid price that was less than or equal to $100, and three or more market makers.


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


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


    • In accordance with Rule 4710, Nasdaq periodically reviews the SOES tier size applicable to each Nasdaq National Market security to determine if the trading characteristics of the issue have changed so as to warrant a tier size adjustment. Such a review was conducted using data as of June 30, 1997, pursuant to the aforementioned standards. The SOES tier-size changes called for by this review are being implemented with three exceptions.

    • First, issues were not permitted to move more than one tier-size level. For example, if an issue was previously categorized in the 1,000-share tier, it would not be permitted to move to the 200-share tier, even if the formula calculated that such a move was warranted. The issue could move only one level to the 500-share tier as a result of any single review. In adopting this policy, the NASD was attempting to maintain adequate public investor access to the market for issues in which the tier-size level decreased and to help ensure the ongoing participation of market makers in SOES for issues in which the tier-size level increased.


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


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


    • In addition, with respect to initial public offerings (IPOs), the SOES tier-size 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 June 30, 1997, were not subjected to the SOES tier size review.

    Following is a listing of the 537 Nasdaq National Market issues that will require a SOES tier-level change on October 1, 1997.

    Nasdaq National Market SOES Tier-Size Changes
    All Issues In Alphabetical Order By Security Name
    (Effective October 1, 1997)
    Symbol Company Name Old Tier Level New Tier Level
    A
    AAII APPLIED ANALYTICAL 500 1000
    AANB ABIGAIL ADAMS NATL 500 1000
    AASI ADVANCED AERO CL A 500 1000
    AASIW ADVANCED AERO WT A 500 1000
    ABFI AMERICAN BUS FIN SVC 500 1000
    ABFSP ARKANSAS BEST CV PFD 500 1000
    ACCB ACCESS BEYOND INC 500 1000
    ACCL ACCELGRAPHICS INC 200 500
    ACLE ACCEL INTL CP 1000 500
    ACLR ACCENT COLOR SCIENCE 500 1000
    ACLY ACCELER8 TECH CORP 500 1000
    ADECY ADECCO SA ADR 200 500
    AFCX A F C CABLE SYS INC 500 1000
    AFED AFSALA BANCORP INC 1000 500
    AGTX APPLIED GRAPHICS TEC 500 1000
    AHEPZ AMER HEALTH DEP SHRS 1000 500
    AHLS A H L SERVCES INC >#/td> 200 500
    ALLE ALLEGIANT BNCP INC 200 500
    ALRI ALLERGAN LIGAND RET 200 500
    AMBC AMER BNCP OHIO 500 200
    AMIE AMBASSADORS INTL INC 1000 500
    AMPI AMPLICON INC 500 200
    AMRS AMERUS LIFE HLDGS 500 1000
    AMSN AMSCAN HLDGS INC 500 1000
    AMTD AMERITRADE HLDG A >#/td> 200 500
    AMZN AMAZON.COM INC 200 500
    ANDR ANDERSEN GROUP INC 200 500
    APEX APEX PC SOLUTIONS 200 500
    AREA AREA BANCSHARES CP 200 500
    ARGL ARGYLE TELEVISION A 500 1000
    ARSD ARABIAN SHIELD DEV 500 1000
    ARTW ART S WAY MFG CO INC 200 500
    ASBP A S B FINANCIAL CP 1000 500
    ASFN ALLSTATE FINL CP 1000 500
    ASIGF ANSALDO SIGNAL NV 500 1000
    ASIS ASI SOLUTIONS INC 200 500
    ASTM AASTROM BIOSCIENCES 500 1000
    ATAC AFTERMARKET TECH CP 500 1000
    ATLPA ATL PRODUCTS CL A 200 500
    AXYS AXSYS TECHS INC 500 1000
    B
    BACU BACOU USA INC 500 1000
    BANCP BBC CAPITAL TR I PFD 200 500
    BCGA BANK CORP OF GEORGIA 500 200
    BCIS BANCINSURANCE CP 1000 500
    BCORY BIACORE INTL AB ADR 500 1000
    BEAS B E A SYSTEMS INC 200 500
    BEXP BRIGHAM EXPLORATION 200 500
    BFEN B F ENTERPRISES INC 500 200
    BFFC BIG FOOT FIN CORP 500 1000
    BGAS BERKSHIRE GAS CO 1000 500
    BGSS B G S SYSTEMS INC 500 1000
    BHIKF B H I CORP 500 1000
    BINX BIONX IMPLANTS INC 200 500
    BKCT BANCORP CONN INC 500 1000
    BKLA BANK OF LOS ANGELES 500 1000
    BKNG BANKNORTH GP INC 500 1000
    BKUNO BANKUNITED FIN PFD 200 500
    BLCI BROOKDALE LIVING COM 200 500
    BLSC BIO LOGIC SYS CP 500 1000
    BMAN BIRMAN MANAGED CARE 500 1000
    BMCCP BANDO MCGLOC PFD A 500 200
    BONEO BANC ONE CP PFD C 1000 500
    BORAY BORAL LTD ADS 500 200
    BOTX BONTEX INC 500 200
    BOXXA BOX ENERGY CP CL A 200 500
    BOYD BOYD BROS TRANS INC 500 1000
    BPOPP POPULAR INC PFD A 500 1000
    BRZS BRAZOS SPORTSWEAR 1000 500
    BSTE BIOSITE DIAGNOSTIC 500 1000
    BTEK BALTEK CP 200 500
    BTIC BRUNSWICK TECHS INC 500 1000
    BTRN BIOTRANSPLANT INC 500 200
    BWLN BOWLIN OUTDOOR ADVER 500 1000
    C
    CAFI CAMCO FINANCIAL CP 1000 500
    CALM CAL-MAINE FOODS INC 500 1000
    CANX CANNON EXPRESS INC 200 500
    CAPS CAPITAL SAV BNCP INC 500 1000
    CARD CARDINAL BSCHS INC 500 1000
    CASS CASS COMMERCIAL CORP 200 500
    CBBI C B BANCSHARES INC 500 1000
    CBCG C B COMM REAL ESTATE 500 1000
    CBHI C BREWER HOMES INC A 1000 500
    CBMD COLUMBIA BANCORP MD 1000 500
    CBSL COMPLETE BUSINESS 200 500
    CCBC CALIFORNIA COMM BCSH 200 500
    CDEN COAST DENTAL SVCS 500 1000
    CDIR CONCEPTS DIRECT INC 500 200
    CDWN COLONIAL DOWNS CL A 200 500
    CENI CONESTOGA ENTRPR INC 500 1000
    CERS CERUS CORP 500 1000
    CFAC CENTRAL FIN ACCEPT 500 1000
    CFIC COMMUNITY FIN CP 1000 500
    CFIN CONSUMERS FIN CP 200 500
    CFINP CONSUMERS FIN CP PFD 200 500
    CFNC CAROLINA FINCORP INC 500 1000
    CHCO CITY HOLDING CO 1000 500
    CINS CIRCLE INCOME SHARES 1000 500
    CLNPP CALLON PETRO PFD A 500 200
    CLTDF COMPUTALOG LTD 500 200
    CLTR COULTER PHARM INC 500 1000
    CMDAW CAM DESIGNS INC WTS 500 200
    CMSS CREDIT MGMT SOLU 500 1000
    CNBA CHESTER BANCORP INC 1000 500
    CNBC CENTER BANCORP INC 200 500
    CNBF C N B FINANCIAL CP 500 200
    CNBI C N BIOSCIENCES INC 500 1000
    COBI COBANCORP INC 500 1000
    COLTY C O L T TELECOM ADR 500 1000
    COSC COSMETIC CENTER CL C 200 500
    COSE COSTILLA ENERGY INC 500 1000
    COVB COVEST BANCSHARES 1000 500
    CPLNY CONCORDIA PAPER ADS 200 500
    CRBO CARBO CERAMICS INC 500 1000
    CRESY CRESUD SACIF ADR 200 500
    CRYSF CRYSTAL SYSTEMS SOL 500 1000
    CTBIP CTBI PFD CAP TRUST 200 500
    CTIC CELL THERAPEUTICS # 200 500
    CTRIS CLEVETRUST RLTY SBI 500 1000
    CTWS CONN WATER SVCS INC 1000 500
    CVTX C V THERAPEUTICS INC 500 1000
    CWTR COLDWATER CREEK INC 500 1000
    CYFN CENTURY FINANCIAL CP 200 500
    D
    DAHX DECRANE AIRCRAFT 200 500
    DAOU D A O U SYSTEMS INC 500 1000
    DARL DARLING INTL INC 500 200
    DATX DATA TRANSLATION 500 1000
    DAVE FAMOUS DAVES OF AMER 500 1000
    DCBI DELPHOS CITIZENS BCP 500 1000
    DCRNW DIACRIN INC WT 1000 500
    DEVC DEVCON INTL CP 1000 500
    DGIC DONEGAL GROUP INC 1000 500
    DIGL DIGITAL LIGHTWAVE 500 1000
    DITI DIATIDE INC 500 1000
    DLIA DELIA*S INC 500 1000
    DLTK DELTEK SYSTEMS INC 200 500
    DMAR DATAMARINE INTL INC 1000 500
    DNCC DUNN COMPUTER CORP 200 500
    DOCDF DOCDATA NV 200 500
    DTAM DATAMARK HOLDING INC 500 1000
    DTMC D T M CORP 200 500
    DTPI DIAMOND TECH PTNRS 200 500
    DXCPP DYNEX CAPITAL PFD A 1000 500
    E
    EACO E A ENGRG SCI TECH 1000 500
    EAII ENGINEERING ANMTN 500 1000
    ECSGY ECSOFT GROUP PLC ADR 500 1000
    ECSI ENDOCARDIAL SOLUTION 200 500
    EDCO EDISON CONTROL CP 200 500
    EDMD EDUCATIONAL MEDICAL 500 1000
    EDSE E S E L C O INC 500 200
    EEFT EURONET SVCS INC 200 500
    EFBC EMPIRE FED BANCORP 500 1000
    EGLB EAGLE BANCGROUP INC 1000 500
    EIDSY EIDOS PLC ADR 500 1000
    EIRE EMERALD ISLE BANCORP 1000 500
    ELET ELLETT BROTHERS INC 500 1000
    ELGT ELECTRIC & GAS TECH 500 1000
    ELNK EARTHLINK NETWORK 500 1000
    ELTKF E L T E K LTD 500 1000
    ELXS E L X S I CP 500 1000
    EMITF ELBIT MED IMAGING 500 1000
    EMKR EMCORE CORP 200 500
    EMSI EFFECTIVE MGMT SYS 1000 500
    ENMC ENCORE MEDICAL CORP 200 500
    ENMCW ENCORE MEDICAL CP WT 200 500
    ENSR ENSTAR INC 200 500
    ENTS PHYSICIANS SPECIALTY 200 500
    EPEX EDGE PETROLEUM CP # 200 500
    EPTO EPITOPE INC 500 1000
    ERGB ERGOBILT INC 500 1000
    ESCA ESCALADE INC 1000 500
    ESLTF ELBIT SYSTEMS LTD 500 1000
    ESPRY ESPRIT TELECOM ADR 200 500
    EVAN EVANS INC 500 1000
    EXAC EXACTECH INC 1000 500
    F
    FARM FARMER BROTHERS CO 200 500
    FATS FIREARMS TRAINING 500 1000
    FAVS FIRST AVIATION SVCS 200 500
    FBAYF FRISCO BAY INDUS 1000 500
    FBCG FIRST BKG CO SE GA 200 500
    FBCI FIDELITY BANCORP DEL 1000 500
    FBNC FIRST BANCP TROY NC 500 200
    FBNKO FIRST PFD CAP TR PFD 500 1000
    FCBF F C B FINANCIAL CP 500 1000
    FCNCA FIRST CITIZENS CL A 1000 500
    FCPY FACTORY CARD OUTLET 500 1000
    FFED FIDELITY FED BNCP 1000 500
    FFHH FSF FINANCIAL CP 1000 500
    FFIN FIRST FINL BKSHS INC 500 1000
    FFLC FFLC BNCP INC 1000 500
    FIFS FIRST INV FIN SVC GP 1000 500
    FKFS FIRST KEYSTONE FIN 1000 500
    FLCHF FLETCHER'S FINE FOOD 500 200
    FLGS FLAGSTAR BANCORP # 200 500
    FLYAF C H C HELICO CL A 500 200
    FMAR FIRST MARINER BNCP 500 1000
    FOBBA FIRST OAK BROOK CL A 500 1000
    FOBC FED ONE BANCORP INC 1000 500
    FORR FORRESTER RESEARCH 500 1000
    FOUR FOUR MEDIA COMPANY 500 1000
    FPBN F P BANCORP INC 1000 500
    FREEY FREEPAGES GR PLC ADR 200 500
    FRME FIRST MERCHANTS CP 1000 500
    FRPP F R P PROPERTIES INC 500 200
    FSBI FIDELITY BANCORP INC 500 200
    FSBIP FB CAPITAL TR PFD 200 500
    FSBT FIRST STATE CP 200 500
    FSFH FIRST SIERRA FIN INC 200 500
    FSNJ FIRST SAV BK OF NJ 1000 500
    FSTC FIRST CITIZENS CORP 200 500
    FTCG FIRST COLONIAL GP 500 200
    FTFN FIRST FIN CP (RI) 1000 500
    FTMTF FANTOM TECHS INC 1000 500
    FVHI FIRST VIRTUAL HLDGS 500 1000
    FWRX FIELDWORKS INC 200 500
    G
    GBBK GREATER BAY BANCORP 1000 500
    GBBKP GBB CAP I CUM TR PFD 200 500
    GBCI GLACIER BANCORP 500 1000
    GEOC GEOTEL COMMUN CP 500 1000
    GETTY GETTY COMMUN ADR 500 1000
    GFCO GLENWAY FIN CP 500 200
    GFED GUARANTY FED SAV BK 500 1000
    GFNL GRANITE FINANCIAL 1000 500
    GGEN GALAGEN INC 500 1000
    GIFI GULF ISLAND FABRIC 200 500
    GLDB GOLD BANC CORP INC 500 1000
    GLTB GOLETA NATL BANK 500 200
    GMCC GEN MAGNAPLATE CP 500 200
    GMRK GULFMARK OFFSHORE 200 500
    GNCNF GORAN CAPITAL INC 1000 500
    GRERF GREENSTONE RESOURCES 500 1000
    GRLL ROADHOUSE GRILL INC 500 1000
    GSBI GRANITE STATE BKSHS 500 1000
    GSLA G S FINANCIAL CP 200 500
    GSLC GUARANTY FIN CP 1000 500
    GTPS GREAT AMER BNCP INC 1000 500
    GTRC GUITAR CENTER INC 200 500
    H
    HABK HAMILTON BANCORP INC 200 500
    HACH HACH CO 500 1000
    HCBB HCB BANCSHARES INC 200 500
    HCCO HECTOR COMMUN CP 500 1000
    HCFP HEALTHCARE FIN PTRS 500 1000
    HECHB HECHINGER CO CL B 500 1000
    HELI HELISYS INC 1000 500
    HFFB HARRODSBURG FIRST 500 200
    HFGI HARRINGTON FIN GRP 500 1000
    HIFS HINGHAM INSTI SAVING 200 500
    HIHOF HIGHWAY HLDGS LTD 500 1000
    HMII H M I INDUSTRIES INC 1000 500
    HMLD HOMELAND HLDG CORP 200 500
    HMLK HEMLOCK FED FIN CORP 200 500
    HPSC H P S C INC 1000 500
    HYDEB HYDE ATHLETIC INDS B 500 1000
    I
    IATA IAT MULTIMEDIA # 200 500
    ICGX ICG COMMUNICATION # 200 500
    ICIQ INTL COMPUTEX INC 200 500
    ILABY INSTRUMENTATION ADR 1000 500
    ILOGY I L O G ADR 500 1000
    ILXO I L E X ONCOLOGY INC 200 500
    IMGXP NETWORK IMGNG CP PFD 500 1000
    IMGXW NETWORK IMAGING WTS 500 1000
    INDQB INTL DAIRY QUEEN B 500 200
    INHO INDEPENDENCE HLDG CO 500 1000
    INLD INLAND CASINO CP 200 500
    IONAY IONA TECHS ADR # 200 500
    IPSW IPSWICH SAV BK 1000 500
    IQST INTELLIQUEST INFO GP 500 1000
    ITCC ITC LEARNING CORP 500 1000
    ITGR INTEGRITY INC 1000 500
    ITIC INVESTORS TITLE CO 1000 500
    IUBC INDIANA UNITED BNCP 500 200
    IVBK INTERVISUAL BOOKS 1000 500
    J
    JEFFP J B I CAPITAL TR PFD 200 500
    JLNY JENNA LANE INC # 200 500
    JLNYW JENNA LANE INC WTS 200 500
    JPEI J P E INC 500 1000
    JRBK JAMES RIVER BKSHS 200 500
    JUDG JUDGE GROUP INC 500 1000
    K
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  • 97-60 SEC Approves New Procedures For Granting Exemptions To NASD Rules

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    SUGGESTED ROUTING

    Senior Management
    Legal & Compliance



    Executive Summary

    On August 7, 1997, the Securities and Exchange Commission (SEC) approved amendments to the National Association of Securities Dealers, Inc. (NASD®) Code of Procedure setting forth, among other things, general procedures for members to apply for exemptions under various rules and conforming changes to provide exemptive authority for particular rules. The new rules supersede prior procedures, which vested authority for granting exemptions in various standing committees of the NASD.

    Questions concerning this Notice may be directed to Alden S. Adkins, General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8332; Mary Dunbar, Assistant General Counsel, Office of General Counsel, NASD RegulationSM, at (202) 728-8252; and Robert J. Smith, Senior Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8176.

    Discussion

    As part of the NASD's settlement of administrative proceedings with the SEC last year, the NASD agreed to provide autonomy and independence to the regulatory staff of the NASD and its subsidiaries such that the staff: (i) has sole discretion as to what matters to investigate and prosecute, (ii) has sole discretion to handle all other regulatory matters, (iii) prepares rule proposals, rule interpretations, and other policy matters involving consultations with interested NASD constituencies in a fair and even-handed manner, and (iv) is generally insulated from the commercial interests of its members and The Nasdaq Stock MarketSM (Nasdaq®).

    On August 7, 1997, the SEC approved amendments to the NASD's Code of Procedure setting forth, among other things, general procedures for members to apply for exemptions under various rules and conforming changes to provide exemptive authority for particular rules. The approved amendments provide autonomy and independence to the regulatory staff in that the amendments require members to apply to the staff in the first instance for an exemption under various rules and provide a right of appeal to the National Business Conduct Committee (NBCC). Under previous rules, certain quasi-adjudicative or exemptive authority was granted to various standing committees. The rules were developed after extensive consultation with SEC staff.

    Description

    The amendments create a new Rule 9600 Series under the Code of Procedure that requires a member seeking an exemption from certain NASD rules to file a written application with the Office of General Counsel of NASD Regulation. The amendments also set forth a list of specific rules under which exemptions are available, including: rules relating to registration requirements (Rule 1021); categories of principal registration (Rule 1022); qualification examinations and waiver of requirements (Rule 1070): free-riding and withholding (IM-2110-1)1; communications with the public (Rule 2210); customer account statements (Rule 2340); margin accounts (Rule 2520); underwriting terms and arrangements for corporate financing matters (Rule 2710); conflicts of interest involving distributions of securities of members and affiliates (Rule 2720); direct participation programs (Rule 2810); position limits for index warrants (Rule 2850); exercise limits for index warrants (Rule 2851); position limits for options (Rule 2860); position limits for index options (IM-2860-1); exercise limits for options (Rule 2860); securities categorized as "failed to receive" and "failed to deliver" (Rule 3210); short sales (Rule 3350); customer account transfer contracts (Rule 11870); clearance of corporate debt securities (Rule 11900); and MSRB Rule G-37.

    The rules provide that any written application for an exemption must contain the member's name and address, the name of a person associated with the member who will serve as the primary contact for the application, the rule from which the member is seeking an exemption, and a detailed statement of the grounds for granting the exemption. If the member does not wish the application or the decision on the application to be publicly available in whole or in part, the member also must include in its application a detailed statement, including supporting facts, showing good cause for treating the application or decision as confidential in whole or in part.

    The rules require the NASD Regulation staff, after considering an application, to issue a written decision setting forth its findings and conclusions and to serve this decision on the applicant pursuant to NASD Rules 9132 and 9134 in the Code of Procedure. After the decision is served on the applicant, the application and decision will be made publicly available unless NASD Regulation staff determines that the applicant has shown good cause for treating the application or decision as confidential in whole or in part.

    The rules permit an applicant to appeal the decision by filing a written notice of appeal within 15 calendar days after service of a decision issued under proposed Rule 9620. The notice of appeal must contain a brief statement of the findings and conclusions as to which exception is taken. The NBCC may order oral argument. If the applicant does not want the NBCC's decision on appeal to be publicly available in whole or in part, the applicant must include in its notice of appeal a detailed statement, including supporting facts, showing good cause for treating the decision as confidential in whole or in part. The notice of appeal must be signed by the applicant. Where the failure to promptly review a decision to deny a request for exemption would unduly or unfairly harm the applicant, the NBCC shall provide expedited review. An applicant may withdraw its notice of appeal at any time by filing a written notice of withdrawal of appeal with the NBCC.

    The rules require the NBCC, following the filing of a notice of appeal, to designate a subcommittee to hear an oral argument, if ordered, to consider any new evidence that the applicant can show good cause for not including in its application, and to recommend to the NBCC a disposition of all matters on appeal. After considering all matters on appeal and the subcommittee's recommendation, the NBCC will affirm, modify, or reverse the decision issued under proposed Rule 9620. The NBCC must issue a written decision setting forth its findings and conclusions and serve the decision on the applicant. The decision must be served pursuant to NASD Rules 9132 and 9134 in the Code of Procedure. The decision will be effective upon service and constitutes final action of the NASD.

    Where necessary, the rules also make conforming changes to those particular rules under which exemptive authority may be exercised and clarify that the authority for granting such exemptions rests with NASD Regulation staff in the first instance.

    In addition, authority has been newly created under NASD Rule 2210 to permit the Advertising Regulation Department to grant exemptions from the pre-filing requirements of paragraph (c) of that rule in order to reflect existing practice. The need for such authority under NASD Rule 2210 arises when, for example, members are the subject of a buyout or reorganization, or form a subsidiary firm, and the successor entity is substantially similar to the predecessor entity, retains the same control persons, and continues to produce the same securities products that were previously filed with the Department. In such situations, the pre-filing requirements may not be necessary in order to serve the purpose of the rule.

    Finally, the rules delete the Rule 9800 series, which contained procedures for committee review of staff decisions relating to corporate financing and direct participation program matters.

    The rules do not affect certain existing functions of committees when the functions performed are fundamentally different from adjudicatory functions, or when the issues presented are highly technical and do not require a formal process. In particular, NASD Rule 11110 will continue to authorize certain functions for the Financial Responsibility and Operations Committees, such as review of "regular way" and "when issued" transactions or an issuer's notification of a due bill or dividend announcement in certain circumstances. NASD Rules 10102, 10104 and 10301(b) will continue to authorize certain functions for the National Arbitration and Mediation Committee, such as consideration of qualifications for arbitrators, recruitment of arbitrators, maintenance of the arbitrator pool, composition and appointment of an arbitration panel in a particular case, and approval of the determination to decline the use of the NASD's arbitration forum in any dispute.

    The rules create procedural regularity and predictability to optimize even-handed results and minimize disparate results. At the same time, the amendments both clarify and streamline the process for granting exemptions by articulating the application and decision process and by clearly defining appeal rights.


    Text Of Amendments

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

    CODE OF PROCEDURE

    9600. Procedures for Exemptions

    9610. Application

    (a) File with General Counsel
    A member seeking an exemption from Rule 1021, 1022, 1070, 2210, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860, Interpretive Material 2860-1, 3210, 3350, 11870, or 11900, Interpretive Material 2110-1, or Municipal Securities Rulemaking Board Rule G-37 shall file a written application with the Office of General Counsel of NASD Regulation.
    (b) Content
    An application filed pursuant to this Rule shall contain the member's name and address, the name of a person associated with the member who will serve as the primary contact for the application, the Rule from which the member is seeking an exemption, and a detailed statement of the grounds for granting the exemption. If the member does not want the application or the decision on the application to be publicly available in whole or in part, the member also shall include in its application a detailed statement, including supporting facts, showing good cause for treating the application or decision as confidential in whole or in part.
    (c) Applicant
    A member that files an application under this Rule is referred to as "Applicant" hereinafter in the Rule 9600 Series.

    9620. Decision

    After considering an application, NASD Regulation staff shall issue a written decision setting forth its findings and conclusions. The decision shall be served on the Applicant pursuant to Rules 9132 and 9134. After the decision is served on the Applicant, the application and decision shall be publicly available unless NASD Regulation staff determines that the Applicant has shown good cause for treating the application or decision as confidential in whole or in part.

    9630. Appeal

    (a) Notice
    An Applicant may file a written notice of appeal within 15 calendar days after service of a decision issued under Rule 9620. The notice of appeal shall contain a brief statement of the findings and conclusions as to which exception is taken. The National Business Conduct Committee may order oral argument. If the Applicant does not want the National Business Conduct Committee's decision on the appeal to be publicly available in whole or in part, the Applicant also shall include in its notice of appeal a detailed statement, including supporting facts, showing good cause for treating the decision as confidential in whole or in part. The notice of appeal shall be signed by the Applicant.
    (b) Expedited Review
    Where the failure to promptly review a decision to deny a request for exemption would unduly or unfairly harm the applicant, the National Business Conduct Committee shall provide expedited review.
    (c) Withdrawal of Appeal
    An Applicant may withdraw its notice of appeal at any time by filing a written notice of withdrawal of appeal with the National Business Conduct Committee.
    (d) Appointment of Subcommittee
    Following the filing of a notice of appeal, the National Business Conduct Committee shall designate a Subcommittee to hear an oral argument, if ordered, consider any new evidence that the Applicant can show good cause for not including in its application, and recommend to the National Business Conduct Committee a disposition of all matters on appeal.
    (e) Decision
    After considering all matters on appeal and the Subcommittee's recommendation, the National Business Conduct Committee shall affirm, modify, or reverse the decision issued under Rule 9620. The National Business Conduct Committee shall issue a written decision setting forth its findings and conclusions and serve the decision on the Applicant. The decision shall be served pursuant to Rules 9132 and 9134. The decision shall be effective upon service and shall constitute final action of the Association.

    Conforming Rule Changes

    Rule 1021. Registration Requirements

    (e)
    (2) Pursuant to the Rule 9600 Series, the [President of the] Association[, upon written request,] may waive the provisions of subparagraph (1)[, above,] in situations [which] that indicate conclusively that only one person associated with an applicant for membership should be required to register as a principal.

    1022. Categories of Principal Registration

    (b)
    (4) Pursuant to the Rule 9600 Series, the Association may exempt a member[,] or an applicant for membership in the Association[, may upon written request, be exempted by the President of the Association, or his delegate,] from the requirement to have a Limited Principal—Financial and Operations if:
    (A) it has been expressly exempted by the Commission from SEC Rule 15c3-1(b)(1)(iii);
    (B) it is subject to the provisions of SEC Rule 15c3-1(a)(2) or to Section 402.2(c) of the rules of the Treasury Department.

    1070. Qualification Examinations and Waiver of Requirements

    (e) Pursuant to the Rule 9600 Series, the [President of the] Association may, in exceptional cases and where good cause is shown, waive the applicable Qualification Examination [upon written request by the member,] and accept other standards as evidence of an applicant's qualifications for registration. Advanced age, physical infirmity or experience in fields ancillary to the investment banking or securities business will not individually of themselves constitute sufficient grounds to waive a Qualification Examination.

    2210. Communications with the Public

    (c) Filing Requirements and Review Procedures
    (8) Exemptions. Pursuant to the Rule 9600 Series, the Association may exempt a member or person associated with a member from the pre-filing requirements of this paragraph for good cause shown.

    2340. Customer Account Statements

    (d) Pursuant to the Rule 9600 Series, the Association[, acting through its Operations Committee] may[, pursuant to a written request for good cause shown,] exempt any member from the provisions of this Rule for good cause shown.

    2520. Margin Accounts

    (c)
    (5)
    (C) Joint Accounts in Which the Carrying Organization or a Partner or Stockholder Therein Has an Interest
    In the case of a joint account carried by a member in which such member, or any partner, or stockholder (other than a holder of freely transferable stock only) of such member participates with others, each participant other than the carrying member shall maintain an equity with respect to such interest pursuant to the margin provisions of this paragraph as if such interest were in a separate account.
    Pursuant to the Rule 9600 Series, [T]the Association [will consider requests for exemption from the] may grant an exemption from the provisions of [this] paragraph (c)(5)(C)[, provided] if the account is:
    (i) [the account is] confined exclusively to transactions and positions in exempted securities;
    (ii) [the account is] maintained as a Market Functions Account conforming to the conditions of Section 220.12(e) (Odd-lot dealers) of Regulation T of the Board of Governors of the Federal Reserve System; or
    (iii) [the account is] maintained as a Market Functions Account conforming to the conditions of Section 220.12(c) (Underwritings and Distributions) of Regulation T of the Board of Governors of the Federal Reserve System and each other participant margins his share of such account on such basis as the Association may prescribe.

    2710. Corporate Financing Rule—Underwriting Terms and Arrangements

    (d) Exemptions. Pursuant to the Rule 9600 Series, the Association may exempt a member or person associated with a member from the provisions of this Rule for good cause shown.

    2720. Distribution of Securities of Members and Affiliates—Conflicts of Interest

    (p) Requests for Exemption from Rule 2720
    Pursuant to the Rule 9600 Series, [T]the Association [Corporate Financing Committee of the Board of Governors, upon written request,] may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of this Rule which it deems appropriate. [Unless waived by the party requesting an exemption, a hearing shall be held upon a request before the Corporate Financing Committee, or a Subcommittee thereof designated for that purpose.]

    2810. Direct Participation Programs

    (c) Exemptions. Pursuant to the Rule 9600 Series, the Association may exempt a member or person associated with a member from the provisions of this Rule for good cause shown.

    2850. Position Limits

    (a) Except with the prior written approval of the Association pursuant to the Rule 9600 Series for good cause shown in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, a purchase or sale transaction in an index warrant listed on Nasdaq or on a national securities exchange if the member has reason to believe that as a result of such transaction the member, or partner, officer, director or employee thereof, or customer would, acting alone or in concert with others, directly or indirectly, hold or control an aggregate position in an index warrant position on the same side of the market, combining such index warrant position with positions in index warrants overlying the same index on the same side of the market, in excess of the position limits established by the Association, in the case of Nasdaq-listed index warrants, or on the exchange on which the warrant is listed.

    2851. Exercise Limits

    (a) Except with the prior written approval of the Association pursuant to the Rule 9600 Series for good cause shown, in each instance, no member or person associated with a member shall exercise, for any account in which such member or person associated with a member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, a long position in any index warrant if as a result thereof such member or partner, officer, director or employee thereof or customer, acting alone or in concert with others, directly or indirectly:

    (1) has or will have exercised within any five (5) consecutive business days a number of index warrants overlying the same index in excess for the limits for index warrant positions contained in Rule 2850; or
    (2) has or will have exceeded the applicable exercise limit fixed from time to time by an exchange for an index warrant not dealt in on Nasdaq.
    (b) The Association, pursuant to the Rule 9600 Series for good cause shown, may institute other limitations concerning the exercise of index warrants from time to time [by action of the Association]. Reasonable notice shall be given of each new limitation fixed by the Association. These exercise limitations are separate and distinct from any other exercise limitations imposed by the issuers of index warrants.

    2860. Options

    (b) Requirements
    (3) Position Limits
    (A) Stock Options—Except in highly unusual circumstances, and with the prior written approval of the Association pursuant to the Rule 9600 Series for good cause shown in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, an opening transaction through Nasdaq, the over-the-counter market or on any exchange in a stock option contract of any class of stock options if the member has reason to believe that as a result of such transaction the member or partner, officer, director or employee thereof, or customer would, acting alone or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate position in excess of:
    (i) 4,500 option contracts of the put class and the call class on the same side of the market covering the same underlying security, combining for purposes of this position limit long positions in put options with short positions in call options, and short positions in put options with long positions in call options; or
    (ii) 7,500 options contracts of the put class and the call class on the same side of the market covering the same underlying security, providing that the 7,500 contract position limit shall only be available for option contracts on securities which underlie or qualify to underlie Nasdaq or exchange traded options qualifying under applicable rules for a position limit of 7,500 option contracts; or
    (iii) 10,500 option contracts of the put class and the call class on the same side of the market covering the same underlying security providing that the 10,500 contract position limit shall only be available for option contracts on securities which underlie or qualify to underlie Nasdaq or exchange-traded options qualifying under applicable rules for a position limit of 10,500 option contracts; or
    (iv) 20,000 options contracts of the put and the call class on the same side of the market covering the same underlying security, providing that the 20,000 contract position limit shall only be available for option contracts on securities which underlie or qualify to underlie Nasdaq or exchange-traded options qualifying under applicable rules for a position limit of 20,000 option contracts; or
    (v) 25,000 options contracts of the put and the call class on the same side of the market covering the same underlying security, providing that the 25,000 contract position limit shall only be available for option contracts on securities which underlie or qualify to underlie Nasdaq or NASD Notice to Members 97-60 September 1997 exchange-traded options qualifying under applicable rules for a position limit of 25,000 option contracts; or
    (vi) such other number of stock options contracts as may be fixed from time to time by the Association as the position limit for one or more classes or series of options provided that reasonable notice shall be given of each new position limit fixed by the Association.
    (vii) Equity Option Hedge Exemption
    a. The following positions, where each option contract is "hedged" by 100 shares of stock or securities readily convertible into or economically equivalent to such stock, or, in the case of an adjusted option contract, the same number of shares represented by the adjusted contract, shall be exempted from established limits contained in (i) through (vi) above: 1. long call and short stock; 2. short call and long stock; 3. long put and long stock; 4. short put and short stock.
    b. Except as provided under the OTC Collar Exemption contained in paragraph (b)(3)(A)(viii), in no event may the maximum allowable position, inclusive of options contracts hedged pursuant to the equity option position limit hedge exemption in subparagraph a. above, exceed three times the applicable position limit established in paragraph (b)(3)(A)(i)-(v).
    c. The Equity Option Hedge Exemption is a pilot program authorized by the Commission through December 31, 1997.
    (viii) OTC Collar Aggregation Exemption
    a. For purposes of this paragraph (b), the term OTC collar shall mean a conventional equity option position comprised of short (long) calls and long (short) puts overlying the same security that hedge a corresponding long (short) position in that security.
    b. Notwithstanding the aggregation provisions for short (long) call positions and long (short) put positions contained in subparagraphs (i) through (v) above, the conventional options positions involved in a particular OTC collar transaction established pursuant to the position limit hedge exemption in subparagraph (vii) need not be aggregated for position limit purposes, provided the following conditions are satisfied:
    1. the conventional options can only be exercised if they are in-the-money;
    2. neither conventional option can be sold, assigned, or transferred by the holder without the prior written consent of the writer;
    3. the conventional options must be European-style (i.e., only exercisable upon expiration) and expire on the same date;
    4. the strike price of the short call can never be less than the strike price of the long put; and
    5. neither side of any particular OTC collar transaction can be in-the-money when that particular OTC collar is established.
    6. the size of the conventional options in excess of the applicable basic position limit for the options established pursuant to subparagraph (A)(i)-(v) above must be hedged on a one-to-one basis with the requisite long or short stock position for the duration of the collar, although the same long or short stock position can be used to hedge both legs of the collar.
    c. For multiple OTC collars on the same security meeting the conditions set forth in subparagraph b. above, all of the short (long) call options that are part of such collars must be aggregated and all of the long (short) put options that are part of such collars must be aggregated, but the short (long) calls need not be aggregated with the long (short) puts.
    d. Except as provided above in subparagraph b. and c., in no event may a member fail to aggregate any conventional or standardized options contract of the put class and the call class overlying the same equity security on the same side of the market with conventional option positions established in connection with an OTC collar.
    e. Nothing in this subparagraph (viii) changes the applicable position limit for a particular equity security.

    IM-2860-1. Position Limits

    (B) Index Options

    (i) Except in highly unusual circumstances, and with the prior written approval of the Association pursuant to the Rule 9600 Series for good cause shown in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, an opening transaction in an option contract of any class of index options displayed on Nasdaq or dealt in on an exchange if the member has reason to believe that as a result of such transaction the member or partner, officer, director or employee thereof, or customer, would, acting alone or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate position in excess of position limits established by the Association, in the case of Nasdaq index options, or the exchange on which the option trades.
    (4) Exercise Limits
    Except in highly unusual circumstances, and with the prior written approval of the Association[,] pursuant to the Rule 9600 Series for good cause shown in each instance, no member or person associated with a member shall exercise, for any account in which such member or person associated with a member has an interest, or for the account of any partner, officer, director or employee thereof or for the account of any customer, any option contract if as a result thereof such member or partner, officer, director or employee thereof or customer, acting alone or in concert with others, directly or indirectly, has or will have exercised within any five (5) consecutive business days a number of option contracts of a particular class of options in excess of the limits for options positions in paragraph (b)(3). The association may institute other limitations concerning the exercise of option contracts from time to time by action of the Association. Reasonable notice shall be given of each new limitation fixed by the Association.

    3210. Securities "Failed to Receive" and "Failed to Deliver"

    (b) Pursuant to the Rule 9600 Series, [F]for good cause shown and in exceptional circumstances, the Association may exempt a member or a person associated with a member [a member may request exemption] from the provisions of this Rule [by written request to the District Director of the District in which his principal office is located].

    3350. Short Sale Rule

    (j) Pursuant to the Rule 9600 Series or on the Association's [Upon application or on its] own motion, the Association may exempt either unconditionally, or on specified terms and conditions, any transaction or class of transactions from the provisions of this Rule.

    [9800. Corporate Financing and Direct Participation Program Matters]

    [9810. Purpose]

    [The purpose of this Rule 9800 Series is to provide a procedure for review of determination by the Association's staff regarding compliance with Rules of the Association relating to corporate financing and direct participation program matters by which any member is aggrieved.]

    [9820. Application by Aggrieved Member]

    [Any member aggrieved by a determination rendered pursuant to any Rule or regulation of the Association relating to underwriting terms or arrangements may make application for review of such determination. In exceptional or unusual circumstances, a member may request conditionally or unconditionally an exemption from such Rules or regulations. Applications for review will be accepted only with respect to offerings for which a registration statement or similar document has been filed with the appropriate federal or state regulatory agency; provided, however, that a hearing committee may waive the requirement for filing prior to review upon a finding that such review is appropriate under the circumstances.]

    [9830. Application for Review]

    [Any member making application for review pursuant to Rule 9820 (hereinafter referred to as "applicant") shall request such review in writing and shall specify in reasonable detail the source and nature of the aggrievement and the relief requested. The applicant shall state whether a hearing is requested and shall sign the written application.]

    [9840. Notice of Hearing]

    [Any applicant shall have a right to a hearing before a hearing committee constituted as provided in Rule 9850. The hearing committee may request a hearing on its own motion. A hearing shall be scheduled as soon as practicable, at a location determined by the hearing committee. Written notice of the hearing shall be sent to the applicant stating the date, time, and location of the hearing.]

    [9850. Hearing Committee and Procedure]

    [(a) Any hearing shall be before an individual designated by the Association, who shall be current or past members of the appropriate standing committee of the Board of Governors, i.e. the "hearing committee." Any applicant shall be entitled to appear at, and participate in, the hearing, to be represented by counsel, and to submit any relevant testimony or evidence. Representatives of the Association shall be entitled to appear at, participate in, the hearing, to be represented by counsel, and to submit any relevant testimony or evidence. Upon agreement of the applicant, representatives of the Association, and the hearing committee, a hearing may be conducted by means of telephonic or other linkage which permits all parties to participate simultaneously in the proceeding.]
    [(b) In the event that the applicant waives a hearing before the appropriate hearing committee, the hearing committee shall review the matter on the record before it. Any applicant and the Association shall be entitled to submit any relevant written testimony or evidence to the hearing committee.]

    [9860. Requirement for Written Determination]

    [The hearing committee shall render a determination as to all issues which the committee finds to be relevant as soon as practicable following conclusion of the hearing or, in cases in which a hearing is not requested, completion of the committee's review of the record. The hearing committee may determine whether the proposed underwriting or other terms and arrangements in connection with or relating to the distribution of the securities, or the terms and conditions related thereto, taking into consideration all elements of compensation and all of the relevant surrounding factors and circumstances, are fair and reasonable and in compliance with applicable Rules and regulations. The determination of the hearing committee shall be issued in writing, and a copy shall be sent to each applicant.]

    [9870. Review by Committee of Board]

    [(a) Any member aggrieved by a determination of a hearing committee shall have a right to have that determination reviewed by the appropriate standing committee of the Board of Governors.]
    [(b) Any member seeking a review of a determination of a hearing committee shall submit a written request for such review to the Association within fifteen (15) business days following issuance of the hearing committee's written determination. Any such member shall submit with the written request for review a written statement specifying the portion of the hearing committee's determination for which review is requested and the relief sought. Any such member may submit written testimony or evidence for consideration by the committee. Representatives of the Association may also submit written testimony or evidence to the committee.]
    [(c) Pursuant to a request duly made, the appropriate standing committee of the Board of Governors will review the determination of a hearing committee, giving consideration to all parts of the record which the Board committee finds relevant. The Board committee shall render a determination as to all issues which the committee finds to be relevant. The determination of the Board committee shall be issued in writing, and a copy shall be sent to each member requesting review.]

    [9880. Nature of Determination]

    [Any determination by a hearing committee or standing committee rendered shall constitute the opinion of that committee as to compliance with applicable Association Rules, interpretations or policies and shall be advisory in nature only. Such determination shall not be subject to review by the Board of Governors. No such determination shall constitute a finding of a violation of any Rule, interpretation or policy. A finding of a violation shall be made only by a District Business Conduct Committee.]

    11870. Customer Account Transfer Contracts

    (j) Exemptions

    (1) Pursuant to the Rule 9600 Series, the Association may exempt from the provisions of this Rule, either unconditionally or on specified terms and conditions, (A) any member or (B) any type of account, security or financial instrument.

    11900. Clearance of Corporate Debt Securities

    Each member or its agent that is a participant in a registered clearing agency, for purposes of clearing over-the- counter securities transactions, shall use the facilities of a registered clearing agency for the clearance of eligible transactions between members in corporate debt securities. Pursuant to the Rule 9600 Series, the Association may exempt any transaction or class of transactions in corporate debt securities from the provision of this Rule as may be necessary to accommodate special circumstances related to the clearance of such transactions or class of transactions.

    Endnotes

    1 An exemption is available under IM-2110-1 (free-riding and withholding) only with respect to paragraph (d) relating to issuer-directed securities. However, the NASD has proposed amendments that would provide broader exemptive authority for all of the provisions of IM-2110-1 (see Notice to Members 97-30 (May 1997)).

  • 97-59 NASD Regulation Requests Comment On Injunctive Relief And Expedited Proceedings

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    Executive Summary

    NASD Regulation, Inc. (NASD RegulationSM) is seeking from members, associated persons, and others, comments on the procedures for obtaining injunctive relief and expedited proceedings under Rule 10335 of the Code of Arbitration Procedure (Code).

    Questions concerning this Request For Comment should be directed to Deborah Masucci, Vice President, Office of Dispute Resolution, NASD Regulation, at (212) 858-4400; or Elliott R. Curzon, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8451.

    Background

    On January 3, 1996, the National Association of Securities Dealers, Inc. (NASD®) implemented a one-year pilot arbitration procedure to govern injunctive relief claims between or among members and associated persons. The pilot procedure, codified in Rule 10335 (Rule) (formerly Section 47), was extended for another year on January 3, 1997, in order to permit NASD Regulation's Office of Dispute Resolution to gain additional experience with the Rule in anticipation of making the Rule a permanent addition to the Code. NASD Regulation is seeking comments from members, associated persons, and others concerning how the injunctive relief rule and expedited proceedings work and how to improve the Rule and procedures. The text of Rule 10335 is set forth following this Notice.

    Rule 10335 provides, among other things, that:

    • Parties may seek temporary injunctive relief either in court or in arbitration.


    • Parties who seek temporary injunctive relief in court must simultaneously submit the claim to arbitration for permanent relief.


    • Parties may obtain interim injunctive relief in arbitration in the form of either an Immediate Injunctive Order or a Regular Injunctive Order.


    • Permanent injunctive relief may be obtained in arbitration as part of the final relief sought by a party in connection with a claim.


    • Applications for interim injunctive relief are expedited.


    • Where a court grants interim injunctive relief to one of the parties, arbitration proceedings on the dispute must be expedited.

    From January 3, 1996, when the Rule took effect, through August 18, 1997, the Office of Dispute Resolution has had the following experiences with injunctive relief actions.

    • 433 cases were filed seeking injunctive relief.


    • The national average number of days between filing and the arbitrator's initial injunctive relief order was approximately 7.5 days.


    • Few cases went forward to a hearing on the merits following issuance of an injunctive order by either a court or arbitrator because most of the cases were: (i) settled shortly after filing; (ii) settled just before an injunctive hearing in arbitration; or (iii) settled shortly following an injunctive hearing in arbitration.


    • Most of the cases filed under the Rule concerned associated persons leaving one firm for employment at another firm (often referred to as "raiding" cases). The associated person's former firm was generally, though not in all instances, the petitioner in arbitration. In most such cases, the firm filed the action to prevent a former employee from soliciting clients the employee serviced at the firm. The causes of action asserted in many of the cases included: (i) breach of contract; (ii) misappropriation or conversion of trade secrets (customer information); and (iii) defamation (relating to the circumstances of the employee's departure from the firm).

    In connection with the plan to extend the effectiveness of Rule 10335 or make it permanent, NASD Regulation is soliciting comments on the functioning of the Rule. Since the Rule was adopted, NASD Regulation's Office of Dispute Resolution (Office) has received comments from users of the Rule. These comments form the basis for the questions set forth below.

    Availability Of Temporary Injunctive Relief In Court

    Some users of Rule 10335 have complained that, although the Rule permits a party to obtain temporary injunctive relief (a temporary restraining order or TRO) in court prior to seeking other relief in arbitration, some courts have become reluctant to entertain requests for TROs because temporary relief is available in arbitration under the Rule.

    Question 1. Should the Rule be modified to eliminate the TRO equivalent in arbitration?

    Question 2. Should the Rule be modified to eliminate the TRO equivalent in arbitration and eliminate the option of resorting to the courts for TROs, or to vacate TROs, leaving the parties the remedies (including injunctions) available in an expedited proceeding?

    Question 3. If the TRO equivalent is retained in arbitration, should the Rule be modified to eliminate the option of resorting to the courts for TROs, thereby requiring parties to seek all relief in arbitration?

    Question 4. If the option of obtaining a TRO in court is not eliminated, should parties be barred from seeking a court injunction if an arbitration panel has already denied the request?

    Question 5. If the option of obtaining a TRO in court is not eliminated, should the parties be barred from seeking relief other than the TRO in court? For example, should they be barred from seeking discovery and/or a preliminary injunction in court?

    Terminology

    Some users of the Rule have noted that the terminology of the Rule is confusing. The Rule provides for Immediate and Regular Injunctive Orders, and both types can be "interim" in nature. The Rule also does not specify whether an injunctive order can be permanent.

    Question 6. Should the rule be modified to adopt the terminology and practice generally used in courts relating to injunctive relief (TRO, Preliminary Injunction, Permanent Injunction)?

    Time Limits On Injunctive Relief

    Some users of the Rule have noted that it does not specify time limitations on the effectiveness of temporary or preliminary relief, or the time limitations specified are contingent on a party seeking the next step in arbitration.

    Question 7. Should the Rule provide that TROs or preliminary injunctions expire after certain specific times, or upon the failure of a party to seek further relief?

    Question 8. Should the arbitrators be required to specify an expiration date for TROs or preliminary injunctions?

    Question 9. Should the Rule provide a procedure for extending or extinguishing a court- or arbitrator-issued TRO or preliminary injunction?

    Discovery

    Ordinarily, discovery is not available in connection with a TRO, often because it is an emergency proceeding and the relief is of very short duration. Discovery is reserved for later in a proceeding, either limited discovery designed to ascertain facts necessary to support or defeat an application for a preliminary injunction, or comprehensive discovery relating to the main action for complete relief.

    Question 10. Should the Rule specifically provide for discovery in injunctive relief proceedings, or do the other provisions of the Code that provide for the exchange of information in connection with the substantive claims for relief give the arbitrators sufficient authority to address discovery issues in connection with claims for injunctive relief?

    Service Of Process

    Paragraph (c) of the Rule provides that service of the application for injunctive relief in the form of a Statement of Claim and a statement of facts demonstrating the necessity for injunctive relief is to be made by the claimant. Rule 10314 of the Code provides that, in ordinary arbitration cases, the Statement of Claim is served on respondents by the Director of Arbitration (Director). Some users of the injunctive relief process have noted that these provisions create confusion about who serves the Statement of Claim and the manner in which an action should be initiated. Further, parties in an injunctive relief action are not always served simultaneously.

    Question 11. Should the service provisions be amended to require that all papers relating to an injunctive relief action be served simultaneously?

    Question 12. Should the parties or the Director serve papers that relate to injunctive relief actions?

    Hearing Procedure

    The Rule provides that a party may apply for a "Regular Injunctive Order" under paragraph (d)(2). The procedures in paragraph (d)(2) specify very short time frames for Regular Injunctive proceedings. Paragraph (g) of the Rule also provides that if a court has issued an injunction, the arbitration must proceed on an expedited schedule in accordance with procedures specified by the panel of arbitrators, but it does not provide for specific deadlines or schedules. The Rule also does not preclude parties from seeking a Regular Injunctive Order under paragraph (d)(2) if they have obtained temporary relief. Nevertheless, some courts, after granting an application for a TRO, have ordered further proceedings to occur under paragraph (g). Some users believe that parties should be able to obtain a Regular Injunctive Order under paragraph (d)(2) even though they obtained the initial relief in court.

    In addition, the Rule does not specify whether hearings on applications for injunctive orders under the Rule should be comprehensive evidentiary hearings on the merits of a dispute, or abbreviated inquiries concerning facts and issues relating to the applicant's entitlement to a temporary or permanent injunction.

    Finally, the Rule does not address situations where several separately filed actions for injunctive relief involve the same applicant or respondent.

    Question 13. Should parties be able to request a Regular Injunctive Order under paragraph (d) even if a court has ordered the parties to proceed under paragraph (g)?

    Question 14. Should the Rule be amended to specify more clearly the type of hearing and the evidentiary showing required for each type of injunctive relief requested?

    Question 15. Should there be page limitations on submissions in injunctive relief actions?

    Question 16. Should the Rule be amended to permit a single arbitrator, who is hearing several applications for interim injunctive relief involving the same applicant or respondent, to consolidate the actions?

    Arbitrator's Authority

    The Rule is not clear about the authority of arbitrators to modify or vacate an injunction issued by a court. The Rule also is not clear about the authority of sole arbitrators appointed under the Rule to sanction any party who does not comply with an arbitrator's order.

    Question 17. Should the Rule be amended to specify that arbitrators have the authority to modify or vacate any injunctive order issued by a court?

    Question 18. Should the Rule be amended to specify that arbitrators have the authority to sanction any party that does not comply with an arbitrator's orders?

    Forum Shopping

    The Rule requires a party seeking a temporary injunction in court to file simultaneously a claim for permanent relief in arbitration. NASD Regulation has noted that some firms that have obtained court injunctions are filing their arbitration proceedings with another forum that does not require such proceedings to be expedited (the forum will, however, expedite proceedings upon the request of both parties). In this circumstance, the party that obtained injunctive relief in court benefits from the delay by filing in a forum other than NASD Regulation's.

    Question 19. Are there benefits to parties seeking injunctive relief to be able to have their claims heard in other forums?

    Question 20. Should parties who have sought temporary injunctive relief in court be barred from seeking permanent relief in forums that have not adopted procedures for adjudicating expedited injunctive relief claims unless the party that sought the injunctive relief agrees to expedite the proceeding?

    Question 21. Should the NASD's rules be amended to provide that failure to file an arbitration action after obtaining temporary injunctive relief in court as required by the Rule, or that filing an arbitration action in a forum that does not expedite such proceedings will be considered a failure to submit to arbitration, subjecting the member to disciplinary action?

    Other Issues

    Mixed Industry/Public Cases. The availability of the procedures under the Rule has been limited to intra-industry cases. Although rare, the Office has encountered cases involving an industry party (an employee or former employee of a member) and the spouse of the party.

    Question 22. Should the injunctive relief procedures be available in such cases and should the effect of any injunctive order extend to the nonindustry party?

    Fees. NASD Regulation understands that some users of the injunctive relief proceedings believe that the fees charged for the proceedings should be refunded if the proceeding is not expedited. The Office is aware that on occasion circumstances arise which prevent expedited resolution of the proceedings. Parties who have sought injunctions sometimes request delays in order to secure necessary discovery and sometimes the arbitrators will grant requests for delays from responding parties. These circumstances are beyond the control of the Office and, indeed, are a predictable outcome in the process of resolving a dispute. The fees are designed to defray the costs of administering expedited proceedings and the Office often expends significant resources administering these cases even if the final resolution is not expedited. While NASD Regulation will continue to monitor the Office's actual costs of administering injunctive relief proceedings and will consider fee adjustments as necessary for the process to remain as cost-effective as possible, fee refunds are unlikely.

    Request For Comment

    NASD Regulation encourages all members and interested parties to respond to the issues raised in this Notice. 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

    Comments must be received by October 31, 1997. Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation, Inc. Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.


    Text Of Rule 10335 Of The Code Of Arbitration Procedure 10335. Injunctions

    In industry or clearing disputes required to be submitted to arbitration pursuant to Rule 10201, parties to the arbitration may seek injunctive relief either within the arbitration process or from a court of competent jurisdiction. Within the arbitration process, parties may seek either an "interim injunction" from a single arbitrator or a permanent injunction from a full arbitration panel. From a court of competent jurisdiction, parties may seek a temporary injunction. A party seeking temporary injunctive relief from a court with respect to an industry or clearing dispute required to be submitted to arbitration pursuant to Rule 10201 shall simultaneously file a claim for permanent relief with respect to the same dispute with the Director in the manner specified under this Code. This Rule contains procedures for obtaining an interim injunction. Paragraph (g) of this Rule relates to the effect of court-imposed injunctions on arbitration proceedings. If any injunction is sought as part of the final award, such request should be made in the remedies portion of the Statement of Claim, pursuant to Rule 10314(a).

    (a) Single Arbitrator
    Applications for interim injunctive relief shall be heard by a single arbitrator.
    (b) Showing Required
    In order to obtain an interim injunction, the party seeking the injunction must make a clear showing that it is likely to succeed on the merits, that it will suffer irreparable injury unless the relief is granted, and that the balancing of the equities lies in its favor.
    (c) Application for Relief
    Interim injunctions include both Immediate Injunctive Orders and Regular Injunctive Orders, as described in paragraph (d) below. In either case, the applicant shall make application for relief by serving a Statement of Claim, a statement of facts demonstrating the necessity for injunctive relief, and a properly-executed Submission Agreement on the party or parties against whom injunctive relief is sought. The above documents shall simultaneously and in the same manner be filed with the Director of Arbitration, together with an extra copy of each document for the arbitrator, proof of service on all parties, and all fees required under Rule 10205. Filings and service required under this Rule may be made by United States mail, overnight delivery service or messenger.
    (d) The procedures and timetable for handling applications for interim injunctive relief are as follows:

    (1) Immediate Injunctive Orders.
    (A) Upon receipt of an application for an Immediate Injunctive Order, the Director shall endeavor to schedule a hearing no sooner than one and no later than three business days after receipt of the application by the respondent and the Director.
    (B) The filing of a response to an application for an Immediate Injunctive Order is optional to the party against whom the immediate order is sought. Any response shall be served on the applicant. If a response is submitted, the responding party shall, prior to the hearing or at the hearing, file with the Director two copies of the response and proof of service on all parties.
    (C) Notice of the date, time and place of the hearing; the name and employment history of the single arbitrator required by Rule 10310; and any information required to be disclosed by the arbitrator pursuant to Rule 10312 shall be provided to all parties via telephone, facsimile transmission or messenger delivery prior to the hearing.
    (D) The hearing on the application for an Immediate Injunctive Order may be held, at the discretion of the arbitrator or the Director, by telephone or in person in a city designated by the Director of Arbitration.
    (E) The arbitrator shall endeavor to grant or deny the application within one business day after the hearing and record are closed.
    (F) If the application is granted, the arbitrator shall determine the duration of the Immediate Injunctive Order. Unless the parties agree otherwise, however, the order will expire no later than the earlier of the issuance or denial of a Regular Injunctive Order under subparagraph (2) or a decision on the merits of the entire controversy by an arbitration panel appointed under this Code.
    (2) Regular Injunctive Orders.
    (A) Upon receipt of an application for a Regular Injunctive Order, the Director shall endeavor to schedule a hearing no sooner than three and no later than five business days after the response is filed or due to be filed, whichever comes first.
    (B) The party against which a Regular Injunctive Order is sought shall serve a response on the applicant within three business days of receipt of the application. The responding party shall simultaneously and in the same manner file with the Director two copies of the response and proof of service on all parties. Failure to file a response within the specified time period shall not be grounds for delaying the hearing, nor shall it bar the respondent from presenting evidence at the hearing.
    (C) Notice of the date, time and place of the hearing; the name and employment history of the single arbitrator required by Rule 10310; and any information required to be disclosed by the arbitrator pursuant to Rule 10312 shall be provided to all parties via telephone, facsimile transmission or messenger delivery prior to the hearing.
    (D) The hearing on the application for a Regular Injunctive Order may be held, at the discretion of the arbitrator or the Director, by telephone or in person in a city designated by the Director of Arbitration.
    (E) The arbitrator shall endeavor to grant or deny the application within one business day after the hearing and record are closed.
    (F) If the application is granted, the arbitrator shall determine the duration of the Regular Injunctive Order. Unless the parties agree otherwise, however, a Regular Injunctive Order shall expire no later than a decision on the merits of the entire controversy by an arbitration panel appointed under this Code.
    (e) Challenges to Arbitrators
    There shall be unlimited challenges for cause to the single arbitrator appointed to hear the application for injunctive relief, but there shall be no peremptory challenges. Parties wishing to object to the arbitrator shall do so by telephone to the Director, and shall confirm such objection immediately in writing or by facsimile transmission, with a copy to all parties. A peremptory challenge may not be made to an arbitrator who heard an application for an injunctive order and who subsequently participates or is to participate on the arbitration panel hearing the same arbitration case on the merits.
    (f) Hearing on the Merits
    Immediately following the issuance of an Immediate or Regular Injunctive Order, the Director shall appoint arbitrators according to the procedures specified in the Code to hear the matter on the merits. The arbitration shall proceed in an expedited manner pursuant to a schedule and procedures specified by the arbitrators. The arbitrators may specify procedures and time limitations for actions by the parties different from those specified in the Code.
    (g) Effect of Court Injunction
    If a court has issued an injunction against one of the parties to an arbitration agreement, unless otherwise specified by the court, any requested arbitration concerning the matter of the injunction shall proceed in an expedited manner according to a time schedule and procedures specified by the arbitration panel appointed under this Code.
    (h) Security
    The arbitrator issuing the Immediate or Regular Injunctive Order may require the applicant, as a condition to effectiveness of the order, to deposit security in an amount that the arbitrator deems proper, in a separate bank trust or escrow account for the benefit of the party against whom injunctive relieve is sought, for the payment of any costs and damages that may be incurred or suffered by the party against whom injunctive relief is sought if it is found to have been wrongfully enjoined.
    (i) Effective Date
    This Rule shall apply to arbitration claims filed on or after the effective date of this Rule. Except as otherwise provided in this Rule, the remaining provisions of the Code shall apply to proceedings instituted under this Rule. This Rule shall expire one year after its effective date unless extended by the Association's Board of Governors.

  • 97-58 NASD Regulation Requests Comment On Proposed Interpretive Material 1031 Regarding Cold Calling Activity

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    Executive Summary

    NASD Regulation, Inc. (NASD RegulationSM) requests comment on proposed NASD® Interpretive Material 1031 (IM-1031), which would require registration as a representative for all persons associated with a member who communicate with members of the public, except existing customers of the member, for the purpose of soliciting the purchase of securities or related services or identifying prospective customers. IM-1031 also would prohibit any member from engaging or using any unregistered person to communicate on behalf of the member with members of the public, except existing customers of the member, to solicit the purchase of securities or related services or identify prospective customers. Lastly, IM-1031 would permit unregistered persons to contact existing customers for three limited purposes only: (1) extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitation will be conducted by appropriately registered personnel; (2) inquiring whether the existing customer wishes to discuss investments with a registered person; and (3) determining whether the existing customer wishes to receive investment literature from the firm. Notwithstanding these provisions, IM-1031 is not meant to restrict a member's administrative personnel, in the normal course of their duties, from contacting customers regarding routine administrative matters.

    Questions concerning this Request For Comment should be directed to Gary L. Goldsholle, Senior Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8104.

    Background

    Proposed IM-1031 is designed to prohibit unregistered persons from communicating with members of the public to solicit the purchase of securities or related services or identify prospective customers. The interpretation is directed primarily to "cold calling" activity, i.e., solicitation of persons who are not existing customers. The National Association of Securities Dealers, Inc. (NASD) has prohibited cold calling by unregistered persons in a variety of contexts. In Notice to Members 85-48, the NASD explained that the term "representatives" refers to "persons associated with a member who are engaged in the investment banking or securities business for the member, including the function of supervision, solicitation or conduct of business in securities . . . ." The NASD further added that the definition of representatives:

    has been consistently interpreted by the NASD to require registration of persons who engage in activities that only constitute a portion of registered representatives' traditional dealings with public customers. Thus, for example, members are required to register persons who . . . solicit accounts on behalf of members, notwithstanding any limitation of such solicitations to prepared scripts discussing generic products and services offered by the member.

    NTM 85-48; see also NTM 88-24; NTM 88-50.

    The NASD, however, has also stated that the registration requirements are not intended to "restrict a member's administrative personnel, in the normal course of their duties, from contacting customers regarding routine administrative matters involving customers' accounts, such as investment seminars at which any substantive presentations and accounts or order solicitations will be made by appropriately registered personnel." NTM 88-24.

    In Notice to Members 88-50, the NASD set forth the limited circumstances in which a member may employ unregistered persons to contact prospective customers. Specifically, NTM 88-50 states that unregistered persons may contact prospective customers for purposes of: (1) extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitation will be conducted by appropriately registered personnel; (2) inquiring whether the prospective customer wishes to discuss investments with a registered person; and (3) determining whether the prospective customer wishes to receive investment literature from the firm.

    NTM 88-50 requires persons who use unregistered persons for these three activities to observe the following guidelines: (1) pursuant to Rule 1031(b) (formerly Section (1)(b), Part III of Schedule C to the By-Laws), unregistered persons may not discuss general or specific investment products or services offered by the firm, pre-qualify prospective customers as to financial status and investment history and objectives, or solicit new accounts or orders; (2) the member should provide unregistered persons with orientation and training that specifically addresses the limitations of their permissible activities, the regulatory consequences of exceeding these limitations, and the fact that such persons are associated persons of the member, subject to the rules of the NASD and its disciplinary authority; (3) the member should conduct a reasonable investigation of such persons' backgrounds to determine that they are not statutorily disqualified from becoming associated with the member; (4) unregistered persons are regarded as employees of the member and should not be compensated on any basis other than a salary or hourly wage; (5) the member should take reasonable steps to assure that the activities of unregistered persons are consistent with applicable state statutes and rules and with the rules of other self-regulatory organizations; and (6) the member should be able, upon request, to demonstrate that its supervisory procedures include procedures reasonably designed to prevent violative conduct by unregistered persons.

    Based upon experience gained from recent investigations, including a recent review of sales practice activities of selected firms by the staffs of the NASD, the SEC, the New York Stock Exchange, and representatives of the North American Securities Administrators Association, Inc., NASD Regulation staff are concerned that the policy embodied in NTM 88-50 and the current restrictions on the use of unregistered cold callers may not be effective in preventing abusive cold calling practices. NASD Regulation staff have discovered evidence of abusive cold calling practices, such as high pressure and aggressive sales pitches, often delivered by unregistered persons using specially designed scripts. Customers who are solicited by these unregistered persons may not be given all the protections and disclosures that would be afforded them if they were contacted by registered persons.

    To address these violations, protect investors, and to provide the NASD with a greater ability to discipline firms and individuals who engage in improper cold calling practices, NASD Regulation is considering altering its policy and practice with respect to cold calling to require registration of all persons who contact prospective customers concerning the purchase of securities or related services or for the purpose of identifying potential customers. This change is intended to assure that persons who contact prospective customers have the appropriate qualifications and training regarding solicitations and the sale of securities.

    NASD Regulation staff also preliminarily believe that IM-1031, with its absolute prohibition against cold calling prospective customers by unregistered persons, would provide members with greater clarity and consistency with respect to the registration requirements. NASD Regulation staff have observed an increasing number of inquiries concerning the scope of permissible cold calling activities under NTM 88-50, and are concerned that members may not be consistently applying the current cold calling prohibitions and registration requirements.

    Moreover, an absolute prohibition against cold calling prospective customers by unregistered persons would make violations much easier to detect, and thus aid enforcement of the registration requirements. Under IM-1031, unregistered persons cold calling prospective customers would per se violate NASD rules.

    NASD Regulation does not, however, believe that unregistered persons should be prohibited from contacting existing customers in appropriate circumstances. Accordingly, proposed IM-1031 permits unregistered persons to contact existing customers for the limited purposes contained in NTM 88-50, which include extending invitations to firm-sponsored events, and inquiring whether the customer wishes to discuss investments with a registered person or receive investment literature. Further, IM-1031 would not prohibit a member's administrative personnel, in the normal course of their duties, from contacting customers regarding routine administrative matters such as confirming mailing addresses and acknowledging receipt of communications.

    NASD Regulation has previously recognized a distinction between potential and existing customers in the context of the "telemarketing rules." The "telemarketing rules," NASD Conduct Rules 2211 and 3110, were adopted on December 2, 1996, pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act, under which the NASD was required to adopt rules similar to those adopted by the Federal Trade Commission prohibiting deceptive and abusive telemarketing acts and practices. In particular, NASD Conduct Rule 2211 exempts the time-of-day and disclosure requirements normally placed on cold calls from calls made to an "existing customer," which is defined to include "a customer for whom the broker or dealer, or a clearing broker or dealer or dealer on behalf of such broker or dealer, carries an account." NASD Regulation preliminarily believes that a similar distinction is appropriate with respect to cold calling registration requirements.

    Description

    Paragraph (a)(1) of proposed IM-1031 provides that any person associated with a member who communicates with members of the public for the purpose of soliciting the purchase of securities or related services, or for the purpose of identifying potential customers, is engaged in the securities business and is required to register as a representative. Paragraph (a)(2) provides that no member shall engage or use any person to communicate on behalf of the member with members of the public to solicit the purchase of securities or related services, or to identify prospective customers, unless such person is registered as a broker or dealer under the Securities Act of 1934, or is registered as a representative. Under this provision, third-party telemarketing firms that solicit on behalf of broker-dealers would themselves be required to register as either a broker or dealer, and their employees engaged in soliciting activity would be required to register as representatives.

    As noted above, NASD Regulation believes unregistered persons should be permitted to contact existing customers for the limited activities identified in NTM 88-50. Specifically, paragraph (b)(1) permits unregistered persons associated with a member to communicate with existing customers so long as their communications are limited to: (A) extending invitations to firm-sponsored events at which substantive presentations and account or order solicitation will be conducted by appropriately registered personnel; (B) inquiring whether the existing customer wishes to discuss investments with a registered person; and (C) determining whether the existing customer wishes to receive investment literature. Paragraph (b)(2) outlines the responsibilities of members employing or seeking to employ unregistered persons pursuant to section (b)(1). Lastly, paragraph (c) would adopt the same scope for the definition of "existing customer" for IM-1031 as is used in telemarketing Rule 2211. NASD Regulation requests comment on the nature and scope of permissible contact between unregistered persons and existing customers and whether the definition of existing customer should be the same as it is under the "telemarketing rules."

    NASD Regulation also requests comment on whether an alternative registration category should be developed for cold calling activity. Separate registration categories for assistant representatives and limited representatives apply to associated persons who perform only limited activities. See NASD Conduct Rules 1041 and 1032. As proposed, IM-1031 would require registration as a general securities representative. However, NASD Regulation is soliciting comment on whether an alternative registration category should be developed for persons who engage solely in cold calling activities, and if such an alternative category is used, how NASD Regulation may define the scope of conduct permissible under such category. Finally, if an alternative registration category is used, should the NASD develop a different Qualification Examination for the cold calling registration category?

    Request For Comment

    NASD Regulation encourages all members and interested parties to respond to the issues raised in this Notice. 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

    Comments must be received by October 31, 1997. Before becoming effective, any interpretive material or rule change developed as a result of comments received must be adopted by the NASD Regulation, Inc. Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.


    Text Of Proposed Interpretive Material

    (Note: All language is new.)

    IM-1031. Registration of Cold-Callers, Telemarketers and Related Persons

    (a)
    (1) Persons associated with a member who communicate with members of the public for the purpose of soliciting the purchase of securities or related services or for the purpose of identifying prospective customers are engaged in the securities business and are required to register as a representative.
    (2) No member shall engage or use any person to communicate on behalf of the member with members of the public to solicit the purchase of securities or related services or to identify prospective customers unless such person is registered as a broker or dealer under the Securities Exchange Act of 1934, or is registered as a representative.
    (b)
    (1) Notwithstanding the provisions of paragraph (a), persons associated with a member who communicate with existing customers for the purpose of soliciting the purchase of securities or related services are not required to be registered with the Association provided that their communications are limited solely to:
    (A) extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitation will be conducted by appropriately registered personnel;
    (B) inquiring whether the existing customer wishes to discuss investments with a registered person; and
    (C) determining whether the existing customer wishes to receive investment literature from the firm.
    (2) Firms employing or seeking to employ unregistered persons pursuant to paragraph (b)(1) shall observe the following guidelines:
    (A) Pursuant to Rule 1031(b), unregistered persons shall not discuss general or specific investment products or services offered by the firm, prequalify customers as to financial status and investment history and objectives, or solicit new accounts or orders;
    (B) The member shall provide unregistered persons with orientation and training that specifically addresses the limitations of such persons' activities, the regulatory consequences of exceeding these limitations, and the fact that such persons are associated persons of the member, subject to the rules of the NASD and its disciplinary authority;
    (C) The member shall conduct a reasonable investigation of such persons' backgrounds to determine that they are not statutorily disqualified from becoming associated with the member;
    (D) Unregistered persons are regarded as employees of the member and shall not be compensated on any basis other than a salary or hourly wage;
    (E) The member shall take reasonable steps to assure that the activities of unregistered persons are consistent with applicable state statutes and rules and with the rules of other self-regulatory organizations; and
    (F) The member shall be able, upon request, to demonstrate that its supervisory procedures include procedures reasonably designed to prevent violative conduct by unregistered persons.
    (c) For the purposes of paragraph (b), the term "existing customer" means a customer for whom the broker or dealer, or a clearing broker or dealer on behalf of such broker or dealer, carries an account.

  • 97-57 NASD Interpretations Of SEC Order Handling Rules, NASD Limit Order Protection Rules, And Member Best Execution Responsibilities

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    Executive Summary

    In the following document, the National Association of Securities Dealers, Inc. (NASD®), after consultation with staff of the Securities and Exchange Commission (SEC), is providing interpretive advice regarding a member's best execution obligations when handling a customer order, especially in light of the SEC's Order Handling Rules and the NASD's Limit Order Protection Rules. The Questions and Answers that follow are an attempt to provide members with answers to compliance questions raised following the implementation of the new Order Handling Rules. If members have additional questions regarding these issues, please contact Eugene A. Lopez, Director, Market Services, The Nasdaq Stock Market, Inc., at (202) 728-6998 or NASD Regulation, Inc.'s Market Regulation Department, at (800) 925-8156. Any requests for legal opinions regarding matters addressed in this Notice should be directed to the Nasdaq Office of General Counsel, at (202) 728-8294.

    Questions And Answers On New SEC Order Handling Rules And Associated Nasdaq Rules: Best Execution And Other Issues

    In its release adopting and amending the new and amended SEC Order Handling Rules, Rule 11Ac1-4 and Rule 11Ac1-1, the SEC made specific statements regarding the best execution of customer orders. Specifically, the SEC stated that when a market maker holds an undisplayed limit order priced better than the quote, and it subsequently receives a market order on the opposite side of the market from the limit order, it is no longer appropriate for the market maker to execute the market order at the published quote and the limit order at its limit price. The market maker must pass along the price improvement of the limit order to the market order. The Nasdaq Stock MarketSM, (Nasdaq®) has received a number of questions regarding NASD member firm obligations to obtain best execution of customer orders in light of this statement. Nasdaq and NASD RegulationSM have discussed various best execution scenarios as detailed below with the SEC.

    In using this Q & A as a tool to develop a member's policies regarding its best execution obligations, it is important to note that the application of best execution concepts necessarily involves a "facts and circumstances" analysis. Depending upon the particular set of facts surrounding an execution, actions that in one set of circumstances may meet a firm's best execution obligation, may not meet that standard in another set of circumstances. It should also be noted that the best execution obligation is an obligation that evolves as rules and systems change. Thus, if Nasdaq were to amend its Limit Order Protection Rule, a firm's best execution obligations will likely change as well.

    In addition, it should be noted that the discussion that follows relates principally to the handling of orders in Nasdaq securities (National Market and SmallCap) in light of the NASD's Limit Order Protection Rule, IM-2110-2. However, because the NASD Limit Order Protection Rule (Manning) only applies to Nasdaq securities, the limit order protection requirements discussed below do not necessarily apply to over-the-counter equity securities that may trade in the NASD's OTC Bulletin Board®. Of course, members continue to have best execution obligations for these securities. The NASD continues to evaluate best execution and limit order handling obligations for such securities and will provide information regarding a firm's obligations in a separate document at a future date. Separately, we note that limit order protection for over-the-counter executions in exchange-listed securities is governed by NASD Rule 6440 and members continue to have best execution obligations for these securities as well.

    I. Treatment Of Orders Received From Another Member

    Question 1: Basic Obligation

    Nasdaq Inside Market: 10 - 10 1/2 10 x 10

    Market Maker A (MMA) holds customer limit to buy 1,500 shares at 10 1/4.

    The customer requests that this order not be displayed.

    MMA receives a market order to sell 1,000 shares from another customer through its internal order delivery and execution system.

    What must MMA do?

    Answer 1:

    Under best execution principles discussed in the SEC's Adopting Release, market makers holding undisclosed limit orders must execute incoming market orders at the limit order price. Thus, MMA must execute the market order at 10 1/4, the price of the undisplayed limit order. MMA may execute the market order against the limit order or against its own inventory. However, if it fills the market order out of its own inventory, the Manning Rule requires that MMA protect the limit order at its price. Therefore, the limit order would also have to be executed at its price. The remaining 500 shares of the limit order would continue to reside undisplayed on MMA's book.

    Question 2: System Orders

    Nasdaq Inside Market: 10 -10 1/2 10 x 10

    MMA holds a customer limit order to buy at 10 1/4 for 1,500 shares that is not displayed.

    MMA receives a customer market order to sell 1,000 shares from another broker/dealer through MMA's automated order delivery and execution system.

    At what price should the limit and market orders be executed?

    Answer 2:

    Even though the order is from another broker/dealer, because the other firm has routed its order with the understanding that MMA will provide automated executions for that broker's customer orders and thereby provide best execution through MMA's system, MMA must match (as principal or as agent, as explained in Answer 1, above) the 1,000-share customer market order against 1,000 shares of the undisclosed customer limit and execute at 10 1/4. The remaining 500 shares of the 10 1/4 limit order remains undisclosed on MMA's files. The same rationale for matching the market order against the limit order would apply if the customer order had been routed to MMA through Nasdaq's Advanced Computerized Execution System (ACES®) facility.

    Question 3: Phone Orders—Market Maker And Order Entry Firm Have A Relationship

    Nasdaq Inside Market: 10 - 10 1/2 10 x 10

    MMA holds an undisclosed customer limit order at 10 1/4 for 1,500 shares.

    MMA is quoting publicly 10 bid.

    Broker/dealer B (BD-B) telephones MMA to sell 1,000 shares at the market for a customer. MMA has an arrangement with BD-B with the understanding that MMA will provide BD-B's customer orders with best execution, such as part of a payment for order flow, reciprocal, or correspondent arrangement.

    What is MMA's obligation to broker/dealer B and to the limit order to buy?

    Answer 3:

    Even though the order is from another broker/dealer, MMA must match 1,000 shares of BD-B's customer order against the undisclosed limit order of 10 1/4, because MMA has an arrangement under which it has implicitly or explicitly undertaken to provide best execution to BD-B's customer orders. MMA will execute 1,000 shares of the market order and the limit order at 10 1/4.

    However, because the Limit Order Display Rule, Rule 11Ac1-4, has not been fully implemented as of the date of this document, limit orders received by a market maker may not yet be reflected in the market maker's quote. Consequently, it may be difficult for a market maker to quickly access information regarding the limit order at a better price that it holds at the time the telephone order is received. Accordingly, until such time that all Nasdaq stocks are subject to Rule 11Ac1-4 and thus are likely to be reasonably accessible to the trader, the NASD will not take regulatory action against market makers that fail to provide the undisplayed limit order price to the execution of telephone orders that they receive in any Nasdaq stocks during the phase-in period. Once all Nasdaq securities are subject to Rule 11Ac1-4, members will be expected to provide telephone orders, except as detailed below, the benefit of superior limit order prices, whether displayed or not.

    Question 4: Phone Orders—Market Maker And Order Entry Firm Do Not Have A Relationship

    Nasdaq Inside Market: 10 - 10 1/2 10 x 10

    MMA holds an undisclosed customer limit order at 10 1/4 for 1,500 shares.

    MMA is quoting publicly 10 bid.

    Broker/dealer B telephones MMA to sell 1,000 shares at the market for BD-B's own account where MMA has no agreement or understanding to treat BD-B's orders as customer orders or otherwise provide them with best execution.

    What is MMA's obligation to broker/dealer B and to the limit order to buy?

    Answer 4:

    MMA may execute BD-B's market order to sell at MMA's published quote of 10. MMA does not owe a best execution obligation to a noncustomer where no understanding or expectation of treatment as a customer has been reached by MMA and BD-B. Broker/dealers are not considered customers for purposes of this obligation.

    If MMA executes BD-B's order at 10, MMA, however, has traded through the customer limit order it holds. Under the Manning Rule, therefore, MMA must execute 1,000 shares of the limit order it holds. Under the present interpretation of Manning, MMA must execute 1,000 shares of the customer limit order at 10 1/4 or better, because 10 1/4 is the price at which the limit order was held. MMA, of course, may choose to give the market order customer the price of the limit order, but it is not currently required to do so. The NASD's staff is presently evaluating whether to propose to the Nasdaq Board a change to the Manning Rule that would require a member to provide price improvement to the limit order in this situation.

    Question 5: Rounded Orders

    Nasdaq Inside Market: 20 - 20 1/2 10 x 10

    MMA holds a customer limit order to buy a Nasdaq stock at 20 5/32 for 2,000 shares. MMA changes its quote to 20 1/8 for 2,000 shares to reflect the rounded price of the customer limit order

    MMA receives a market order to sell 2,500 shares.

    At what price must the market and limit orders be executed?

    Answer 5:

    MMA must execute the customer limit order and 2,000 shares of the market order at 20 5/32, even though its displayed quote was rounded to 20 1/8. The execution must occur at the actual limit order price that MMA held.

    Question 6:

    Nasdaq Inside Market: 10 - 10 1/2 10 x 10

    MMA holds a customer limit order to buy at 10 1/4 for 1,500 shares that is not displayed.

    MMA receives a customer limit order to sell 1,000 shares at 10 1/8.

    At what price(s) should the limit orders be executed?

    Answer 6:

    The SEC's best execution discussion in the Adopting Release did not discuss the crossing of limit orders with each other. However, by analogy to the best execution example used in the SEC's Order Handling Release, Nasdaq believes that the crossing of two limit orders is similar to the interaction of a market order and a limit order. Accordingly, Nasdaq believes that to provide best execution to a customer limit order when that limit order would cross another customer limit order, MMA should execute the sell limit order against the buy limit order at 10 1/4. In essence, the second limit order is a marketable limit order that is the equivalent of a market order and should be treated as such under the best execution principles discussed by the SEC.

    Question 7: Minimum Price Improvement To Avoid Manning Violation

    Nasdaq Inside Market: 20 - 20 1/4 10 x 10

    MMA receives a customer limit order to buy at 20 1/16 for 2,000 shares.

    MMA changes its quote to 20 1/16 for 2,000 shares to reflect the price of the customer limit order.

    MMA receives a market order to sell 2,500 shares.

    May MMA offer the market order price improvement over the 20 1/16th limit order and execute the market order for its own account? If so, what is the minimum amount of price improvement allowable?

    Answer 7:

    MMA is allowed to execute the market order at a price better than the limit order. Nasdaq, after consultation with the Quality of Market Committee, believes that the minimum amount of price improvement that would permit a market maker to avoid a violation of the Manning Rule is 1/16th, where the actual spread is greater than 1/16th; however, where the actual quotation spread is the minimum quotation increment, the minimum price improvement is one-half of the normal minimum quote increment. In Question 7, since the actual spread is 20 1/16-20 1/4, the minimum price improvement is 1/16th. Thus, MMA could trade ahead of the limit order at 20 1/8th. If the actual spread were 20 1/16 - 20 1/8, since the security is priced at more than $10 per share, the minimum quote increment is 1/16th. If the market maker wants to trade with an incoming market order to sell without triggering its Manning obligations to the buy limit order, the market maker must buy from the sell order at 20 3/32nds. Similarly, if the security were priced under $10 and quoted at 5 1/32-5 1/16, the minimum price improvement to avoid a violation of the Manning Rule would be 1/64th better than a buy limit order it holds.

    This represents a change from previous statements regarding price improvement. In Notice to Members 95-43, regarding the Manning Rule, Nasdaq stated that market makers may avoid violating Manning if they execute for their own accounts at 1/64th better than the limit order price. This statement no longer is applicable and is superseded by this Notice as of the date of the publication of this Notice.

    II. Discretionary Or Working Orders

    Question 8:

    Nasdaq Inside Market: 10 - 10 1/8 10 x 10

    MMA quote: 9 7/8 - 10 1/4

    MMA receives 100,000 share discretionary ("working") order to buy in which the institutional customer and the market maker agree to the terms under which the order is to be worked and the compensation that MMA is to receive. The parties to this trade agree that MMA may, if necessary to fill the entire order at an acceptable price, trade ahead of the institutional customer's order. MMA immediately sells 30,000 shares to the institution and holds the remaining 70,000 shares.

    A. MMA executes an undisplayed limit order to sell at 10 1/16 for 1,000 shares.
    B. MMA executes a market order to sell for 1,000 shares at 10.
    C. MMA executes an order to sell 10,000 shares at 9 7/8.

    What are MMA's responsibilities to the 70,000 share order when it executes any of the orders described in A, B, or C?

    Answer 8:

    MMA is holding a discretionary market order for which it has agreed to work to obtain an execution satisfactory to the customer. A discretionary order, sometimes called a "not held" or a "working" order, is an order voluntarily categorized by the customer as permitting the member to trade at any price without being required to execute the customer order. A broker/dealer with such an order must use its brokerage judgment in the execution of the order, and if such judgment is properly exercised, the broker is relieved of its normal responsibilities with respect to the time of execution and the price or prices of execution of such an order.

    Because MMA has been given discretion by its customer to work the order, MMA does not owe the same best execution obligations to it and to other crossing orders as it would if the order were a non-discretionary market or limit order. Thus, where beneficial to the discretionary order, MMA may trade at 10 1/16 or lower with incoming orders without necessarily triggering a fill for the discretionary order it holds. Because the discretionary order is not a priced order, there are no Manning obligations to the order, nor is there a specific price at which an incoming order can be matched.

    MMA, however, must clearly document that it has obtained the authorization of its customer to work the order and must disclose to the customer that such discretion means that the firm may trade at the same price or at a better price than that received by the discretionary order. In addition, it should be noted that, because the customer has granted the market maker the discretion to work the order, the market maker, as agent, has a clear responsibility to work to obtain the best fill considering all of the terms agreed to with the customer and the market conditions surrounding the order. In the absence of a clear understanding between the trader and the customer regarding MMA's activities in competing with the customer order, MMA could potentially violate its fiduciary duties to its customer in the way it "works" the order.

    Question 9:

    Nasdaq Inside Market: 10 x 10 1/4 10 x 10

    MMA accepts a discretionary order to buy 100,000 shares with a cap of 10 3/16.

    MMA receives a market order to sell 1,000 shares from a customer.

    Does MMA have to match the market order against the discretionary order that has a cap?

    Answer 9:

    The discretionary order with a cap is not considered a limit order because the firm is "working" the order and may be able to execute it at prices other than the 10 3/16 cap price. Thus, MMA does not have to match the market order against the discretionary order and MMA is able to buy from the market order at its bid of 10, assuming that this handling benefits the discretionary order.

    III. Execution Of Blocks Outside The Inside Market Price

    Question 10:

    Nasdaq Inside Market: 10 x 10 1/4

    MMA accepts a customer limit order to buy 1,000 shares at 10 1/8 that is not displayed.

    MMA negotiates with an institution to buy 100,000 shares at 9 7/8.

    Does MMA have to execute the 1,000-share limit order at 9 7/8?

    Answer 10:

    No. While MMA has a Manning obligation to execute the limit order, MMA can execute the limit order at its stated price of 10 1/8. In addition, MMA is not obligated to execute 1,000 shares of the block at 10 1/8, assuming that MMA has clearly disclosed to the institution that it intends to handle the order in this manner, and the institution has agreed to this practice.

    IV. Net Trades/Internal Sales Credits

    Question 11:

    Nasdaq Inside Market: 20 - 20 1/4 10 x 10

    MMA holds a limit order to buy at 20 for 1,000 shares.

    MMA receives from an institution a limit order to sell 9,000 shares "net" at 20.

    What effect does the "net" sell order have on MMA's Manning or best execution obligations?

    Answer 11:

    MMA must execute the net sell order at 20 by matching (as principal or as agent) the limit order to buy at 20 against the net sell order first and execute the remainder of the net order against its inventory.

    Question 12:

    Assuming the same facts as outlined in Question 11 above, does the answer change if MMA discloses to the institutional customer with the sell limit order that the sales representative is to obtain a 1/8th sales credit and thus, MMA will be holding the limit order at a price exclusive of the sales credit?

    Answer 12:

    If MMA chooses to disclose the internal sales credit to the institutional customer, explains that the 20 net price is to be affected by this sales credit, and the customer agrees to this arrangement, then MMA should hold the limit order to sell at 20 1/8 and display the order in its quote, unless an exception to Rule 11Ac1-4 were available. Thus, the inside market would move to 20 - 20 1/8, 10 x 90. Accordingly, because the net limit order to sell was held at a price (20 1/8) that does not match against the limit order to buy at 20, there is no execution.

    Further, if the net limit order to sell were to be executed, it should be executed at a price of 20 1/8 and reported at such price to Nasdaq for trade reporting purposes and to the customer on the confirmation for purposes of Rule 10b-10. In effect, the agreement regarding the compensation to the sales representative converts an internal division of firm profits on a trade into compensation to the firm that must be treated as a markup/markdown or commission and handled as such. This answer is consistent with statements made by the NASD in Notices to Members 95-67 and 96-10, as well as the letter from Richard Lindsey, SEC, to Richard Ketchum, NASD, dated January 3, 1997.

  • 97-56 Intermarket Surveillance Group Issues New Automated Reporting Requirements

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    Executive Summary

    New uniform provisions regarding the automated reporting requirement for Positions Hedging Stock Options will become effective on December 31, 1997.

    New uniform provisions regarding the automated reporting requirement for Stock Index and Currency Warrants will become effective on December 31, 1997.

    Effective October 15, 1997, all members will be required to file Large Option Position Reports (LOPRs) for FLEX options electronically with the Securities Industry Automation Corporation (SIAC1).

    Effective October 15, 1997, all members must provide a list of all groups of options accounts that act in-concert in a standard electronic format. Further, after October 15, all new or updated in-concert lists must be provided in the same electronic format.

    All members must successfully test the first three items with SIAC in order to be in compliance by the effective dates. The above new provisions will become effective at the options exchanges, the National Association of Securities Dealers, Inc. (NASD®) and those other exchanges which are approved to trade currency and stock index warrants.

    This Notice describing these new provisions and requirements was prepared by the self-regulatory organizations (SROs2) acting jointly as members of the Intermarket Surveillance Group (ISG):

    American Stock Exchange, Inc. (AMEX)

    Boston Stock Exchange, Inc. (BSE)

    Chicago Board Options Exchange, Inc. (CBOE)

    Chicago Stock Exchange, Inc. (CHX)

    Cincinnati Stock Exchange, Inc. (CSE)

    NASD Regulation, Inc.

    New York Stock Exchange, Inc. (NYSE)

    Pacific Exchange, Stock & Options, Inc. (PCX)

    Philadelphia Stock Exchange, Inc. (PHLX)

    I. Automated Reporting Requirement For Positions Hedging Stock Options

    Since 1988, member firms have been approved for an automatic limited exemption from equity options position limits when utilizing the four most commonly used hedged positions (long stock and short call or long put, and short stock and long call or short put). When utilizing these exemptions, the exchanges have required that members report all hedged options positions manually on a special "Hedge Exemption" reporting form which indicates account information, equity options positions, and securities used to hedge the position.

    Effective December 31, 1997, all Hedge Exemption Reports for Options Clearing Corporation (OCC) issued options will be required to be submitted in machine readable form only.3 For those firms providing the report through their own EDP area or through an outside service bureau, see Attachment 1 for the layout of the new hedged instrument position record reporting as well as the current specifications for reporting large options positions. For those firms using SIAC's PC-based software, upgraded software will be provided to you.

    When reporting hedged positions, firms will be required to report the entire customer account options position (all series) and hedge instrument position. Increases or reductions of positions in previously reported series; additions of new series; and series that have been closed out through purchase, sale, exercise, assignment, bona fide adjustment or hedge instrument position changes, must all be reported. Please enter a zero to indicate when a position in a series has been closed. It is not necessary to report changes due to expired series. It is important to remember that all accounts under common control by the same individual or entity must be aggregated for the purpose of calculating the reporting threshold. For firm proprietary accounts, only the firm's hedge instrument position need be reported.

    Firms that introduce options transactions to other firms on a fully disclosed basis need not report the position in such accounts provided that the carrying firm files the required information. Non-clearing firms introducing options business to clearing firms on an omnibus basis are required to report individual positions for both customer and proprietary accounts directly to SIAC.

    The Large Options Positions Report (LOPR)4 should be transmitted to SIAC by no later than 9:00 p.m. eastern time on trade date plus one.

    Questions concerning hedge exemption reporting requirements can be directed to James Alaimo, American Stock Exchange, at (212) 306-1540, Patricia Cerny, Chicago Board Options Exchange, at (312) 786-7722, or Joseph Alotto, NASD Regulation, at (301) 590-6845.

    II. Stock Index And Currency Warrants Reporting

    The Securities and Exchange Commission rules5 concerning transactions in stock index and currency warrants. One provision requires members to report currency and index warrant positions held by an account acting alone or in-concert with other accounts, when the position totals 100,000 warrants or more covering the same underlying currency or index. This revision applies only to currency or stock index warrants listed after August 28, 1995.

    To facilitate the automated reporting of these positions, enhancements have been made to the LOPR. Attachment 2 displays the record layouts for this enhancement.6 Member firms that carry large warrant positions are required to begin reporting on an automated basis by October 15, 1997.

    For purposes of calculating the 100,000-warrant reporting threshold, long positions in call warrants will be aggregated with short positions in put warrants and short positions in call warrants will be aggregated with long positions in put warrants. This aggregation of positions applies only to warrants covering the same underlying currency or index.

    Members with positions which currently meet the warrants position reporting threshold should contact the appropriate individual listed below for guidance in reporting these positions:

    Oree Richburg, American Stock Exchange, Inc., at (212) 306-1547

    Patricia Cerny, Chicago Board Options Exchange, Inc., at (312) 786-7722

    Joseph Alotto, NASD Regulation, Inc., at (301) 590-6845

    Hope Duffy, New York Stock Exchange, Inc., at (212) 656-6197

    David DiCenso, Pacific Exchange, Stock & Options, Inc., at (213) 977-4541

    Richard McDonald, Philadelphia Stock Exchange, Inc., at (215) 496-5353

    III. FLEX Options

    Because of the differences in the FLEX option symbol format, member firms have been permitted to file large FLEX options positions either manually with an interested SRO, or electronically with SIAC. Effective October 15, 1997, all members will be required to file LOPRs for FLEX options electronically with SIAC.7 Manual reporting will no longer be accepted.

    Questions concerning FLEX options reporting requirements can be directed to James Alaimo, American Stock Exchange, at (212) 306-1540, or Patricia Cerny, Chicago Board Options Exchange, at (312) 786-7722.

    IV. Aggregation Of Accounts Acting In-Concert

    Member firms carrying customer accounts that must be aggregated for position limit and LOPR purposes currently file a listing of in-concert accounts in a manual format. As a reminder, this reporting requirement only applies to customer accounts that trade options and whose aggregate position equals 200 or more contracts. This procedure has been changed so that by no later than October 15, 1997, all members must provide a list of all groups of accounts that act in-concert on a 3.5" IBM compatible diskette in the format outlined in Attachment 3. Further, all new or updated in-concert lists must be provided in the above noted manner. Diskettes must be filed with the American Stock Exchange, Market Surveillance Department, 86 Trinity Place, New York, New York 10006. The AMEX will process this information on behalf of all market centers.

    Questions concerning account aggregation reporting should be directed to Oree Richburg, American Stock Exchange, at (212) 306-1547.

    V. Testing

    Members wishing to utilize the new hedge exemption or currency/index warrant reporting methods prior to the deadline can do so by updating their software and conducting a successful test of their computerized data input with SIAC. Firms wishing to obtain SIAC's PC-based software or to upgrade their old PC-based software can contact the SIAC PC Service Center, at (212) 383-2062. Firms wishing to commence hedge exemption reporting directly to SIAC, utilizing their own software, should contact Laura Clinton of SIAC's Network Support Department, at (212) 383-2890 for testing information.

    Note: All firms must successfully test with SIAC before utilizing the new reporting methods. Further, firms which do not utilize hedge exemptions or trade currency or stock index warrants are not required to upgrade their software.


    Endnotes

    1 NASD RegulationSM has special reporting requirements for listed and unlisted options. Please refer to NASD Notice to Members 94-46 for details.

    2 These new provisions and requirements were prepared by the American Stock Exchange, Chicago Board Options Exchange, NASD Regulation, New York Stock Exchange, Pacific Stock Exchange and the Philadelphia Stock Exchange.

    3 NASD Regulation has special reporting requirements for listed and unlisted options. Please refer to NASD Notice to Members 94-46 for details.

    4 This procedure is implemented pursuant to the following rules: AMEX - 906; CBOE - 4.13: NASD-Conduct Rule 2860-1(5); NYSE - 706; PCX - 8.17; PHLX - 1003.

    5 This procedure is implemented pursuant to the following rules: AMEX - 1110; CBOE-30.35; NASD Conduct Rules 2852; NYSE - 414; PCX - 8.17; PHLX - 1003.

    6 NASD Regulation has special reporting requirements for listed and unlisted currency and stock index warrants.

    7 See note 2 above.

  • For Your Information

    View PDF File

    Disciplinary Action Corrections

    The following corrections pertain to the August 1997 Notices to Members Disciplinary Actions section.

    • Page 428—Charles William Duquette (Registered Representative, Beaverton, Oregon) was suspended from January 6, 1996 to July 6, 1997. Lewis H. Aytes (Registered Representative, Medford, Oregon) was suspended from February 15, 1996 to August 15, 1997. The August Notice erroneously stated that Duquette was suspended from January 16, 1996 to July 16, 1996 and that Aytes was suspended from February 15, 1996 to August 15, 1996.

  • 97-55 New Membership Application Rules, New Code Of Procedure, And Other New Disciplinary Rules

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    0120, 0121 and IM22104

    Rule 1010 Series

    Rule 8000 Series

    Rule 9000 Series - 9000 to 9242

    Rule 9000 Series - 9250 to 9370

    Rule 9000 Series - 9400 to 9500

    SUGGESTED ROUTING

     

    Senior Management
    Internal Audit
    Legal & Compliance

    Operations
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    Executive Summary

    On April 18, 1997, the National Association of Securities Dealers, Inc. (NASD®) proposed to the Securitiesand Exchange Commission (SEC or Commission) SR-NASD- 97-28, a rule filing containing proposed rules relating to membership application procedures; disciplinary proceedings; and procedures used to determine eligibility questions, impose limitations on the operations of members, impose summary suspensions, non-summary suspensions, cancellations, or bars, and adjudicate denials of access (Rules).1 The Commission approved the Rules on August 7, 1997.2

    Questions

    Questions should be directed to:

    Membership Application Procedures

    Dan Sibears, Vice President,
    Department of Member Regulation,
    (202) 728-6911

    Mary Dunbar, Assistant General
    Counsel, Office of General Counsel,
    NASD Regulation, (202) 728-8252

    Rule 8000 Series

    John Pinto, Executive Vice President,
    Department of Member Regulation,
    (202) 728-8233

    Mary Dunbar
    (202) 728-8252

    Code Of Procedure Disciplinary Proceedings

    Katherine Malfa, Chief Counsel,
    Department of Enforcement,
    (202) 974-2853

    Sharon Zackula, Assistant General
    Counsel, Office of General Counsel,
    NASD Regulation, (202) 728-8985

    Procedures In Rule 9400 Series-Rule 9500 Series

    Mary Dunbar
    (202) 728-8252

    Case Authorization Process In Code Of Procedure

    William R. Schief, Vice President,
    Department of Enforcement,
    (202) 974-2858

    Louise Corso, Senior Attorney,
    Department of Enforcement,
    (202) 974-2835

    Membership Application Procedures

    The NASD is amending the membership application procedures so thatall initial membership application decisions are made by the Department of Member Regulation rather than a District Committee. In addition, the new Rules set forth more detailed information on the standards for admission and contain specific guidelines for determining when an admission decision must be issued. The new Rules also address applications by a current member to obtain approval of a change in ownership, control, or operations, or a change in a business restriction agreement. The new Rules are set forth in the new Rule 1010 Series.

    Rules Regarding Investigations And Sanctions

    The NASD is making changes to the procedures used in NASD investigations and examinations to clarify the NASD's authority to require members and their associated persons to testify under oath or affirmation and provide other information. The NASD is also revising a procedure for suspending members or their associated persons who fail to provide the NASD with requested information. Such changes are set forth in the amended Rule 8000 Series.

    Disciplinary Procedures In Code Of Procedure

    The NASD is amending the procedures applicable to disciplinary proceedings described in the Code of Procedure to provide for, among other things:

    • Staff-authorized complaints;
    • Staff Hearing Officers presiding over disciplinary proceedings;
    • New Rules relating to discovery, ex parte prohibitions and motions practice;
    • Hearing Panels chaired by staff Hearing Officers;
    • "Trial-level" decisions issued by Hearing Panels, rather than by District Committees; and
    • Appeals of disciplinary decisions by NASD staff as well as by Respondents.

    The new Rules setting forth these changes to the Code of Procedure are the new Rule 9100 Series, the new Rule 9200 Series, and the new Rule 9300 Series. The new Rule 9100 Series sets forth Rules of general applicability not only to disciplinary proceedings described in the new Rule 9200 Series and the new Rule 9300 Series, but also to the procedures set forth in the new Rule 9400 Series and the new Rule 9500 Series described below.

    Procedures Regarding Eligibility, Limitations On Operations, Summary And Non-Summary Suspensions, Cancellations, Bars, And Denials Of Access

    The NASD is amending the procedures relating to eligibility, limitations on operations, summary and non-summary suspensions, cancellations, bars, and denials of access to provide greater detail regarding the procedural rights of a participant in a proceeding and to conform such proceedings to the current corporate structure. These amended Rules are set forth in the new Rule 9400 Series and the new Rule 9500 Series.

    The new Rules set forth sweeping changes in several areas of concern to members, their associated persons, and the investing public. For a complete understanding of the new Rules, the NASD urges members and their associated persons to read the Rules and the description of such Rules in the SEC releases in the Federal Register cited in note 1 and note 2.

    Effectiveness Of The New Procedures

    The Commission approved SR-NASD-97-28 on August 7, 1997, and made the new Rules effective upon approval, except as indicated below.

    Membership Admission Rules

    The new Rule 1010 Series, the membership admission Rules, will take effect on August 7, 1997. Thus, if a membership application is received by the NASD before August 7, 1997, the application will be considered under the old procedures. However, if a membership application is received by the NASD on or after August 7, 1997, the new Rule 1010 Series will apply to the application process.

    Rules Regarding Investigations And Sanctions

    The amendments to the Rule 8000 Series will take effect on August 7, 1997.

    The Code Of Procedure

    The Code of Procedure, as amended (the new Rule 9100 Series through the new Rule 9300 Series), will apply to disciplinary proceedings as follows.

    a) Complaints, Offers Of Settlement

    If a complaint is authorized prior to August 7, 1997, a Respondent may not seek to obtain reconsideration of whether the complaint should have been authorized under the new Code. Otherwise, the application of the new Code to a complaint and the disciplinary proceeding following is established by determining two facts: when the complaint is authorized and when NASD staff first attempted service of the complaint.

    Old Code

    In a disciplinary proceeding involving only one Respondent named in the complaint, the Respondent is subject to the old Code, including those provisions relating to offers of settlement, if the complaint is authorized and the first attempted service occurs prior to August 7, 1997.3 First attempted service means the complaint is mailed by NASD staff or delivered by NASD staff to a courier for transmission by the courier. In a multi-Respondent disciplinary proceeding, all of the Respondents named in the complaint will be subject to the old Code, including those provisions relating to offers of settlement, if the complaint is authorized and, as to at least one Respondent, the first attempted service occurs prior to August 7, 1997.4

    New Code

    In a disciplinary proceeding involving only one named Respondent, the Respondent is subject to the new Code if the complaint is authorized before August 7, 1997, but the first attempted service occurs on or after Special NASD Notice to Members 97-55 August 1997 August 7, 1997. In a disciplinary proceeding in which multiple Respondents are named in the complaint, all Respondents are subject to the new Code if the complaint is authorized before August 7, 1997, but NASD staff does not make the first attempted service of the complaint as to any of the named Respondents until on or after August 7, 1997. Finally, in any case in which the complaint is authorized on or after August 7, 1997, the Respondent will be subject to the provisions of the new Code.
    b) AWCs, MRVs

    The application of the new Code to a letter of acceptance, waiver, and consent (AWC) or a minor rule violation plan letter (MRV) is based on when a member or an associated person executes an AWC or a MRV. Thus, if a member or an associated person executes an AWC or a MRV before August 7, 1997, the AWC or MRV will be subject to review and acceptance under the old Code. However, if a member or an associated person is engaged in negotiations about the terms of an AWC or MRV and the AWC or MRV is not executed until August 7, 1997, or later, it will be subject to review and acceptance under the new Code.
    c) Appeals, Reviews

    The Rule 9300 Series of the new Code will apply to any appeal, call for review, or review of a decision rendered under new Rule 9268 and new Rule 9269 if the decision is: (a) served on a Respondent on or after August 7, 1997, and (b) appealed, called for review, or reviewed. By doing so, all of the new appellate and review procedural enhancements, with one exception, will apply to a completed "trial-level" proceeding that is appealed, subject to a call for review, or reviewed on or after the effective date of the new Code. The one exception is the right of the Department of Enforcement to appeal or cross-appeal a case, which will not apply. This provision in the new Rule 9300 Series will not apply to any disciplinary proceeding unless the disciplinary proceeding is based upon a complaint authorized on or after August 7, 1997.
    d) A 14-Calendar Day "Opt-In" Period

    In SR-NASD-97-28, the NASD proposed that in certain cases a Respondent to a disciplinary proceeding that would be administered under the old Code be allowed to opt in to the new Code. 62 F. R. 25229-25230. TheNASD continues to believe that it is appropriate and desirable to have a period during which a Respondent subject to the old Code may opt to have the proceeding administered under the new Code, even though the Commission made the new Rules effective upon approval. Thus, a Respondent who is named in a complaint that is authorized prior to August 7, 1997, may opt to have the disciplinary proceeding go forward under the new Code if the first attempted service of the complaint upon the Respondent occurred not earlier than 14 calendar days before August 7, 1997, i.e., July 24, 1997. A Respondent must notify NASD staff in writing of its request to have the disciplinary proceeding administered under the new Code prior to or on the date the Respondent's answer is due. As noted in a previous submission to the Commission, the NASD believes that in a disciplinary proceeding involving more than one Respondent, all Respondents must so opt in order for the new Code to apply. NASD staff shall specifically notify a Respondent who has the option to opt in of the existence of this right and the limitations on this right.

    Procedures Regarding Eligibility, Limitations On Operations, Summary And Non-Summary Suspensions, Cancellations, Bars, And Denials Of Access

    The new Rule 9400 Series through the new Rule 9500 Series will take effect on August 7, 1997. If a proceeding is initiated before August 7, 1997, the proceeding will be administered under the old provisions relating to the proceeding. If a proceeding is initiated on or after August 7, 1997, the proceeding will be administered under the new Rules.

    The Case Authorization Process Investigations

    Investigations under the new Code will be handled in essentially the same manner as such matters were performed previously. Previously, staff of the Departments of Member Regulation and Enforcement investigated matters arising in NASD's District Offices. These matters resulted from a variety of sources, including routine or cause examinations of member firms, review of customer complaints, registered representatives' terminations for cause filed on Form U-5, inquiries from the public, or referrals from regulators. The staff of the Departments of Member Regulation and Enforcement will continue to investigate such mattersand obtain the evidence to support allegations of violations of the NASD rules, the rules of the Municipal Securities Rulemaking Board (MSRB), or the federal securities laws. These matters will also be reviewed by an attorney in the District Office who is a member of the Department of Enforcement. As before, the attorney will work with the Member Regulation staff to ensure that there is sufficient evidence to support proposed charges.

    Staff of the Department of Enforcement in Washington, D.C. and the 439 Special NASD Notice to Members 97-55 August 1997 Department of Market Regulation will continue to investigate matters that arise from a variety of sources. Staff in each of these departments also will work with attorneys to ensure that there is sufficient evidence to support allegations of violation.

    At the conclusion of an investigation, the staff will determine whether formal action is appropriate. In certain cases, the staff may determine that formal disciplinary action is not warranted, but informal cautionary action is appropriate. In such instances, the staff may issue a Letter of Caution and may also require individuals and representatives of a member firm to attend a meeting, which the staff has referred to as a "Compliance Conference." These informal actions will not be subject to review by the Case Authorization Unit (CAU) described below.

    When the staff notifies a Respondent that a recommendation of formal disciplinary charges is being considered, the potential Respondent generally will have an opportunity to either settle the matter through the appropriate pre-complaint procedure, or, if the Respondent chooses, submit a written statement explaining why such charges should not be brought. These statements are commonly referred to as "Wells Submissions,"5 and will be provided to the CAU, and, in appropriate cases, the Office of Disciplinary Policy (ODP), along with the staff's recommendation to file a disciplinary action.6 Potential Respondents will have one opportunity to submit a "Wells-type" statement and all appropriate arguments should be addressed at that time.

    Case Authorization

    Beginning August 7, 1997, the effective date of the new Code, all District cases will be authorized by the new CAU, which has been formed in the Department of Enforcement. After the staff has completed its investigation and the matter has been reviewed at the District level by both the attorney responsible for the case and the District Director, the recommendation to bring a formal disciplinary action will be forwarded to the CAU. This unit will review the matter, obtain any additional information necessary to evaluate its basis, and consult with other offices, if appropriate. The Department of Enforcement has developed a computer system to systematically track the progress of matters being reviewed by the CAU.

    The newly formed ODP will assist in the development of overall disciplinary policy for the organization. On behalf of the Office of the President of NASD Regulation, Inc. (NASD RegulationSM) ODP will review and approve all recommendations by District Offices to file significant or complex formal actions raising important regulatory or policy issues. ODP review will be concurrent, and in coordination, with CAU review. The ODP also will provide an objective review and approval of cases that are investigated by the Department of Enforcement in Washington D.C., as well as those that relate to "quality of market" issues. The review and approval of these cases will be performed in a manner similar to that described for the District Office cases, except that ODP will serve as the primary reviewer. The Department of Enforcement, however, will be the authorizing entity within NASD Regulation.

    After review and approval by the CAU, and, in appropriate cases, ODP, the Department of Enforcement will authorize the matter. After a case has been authorized, the appropriate office will issue the complaint and file the complaint with the Office of Hearing Officers. All offers of settlement supported by the staff will be reviewed in the same manner as described above for filing cases. AWCs and MRVs may be negotiated with the staff prior to, and subject to, approval by the Department of Enforcement, and, in appropriate cases, ODP, and acceptance by the National Business Conduct Committee (NBCC).

    This centralized review of disciplinary proceedings is intended to provide an objective review of the case by those not directly involved in the investigation and ensure a level of consistency among the many disciplinary actions that are filed each year. This is a brief summary of the new Rules approved by the Commission. Members, associated persons, and their counsel should refer to the specific Rules for a complete understanding of the Rules and to assure compliance with their terms. The full text of the approved Rules isattached to this Notice as it is published on the NASD Regulation Web Site, www.nasdr.com, "Members Check Here," and then under the caption, "Notices to Members." The full text of the new Rules is also available from NASD MediaSource, at (301) 590-6142.


    Endnotes

    1 SR-NASD-97-28, filed April 18, 1997, Rel. No. 34-38545 (April 24, 1997), 62 F.R. 25226 (May 8, 1997); SR-NASD-97-28, Amendment No. 1, filed April 23, 1997; SRNASD-97-28, Amendment No. 2, filed July 10, 1997, Rel. No. 34-38831 (July 11, 1997), 62 F.R. 38156 (July 16, 1997); SR-NASD-97-28, Amendment No. 3, filed July 11, 1997; SR-NASD-97-28, Amendment No. 4, filed July 21, 1997; and SR-NASD-97-28, Amendment No. 5, filed August 4, 1997. In Amendment No. 2, the NASD also proposed Rules relating to requests for exemptive relief, which are the Rule 9600 Series. The Rule 9600 Series will be addressed in a separate Notice to Members. The amendments that do not contain a Federal Register citation were not published. Terms that are defined in the rule filing are capitalized in this Notice.

    2 Rel. No. 34-38908 (August 7, 1997). The Commission also approved proposed amendments to the Rule 8000 Series, Rule 0120, and Rule 0121, and proposed Rule IM-2210-4. The NASD withdrew the part of SR-NASD-97-28 relating to the restated certificates of incorporation of NASD, NASD Regulation and Nasdaq, Inc. (Nasdaq®), the By-Laws of NASD, NASD Regulation, and Nasdaq, and the Plan of Allocation and Delegation of Functions By NASD to Subsidiaries (Delegation Plan) (collectively, the "Seven Corporate Documents"). The Seven Corporate Documents, as amended to reflect the corporate restructuring recently approved by the NASD Board of Governors, will be resubmitted in a separate rule filing.

    3 The appeal or review of such disciplinary proceeding may be subject to the new Code if the disciplinary proceeding is subsequently appealed to the NBCC or the NBCC subjects the disciplinary proceeding to a review, as described in greater detail below.

    4 See note 3, supra.

    5 This term has been used at the SEC following the issuance of the release Procedures Relating to the Commencement of Enforcement Proceedings and Termination of Staff Investigations, Rel. No. 33-5310 (September 27, 1972). This release addressed recommendations of the Advisory Committee on Enforcement Policies, which was known as the "Wells Committee." The recommendations included the discretionary practice of permitting persons to present a statement to the Commission. See William R. McLucas, et al., An Overview of Various Procedural Considerations Associated with the Securities and Exchange Commission's Investigative Process, 45 Bus. Law. 625, 689 (1990).

    6 In most cases, potential Respondents will be given the opportunity to make such a submission; however, there may be instances where the staff determines it inappropriate to do so. This process is discretionary with the staff and is not a right or policy. The failure to allow for the submission of a "Wells-type" statement has no effect on the staff's ability or authority to file a disciplinary action against a member or an associated person.

  • 97-54 Fixed Income Pricing System Additions, Changes, And Deletions As Of July 25, 1997

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    SUGGESTED ROUTING

     

    Senior Management
    Corporate Finance
    Institutional
    Legal & Compliance

    Municipal
    Operations
    Systems
    Trading



    As of July 25, 1997, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

    Symbol Name Coupon Maturity
    OEC.GA Ohio Edison Co 7.500 08/01/02
    OEC.GB Ohio Edison Co 8.750 02/15/98
    OEC.GC Ohio Edison Co 8.625 09/15/03
    OEC.GD Ohio Edison Co 8.250 04/01/02
    OEC.GE Ohio Edison Co 8.750 06/15/22
    OEC.GF Ohio Edison Co 6.875 09/15/99
    OEC.GG Ohio Edison Co 7.375 09/15/02
    OEC.GH Ohio Edison Co 6.375 04/01/00
    OEC.GI Ohio Edison Co 6.875 04/01/05
    OEC.GJ Ohio Edison Co 7.875 04/01/23
    OEC.GK Ohio Edison Co 7.625 06/15/23
    PPPC.GA Pennsylvania Power Co 8.500 07/15/22
    PPPC.GB Pennsylvania Power Co 7.500 08/01/03
    PPPC.GC Pennsylvania Power Co 6.625 07/01/04
    PPPC.GD Pennsylvania Power Co 7.625 07/01/23
    PPPC.GE Pennsylvania Power Co 6.375 09/01/04
    JCP.GA Penny (JC) Inc 6.950 04/01/00
    ICAB.GB International CableTel Inc 11.500 02/01/06
    AKS.GB AK Steel Corp 9.125 12/15/06
    DRL.GA DI Industries Inc 8.875 07/01/07
    SLGC.GA Sterling Chemicals Inc 11.250 04/01/07
    CNLP.GA Connecticut Light & Power Co 6.500 01/01/98
    CNLP.GB Connecticut Light & Power Co 7.250 07/01/99
    CNLP.GC Connecticut Light & Power Co 7.375 12/01/25
    CNLP.GD Connecticut Light & Power Co 5.750 07/01/00
    CNLP.GE Connecticut Light & Power Co 7.500 07/01/23
    CNLP.GF Connecticut Light & Power Co 5.500 02/01/99
    CNLP.GG Connecticut Light & Power Co 6.125 02/01/04
    CNLP.GH Connecticut Light & Power Co 8.500 06/01/24
    CNLP.GI Connecticut Light & Power Co 7.875 06/01/01
    PIEL.GA Pierce Leahy Corp 11.125 07/15/06
    STO.GM Stone Container Corp 10.750 04/01/02
    PTX.GA Pilowtex Corp 10.000 11/15/06
    CHFP.GA Chief Auto Parts Inc 10.500 05/15/05
    WMAS.GA Western Mass Electric Co 6.750 03/01/98
    WMAS.GB Western Mass Electric Co 7.750 12/01/02
    WMAS.GC Western Mass Electric Co 6.875 01/01/00
    WMAS.GD Western Mass Electric Co 6.250 03/01/99
    WMAS.GE Western Mass Electric Co 7.750 03/01/24
    DFC.GA Delta Financial Corp 9.500 08/01/04

    As of July 25, 1997, the following bonds were deleted from FIPS.

    Symbol Name Coupon Maturity
    CMZ.GA Cincinnati Milcron Inc 12.000 07/15/10
    UIS.GE Unisys Corp 15.000 07/01/97

    As of July 25, 1997, changes were made to the names and symbols of the following FIPS bonds:

    New Symbol New Name Coupon Maturity Old Symbol
    PLH.GA Pierce Leahy Corp 11.125 07/15/06 PIEL.GA
    PLH.GB Pierce Leahy Corp 9.125 07/15/07 PIEL.GB

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

    Any questions regarding the FIPS master file should be directed to Cheryl Glowacki, Nasdaq® Market Operations, at

  • 97-53 Labor Day: Trade Date — Settlement Date Schedule

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    Labor Day: Trade Date — Settlement Date Schedule

    The Nasdaq Stock MarketSM and the securities exchanges will be closed on Monday, September 1,1997, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

    Trade Date Settlement Date Reg. T Date*
    Aug. 26 Aug. 29 Sept. 3
    27 Sept. 2 4
    28 3 5
    29 4 8
    Sept. 1 Markets Closed
    2 5 9


    * 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."

  • 97-52 SEC Approves Amendments Relating To Market Maker Registration And Primary Market Maker Eligibility By Managers And Co-Managers Of Secondary Offerings

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    SUGGESTED ROUTING

    Corporate Finance
    Legal & Compliance
    Operations
    Syndicate
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    Executive Summary

    On June 27, 1997, the Securities and Exchange Commission (SEC) approved amendments to NASD® Rules 4611(d) and 4612(g) with regard to market maker registration and Primary Market Maker (PMM) eligibility by managers and co-managers of secondary offerings.

    Background And Summary

    A) Market Maker Registration

    On April 24, 1997, the National Association of Securities Dealers, Inc. (NASD) submitted a proposed rule change to NASD Rule 4611 to permit managers and co-managers of an underwriting syndicate participating in a secondary offering of a security listed and traded on Nasdaq® to register as a market maker in such issue on a same-day basis on the day of the secondary offering.

    Previously, on-line registration requests by all members in an issue that had been trading on Nasdaq for more than five days became effective on the business day after such request. The rule is designed to minimize the potential for "fair weather" market making and to ensure that members registering as market makers are making a legitimate commitment of their capital to the issue for the betterment of the market, not just capturing short-term trading profits during the brief periods of favorable market conditions. However, managers and co-managers of underwriting syndicates who failed to submit a market maker registration on the day before the offering were sometimes unjustly precluded from trading an issue on the day of the secondary offering.

    Accordingly, with this amendment to Rule 4611(d), managers and co-managers of syndicates in a secondary offering can register in such issue on a same-day basis on the day of the secondary offering. Because of the inherent commitment of managers and co-managers of underwriting syndicates, the need for their members to make a market in the stock to manage their risk, and the additional liquidity and pricing efficiency that these market makers may provide, Nasdaq determined that same-day, on-line registrations are appropriate for managers and co-managers of an issue on the day of the secondary offering.
    B) Primary Market Maker Eligibility

    Also on April 24, 1997, the NASD submitted a proposed rule change to NASD Rule 4612(g), permitting managers and co-managers of a secondary offering to be eligible to become a Primary Nasdaq Market Maker in that issue prior to the effective date of the secondary offering when the member is a PMM in 80 percent or more of the securities in which they are registered, regardless of whether the member was a registered market maker in the stock before the announcement of the secondary offering.1

    While Rule 4612(g) does not prevent member firms from registering as market makers in a particular issue, it may prevent a member firm from registering as a market maker and immediately becoming a PMM in that issue in certain circumstances. Specifically, Rule 4612(g) provides that if a member registers in a stock after a secondary offering in that issue has been announced, or a registration statement has been filed, but before the offering has been declared effective, then that member cannot become a PMM in that stock unless: (1) the secondary offering has become effective and the market maker had satisfied the PMM standards between the time the market maker registered in the security and the time the offering became effective, or (2) the market maker has satisfied the PMM standards for 40 calendar days (Secondary Offering PMM Delay Rule).

    Nasdaq's concern underlying Rule 4612(g) is that dealers may enter the market after secondary offerings have been announced in order to take advantage of the market maker exemption from the short sale rule. Specifically, it has been Nasdaq's experience that the time period after secondary offerings have been announced is sensitive to short selling pressure, as the "overhang" on the market from the offering makes the security particularly susceptible to manipulative short selling.

    Because of the Secondary Offering PMM Delay Rule, there have been instances where managers and co-managers of secondary offerings were precluded from becoming a PMM in the issue prior to the effective date of the secondary offering, simply because they were not previously registered in the issue.

    Because of the inherent commitment of managers and co-managers of underwriting syndicates to their issues, as well as the additional liquidity that these members provide, Nasdaq determined that it would be appropriate to permit managers and co-managers to register as PMMs in their issues prior to the effective date of the secondary offering.

    Text Of Amendments

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

    NASD Rule 4611

    (a) through (c) No change.
    (d) A Nasdaq market maker may become registered in an issue already included in Nasdaq by entering a registration request via a Nasdaq terminal. If registration is requested in an issue that has been included in Nasdaq for more than five (5) days, and the requirements of paragraph (b) above are satisfied, registration shall become effective on the date after the registration request is entered. Provided, [If] however, that same day registration is permissible for:
    (1) a Nasdaq market maker, registered in a security that is the subject of a publicly announced merger or acquisition offer with another Nasdaq issue, who seeks registration in the other merger or acquisition issue; [,same-day registration is permissible.]; and
    (2) a manager or co-manager of an underwriting syndicate for a secondary offering of that security.
    (e) through (g) No change.

    NASD Rule 4612

    (a) through (g)(1) No change.
    (g)(2) Notwithstanding paragraph (g)(1) above, after an offering in a stock has been publicly announced or a registration statement has been filed, no market maker may register in the stock as a Primary Nasdaq Market Maker unless it meets the requirements set forth below:
    (A) For secondary offerings:
    (i) the secondary offering has become effective and the market maker has satisfied the qualification criteria in the time period between registering in the security and the offering becoming effective: provided, however, that if the member is a manager or co-manager of the underwriting syndicate for the secondary offering and it is a PMM in 80% or more of the Nasdaq National Market securities in which it is registered, the member is eligible to become a PMM in the issue prior to the effective date of the secondary offering regardless of whether the member was a registered market maker in the stock before the announcement of the secondary offering; or
    (ii) the market maker has satisfied the qualification criteria for 40 calendar days.
    (g)(2)(B) through (h) No change.

    Questions regarding this rule change should be directed to Nasdaq Market Operations at (800) 219-4861.


    Endnotes

    1 A firm is not precluded from being a manager or co-manager of a secondary offering if it is not a PMM in 80 percent or more of the stocks in which it makes a market.

  • 97-51 NASD Regulation Grants Two Conditional Exemptions Under MSRB Rule G-37

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    SUGGESTED ROUTING

    Senior Management
    Internal Audit
    Legal & Compliance
    Municipal
    Training



    Executive Summary

    Under SEC approved procedures, NASD Regulation, Inc. (NASD RegulationSM) reviews member requests for exemption from the two-year prohibition of municipal securities underwriting business contained in Rule G-37 (Rule) of the Municipal Securities Rulemaking Board (MSRB). Recently, NASD Regulation granted two conditional exemptions under exemption paragraph (i) of the Rule. The two conditional exemptions were granted in light of the highly unusual facts and circumstances of the particular cases, and reflect the MSRB's expressed intent that dealers would not routinely request exemptions and that NASD Regulation would grant exemptions only in very limited circumstances.

    The two conditional exemptions and NASD Regulation's rationale for its determinations are summarized in this Notice. These exemptions should not be viewed as precedents for other requests. Rather, NASD Regulation has determined to provide notice of its responses to selected exemption requests in order to highlight the procedures that all members should institute to avoid triggering the two-year business prohibition under the Rule. Members should be aware that future requests for exemptions under the Rule will be reviewed on an individual basis and granted only in limited cases. Dealers should continue to ensure that their compliance procedures are reasonably designed and implemented to avoid triggering the two-year prohibition.

    Background

    The Rule prohibits a broker, dealer or municipal securities dealer (dealer)from engaging in municipal securities business with an issuer for two years after the dealer, any municipal finance professional (MFP) associated with the dealer, or any political action committee (PAC) controlled by the dealer or any such associated MFP, makes a contribution to any official of the issuer who can, directly or indirectly, influence the awarding of municipal securities business. The only contributions to such an issuer official that do not trigger a prohibition on municipal securities business are contributions by an MFP to an official of an issuer for whom the MFP is entitled to vote that, in total, do not exceed $250 per election.

    Paragraph (i) of the Rule provides NASD Regulation with authority to exempt, conditionally or unconditionally, in particular cases, a dealer from the two-year prohibition on conducting municipal securities business with an issuer following political contributions by municipal securities professionals to specified officials of the issuer.

    The MSRB has stated that a dealer who was subject to the prohibition should have to make a substantial showing to be exempted from that prohibition. The MSRB also has stated that it expects the exemption would not be routinely requested by dealers and that exemptions would be granted by the National Association of Securities Dealers, Inc. (NASD®) only in limited circumstances.

    In connection with the adoption of paragraph (i) of the Rule, the MSRB stated that relief would be appropriate in certain circumstances, such as the following examples raised by public commenters: (1) contributions by a disgruntled employee made purposely to injure the dealer, its management or employees; and (2) a number of small contributions during an election cycle (e.g., over four years) made by an MFP eligible to vote for a particular official of an issuer which, when consolidated, amount to slightly over the $250 de minimis exemption (e.g., $255).

    In determining whether to grant an exemption, the Rule requires that the NASD consider, among other factors, whether: (1) such exemption is consistent with the public interest, the protection of investors and the purposes of the Rule; and, (2) such dealer (A) prior to the time the contribution(s) which resulted in such prohibition was made, had developed and instituted procedures reasonably designed to ensure compliance with the Rule; (B) prior to or at the time the contribution(s) which resulted in such prohibition was made, had no actual knowledge of the contribution(s); (C) had taken all available steps to cause the person or persons involved in making the contribution( s) which resulted in such prohibition to obtain a return of the contribution(s); and (D) had taken such other remedial or preventive measures, as may be appropriate under the circumstances.

    History Of Rule G-37 Exemptions Under Current NASD Regulation Review Procedures

    On October 20,1995, the SEC approved NASD procedures for exemption requests under paragraph (i) of the Rule.1 For details of those procedures, refer to Notice to Members 95-103, (December 1995). Since that time, NASD Regulation has received only a limited number of exemption requests. Under these procedures, NASD Regulation has granted only two conditional exemptions, and has not granted any full exemptions.

    Under the NASD procedures, exemption requests made pursuant to paragraph (i) of the Rule were submitted to NASD Regulation staff. If an exemption request was denied by NASD Regulation staff, it could be reviewed by the NASD Regulation Fixed Income Committee (the Committee) upon request. The two conditional exemptions were Committee determinations.

    The circumstances surrounding the two conditional exemptions as well as the Committee's rationale for its determinations are summarized below. The conditional exemptions were granted for very unusual circumstances, and reflect the MSRB's expressed intent that such exemptions would not be routinely requested by dealers and that exemptions would be granted only in limited circumstances.

    Exemption Request #1

    Circumstances Surrounding The Request

    In May of 1996, the chairman of a dealer wrote a check for $240 to an elected official of a municipality, who was running for re-election. In July of the same year, the chairman inadvertently mailed a duplicative check for $240 to the official's campaign, resulting in a total of $480 being contributed to the official's campaign. This second contribution, in aggregate with the first contribution, triggered the two-year business prohibition under the Rule.

    Upon realizing that he had made the same contribution twice, the chairman requested and received a refund check of $240 from the official's campaign. The chairman stated in an affidavit that at the time he wrote the check, he did not recall having already written a check for the $240 contribution.

    At that time, the dealer's written political contributions policy had required that municipal finance professionals submit a pre-clearance request form to the firm's designated supervisory professional and receive written approval prior to making a contribution. The chairman, in fact, submitted forms in both instances and received approval of both of his pre-clearance forms.

    According to representations made by the dealer, the dealer's designated supervisory principal, at the time the contributions were made, had delegated the responsibility of maintaining the books and records required by MSRB Rule G-8 and G-9 to the dealer's general counsel, who maintained a database of all political contributions by firm personnel. Normally, a pre-request form was reviewed by the general counsel, who compared it against the dealer's database for previous contributions, prior to the delegated supervisory principal's review of the form for approval.

    Under the circumstances at issue, the chairman's pre-request form for the first contribution was pre-reviewed by the general counsel, but the pre-request form for the second contribution was approved by the designated supervisory principal, without the general counsel's review. The designated supervisory principal did not remember previously approving a request form for the chairman, but instead relied only on the chairman's indication on the pre-request form that no prior contributions were made to the candidate.

    The dealer has subsequently revised its compliance procedures to require that, prior to the designated supervisory principal's review of any request form, the general counsel will review the firm's political contribution database to ensure that the applicant had made no prior contributions to that candidate and to indicate approval or disapproval on the request form.

    Committee Determination

    The Committee granted the dealer a conditional exemption by reducing the two-year prohibition to one year from the date of the chairman's second contribution. The Committee found that mitigating factors distinguished the contribution made by the chairman from the contributions seen in other requests before the Committee. The Committee found that the second contribution resulted more from human error by the chairman than from insufficient compliance procedures, failure by the dealer to educate key personnel, or any ignorance by firm personnel of the Rule. The Committee considered the relevant mitigating factors to be that the chairman was knowledgeable of the Rule's requirements and did follow the firm's pre-screening compliance procedures by submitting a second request which, were it not for administrative error, would have prevented the inadvertent second contribution. The Committee also noted that the dealer had already experienced a significant loss of business because of this matter.

    Exemption Request #2

    Circumstances Surrounding The Request

    In 1997, the parent company of a dealer acquired a non-member sponsor of municipal open-ended funds (the acquired company). Upon completion of the acquisition, the chairman and Chief Executive Officer (CEO) of the acquired company became an executive vice president of the dealer and was placed on the dealer's Executive Committee. Under the Rule, the CEO became a municipal finance professional (MFP) of the dealer by virtue of becoming a member of the dealer's Executive Committee. After the acquisition, the dealer discovered that the CEO had made a $500 contribution to the governor of a particular state in 1996, which triggered the two-year business prohibition under the Rule for the dealer in that state, beginning from the date of the contribution. The dealer had a long-standing policy forbidding political contributions of any kind by the firm or its employees for the purpose of influencing the municipal securities business. However, according to the dealer, the persons responsible for examining the acquisition of the acquired company did not anticipate that the CEO would become a member of the dealer's Executive Committee.

    Committee Determination

    The Committee granted the dealer a conditional exemption by reducing the two-year prohibition to one year from the date of the executive's contribution. In reviewing the circumstances surrounding the dealer's request, the Committee found that the placement of the CEO on the dealer's Executive Committee did trigger the two-year prohibition.

    To determine the appropriateness of granting a conditional or unconditional exemption under the circumstances at issue, the Committee considered the five factors required to be considered under paragraph (i) of the Rule, and in particular, the first factor, i.e., whether an exemption under the circumstances would be consistent with the public interest, the protection of investors and the purposes of the Rule.

    Upon review, the Committee determined that the dealer had: (1) developed and instituted procedures reasonably designed to ensure compliance with the Rule; (2) had no actual knowledge of the contribution prior to or at the time of the contribution; (3) had taken all available steps to cause the person involved in making the contribution to obtain a return of the contribution; and (4) had taken such other remedial or preventative measures as were appropriate under the circumstances. The Committee further noted that the two-year prohibition did not occur from a lack of knowledge of the Rule by the persons responsible for examining the acquisition of the acquired company, but from a lack of communication to such persons regarding the intent to place the CEO on the Executive Committee.

    The Committee determined that, in light of the unusual circumstances, prohibiting the dealer from conducting business in the state in question for one year would constitute a significant penalty that would discourage similar occurrences by the dealer and other dealers.

    NASD Regulation notes, however, that the conditional exemption was based on unique and unusual circumstances, including the circumstances surrounding the acquisition and placement of the CEO on the dealer's Executive Committee. This decision should not be construed to mean that a conditional exemption will be granted in future requests if the event which causes the two-year prohibition was inadvertent.

    Summary

    Members should be aware that future requests for exemptions from the two-year prohibition that are based on circumstances similar to those summarized in this Notice may not merit conditional exemptions. Dealers, therefore, should review the circumstances surrounding these two conditional exemptions, and should revise their compliance procedures, if appropriate, to ensure that such procedures are reasonably designed to prevent similar occurrences.

    Questions regarding this Notice may be directed to John H. Pilcher, Assistant General Counsel, Office of General Counsel, at (202) 728-8287.


    Endnotes

    1 These procedures were recently superseded by new Rules 9600 to 9630 of the Code of Procedure (the Code). On August 7, 1997, the SEC approved new NASD Regulation review procedures for exemption requests under the Rule. See, SEC Rel. No. 34-38908 (August 7, 1997). Under new Rule 9610 of the Code, a member seeking an exemption from the Rule shall file a written application with the Office of General Counsel of NASD Regulation. After considering an application, NASD Regulation staff shall issue a written decision, pursuant to new Rule 9620 of the Code, setting forth its findings and conclusions. The decision shall be served on the applicant pursuant to new Rules 9132 and 9134. After the decision is served on the applicant, the application and decision shall be publicly available unless NASD Regulation staff determines that the applicant has shown good cause for treating the application as confidential in whole or in part.

    If the application is denied, an applicant may file a written notice of appeal, pursuant to new Rule 9630, within 15 calendar days after service of a staff decision. The appeal will be reviewed by the National Business Conduct Committee pursuant to new Rule 9630.

  • 97-50 NASD Regulation Requests Comment on Regulation of Payment and Receipt of Cash Compensation Incentives

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    Comment Period Expires: October 15, 1997

    SUGGESTED ROUTING

    Senior Management
    Legal & Compliance
    Mutual Fund



    Executive Summary

    NASD Regulation, Inc. (NASD RegulationSM) requests comment on appropriate regulation regarding the participation by members and their associated persons in arrangements for the payment and receipt of various forms of incentive-based cash compensation for the sale and distribution of investment company and variable contract securities. In addressing this issue, commenters are asked to consider whether certain forms of incentive-based cash compensation designed to encourage sales of these products, such as "revenue sharing" agreements and differential commission payments, are harmful or beneficial to customers or the industry. Commenters are also asked to consider the appropriate regulatory approach to such arrangements, including possible disclosure requirements or substantive prohibitions. NASD Regulation requests that National Association of Securities Dealers, Inc. (NASD®) members, investors, and others, in considering their responses and comments, focus in particular on the need to permit members and associated persons the flexibility to structure compensation arrangements in the most effective manner possible in accordance with their business requirements while addressing any investor protection concerns that may arise in connection with some compensation practices.

    Questions concerning this Request For Comment may be directed to R. Clark Hooper, Senior Vice President, Office of Disclosure and Investor Protection, NASD Regulation, at (202) 728-8325 and Robert J. Smith, Senior Attorney, Office of General Counsel, NASD Regulation, at (202) 728-8176.

    Background

    Current NASD Rules

    Paragraph (l)(1) to NASD Conduct Rule 2830 prohibits principal underwriters of investment company shares from making cash and noncash payments to NASD members selling such shares unless the payments are disclosed in the prospectus. 1 Conduct Rule 2830(l) further states that "special compensation arrangements" made available to individual dealers which are not generally made available to all dealers must be disclosed in detail, including the identity of particular dealers involved.2 This requirement includes disclosure of all such payments to dealers, regardless of whether other prospectus disclosure rules apply.3 The disclosure provisions were intended to inform investors of certain concessions, in addition to the charges already required to be disclosed in the prospectus, that dealers receive to promote specific products.

    Conduct Rule 2830 does not contain a definition of "special compensation arrangement," and members have interpreted the term differently. In some instances, issuers have taken the position that cash compensation arrangements with individual dealers do not constitute "special" compensation arrangements where such arrangements are available to all dealers upon request, and therefore do not have to be disclosed in the prospectus with the required specificity. This interpretive ambiguity has resulted in a wide array of disclosure practices by issuers regarding special cash compensation, ranging from specific to very general disclosure or, in some cases, no disclosure.

    NASD Rules for variable products do not contain any requirements regarding prospectus disclosure of cash compensation arrangements.4

    Recent NASD Initiatives

    In 1994, NASD Regulation requested member comment on proposed rules that would have more closely regulated non-cash compensation arrangements and sales promotion awards involving trips, merchandise and other prizes, for the sale of mutual funds and variable contracts (Non-Cash Proposal).5 While the Non-Cash Proposal generally was aimed at enhancing supervisory control and reducing "point-of-sale" influences inherent in non-cash incentives, it also restated the current requirement in NASD Rules to disclose in the prospectus all "cash compensation" and "special cash compensation" arrangements for the sale of mutual funds. "Cash compensation" was proposed to be defined as "any discount, concession, fee, service fee, commission, asset-based sales charge, loan, or override received in connection with the sale and distribution of investment company securities." "Special cash compensation" was not defined.

    When the Non-Cash Proposal was published by the Securities and Exchange Commission (SEC) for public comment,6 it contained an additional provision that proposed to require that certain cash compensation credit for the sale of mutual funds and variable products be equally weighted. This provision was intended to prevent members from paying out non-cash awards in the form of cash, thereby circumventing the non-cash provisions. However, some commenters, primarily insurance-affiliated broker/dealers, stated that such a requirement appeared to mandate equal treatment of all forms of cash compensation. In particular, the commenters were concerned that the proposed rules would restrict the ability of member firms and their affiliated insurance companies to pay higher commissions or offer higher incentives for their proprietary products. Further, the commenters underscored the difficulties in trying to identify which compensation practices would qualify as cash or noncash compensation for purposes of the proposed rule and to what extent those practices provided significant incentives for salespersons to sell one product over another. As a result of these comments, the Board of Directors of NASD Regulation approved the deletion of the provision requiring equal credit for certain cash compensation incentives. On May 6, 1997, NASD Regulation resubmitted the Non-Cash Proposal to the SEC without the incentive cash compensation provision.

    The Tully Report

    In May 1994, an industry committee chaired by Merrill Lynch Chairman Daniel P. Tully (the Committee) was formed at the request of SEC Chairman Arthur Levitt to address concerns regarding conflicts of interest in the brokerage industry. The Committee's mandates were to review industry compensation practices for registered representatives (RRs) and branch managers, identify actual and perceived conflicts of interest for RRs and branch managers, and identify the "best practices" used in the industry to eliminate, reduce or mitigate such conflicts. The Committee issued its report on April 10, 1995 (Tully Report).7 Among some of the "best practices" identified were (i) paying a portion of RR compensation based on client assets in the account, regardless of transactional activity; (ii) prohibiting sales contests, or permitting contests based only on broad measures, rather than on single products; and (iii) paying identical commissions to RRs for proprietary and non-proprietary products within a product category, so that, with respect to the products in the same category, RRs are less motivated at point-of-sale by incentives.8 Generally, the Tully Report's findings and conclusions reflected a growing concern that the securities industry should more closely align the interests of brokerage firms and RRs to those of their customers and should encourage long-term relationships between firms and RRs and their customers.

    Discussion

    Types Of Arrangements

    NASD Regulation is aware of a broad range of cash compensation practices by which investment company and variable contract issuers, distributors, underwriters, investment advisers or affiliates of these entities (Offerors) provide various payments, incentives, rewards or value-added services to retail broker/dealers or their RRs in exchange for selling, promoting, or carrying the Offeror's products. Some of these payments (sometimes referred to as "revenue sharing") are paid to the broker/dealer and generally remain at the entity level to cover firm costs; other payments, such as differential commission payouts, are passed on to RRs and raise more directly the point-of-sale issues associated with the payment of differential compensation for proprietary products and sales contests.

    Such arrangements include:

    a) differential commission payouts by an Offeror to retail broker/dealers, such as:

    • cash awards or increased commission payouts for sales contests, in particular, contests that promote a single product of an Offeror over the short term;
    • higher base commission payouts for the sale of proprietary products;
    • bonus commissions on new business;
    • excess commissions for the sale of particular products;
    • renewal commissions for maintaining accounts with an Offeror;
    • service commissions for ongoing customer and shareholder account service; and
    • commission payments for large purchases of the Offeror's funds at net asset value by the broker/dealer's customers;
    b) payments by an Offeror to retail broker/dealers in exchange for:

    • carrying the Offeror's funds as one of the broker/dealer's "preferred" funds;
    • conducting "due diligence" examination of an Offeror's products;
    • placing the Offeror's ads in the broker/ dealer's internal newsletter;
    • allowing the Offeror to prepare the broker/dealer's training materials; and
    • providing omnibus and subaccounting services to the broker/dealer's customers who have purchased the Offeror's funds; and
    c) reimbursement by an Offeror to retail broker/dealers to cover business costs, such as:

    • errors and omissions insurance;
    • group life and health insurance;
    • contributions to pension plans;
    • agent and RR licensing fees;
    • generation of sales leads;
    • continuin