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  • 2000

    • 00-90 Mail Vote — NASD Solicits Vote On Amendments To The NASD By-Laws On Selected Corporate Governance Issues (Note: Only NASD member Executive Representatives are allowed to vote)

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      Note: Only NASD member Executive Representatives are allowed to vote. Ballots with voting instructions were distributed with the print version of this Notice.

      ACTION REQUESTED

      NASD By-Law Amendments

      Last Voting Date: January 22, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Corporate Governance
      NASD By-Laws



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD® or Association) invites members to vote to approve certain amendments to the NASD By-Laws. The amendments address several corporate governance issues: the treatment of staff Governors for purposes of Industry/Non-Industry balancing; the role of the National Nominating Committee (NNC) in contested elections; the petition process by which individuals and slates can be included in the election process; and the industry classifications that must be represented on the Board. Additionally, the amendments reflect the new NASD corporate structure, including the impending separation of The Nasdaq Stock Market, Inc. (Nasdaq®) and NASD and the creation of NASD Dispute Resolution, Inc., a wholly owned subsidiary. The amendments also incorporate certain technical changes. Attachment A is a summary of the proposed changes. Attachment B is the text of the amendments.

      It is anticipated that these By-Laws, as amended, will be effective for elections preceding the 2001 annual NASD membership meeting.

      The last voting date is January 22, 2001.

      Questions/Further Information

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

      Background

      The proposed amendments have several purposes and are described in detail as follows:

      Composition, Classification, And Qualifications Of The Board Of Governors

      The NASD Board of Governors has both Industry and Non-Industry members and is required by the By-Laws to have a majority of Non-Industry Governors. In 1998, the NASD effected a substantial corporate restructuring which included the acquisition of the American Stock Exchange, LLC (Amex®). As part of this restructuring, the NASD moved to an overlapping Board structure whereby all members of the NASD Regulation, Inc. (NASDR) and Nasdaq Boards became members of the NASD Board. As a result of the 1998 restructuring, the number of Governors serving on the Board by virtue of their status as staff increased to five (the NASD Chief Executive Officer, the NASD Chief Operating Officer, the Presidents of NASDR and Nasdaq and the Chairman of Amex).

      In accordance with current NASD By-Laws, these five Governors have counted as Industry Governors for balancing purposes. With this current composition and classification of staff Governors, the only realistic manner for NASD to satisfy its obligation to ensure fair representation of all relevant constituencies has been to increase the number of Industry seats on a given Board, and, in order to maintain the required absolute majority of Non-Industry/Public seats on the Board, increase in the number of Non-Industry seats as well. These increases have made it extremely difficult for the NASD Board to be small enough to function with optimum efficiency while still satisfying NASD's obligation to ensure fair representation of the relevant constituencies.

      To improve the efficiency of the Board while maintaining fair representation of the relevant constituents, the Board has approved an amendment to reclassify the NASD CEO and President of NASD Regulation Governor positions as neutral Governors—that is, neither Industry nor Non-Industry Governors. The reclassification of these Governor positions as neutral is consistent with the neutrality classification other self-regulatory organizations assign to their Board staff members. Additionally, since these neutral Governors will no longer be treated as Industry Governors, the two Industry seats the staff occupied will now be available to Industry candidates elected by the NASD membership.

      The approved amendments also reduce the number of staff Governors from the current five to a maximum of four (the NASD CEO, the Presidents of NASD Regulation and Amex, and up to one additional NASD officer appointed by the Board in its discretion should the Board deem it appropriate to name a second staff member). In recognition of the separation of Nasdaq from NASD, the President of Nasdaq will no longer be included on the Board.

      The approved amendments also reduce the overall number of Governors to no fewer that 17 nor more than 27. This amendment will result in a smaller, more efficient Board of Governors.

      National Nominating Committee - Participation In Contested Elections

      The amendments will allow limited National Nominating Committee (NNC) participation in contested elections. Under the current By-Laws, the NASD, NASD staff, the NNC, and other corporate committees are prohibited from taking a position in contested elections. As a result of this prohibition, in contested elections, the NNC has been unable to explain the reasons an NNC-nominated candidate is worthy of support, and has been unable to respond to statements made by other candidates or parties about the NNC nominees. The NNC's current inability to support its candidates in contested elections is a deterrent to qualified individuals accepting nominations.

      To remedy this problem, the Board approved an amendment allowing the NNC to provide limited support to NNC nominated candidates. This proposal to limit NNC's support to "responsiveness" has a goal of allowing the NNC to support its candidates but not to unilaterally wage a significant electoral campaign on behalf of those candidates. Specifically, the amendment will allow the NNC to distribute two mailings to NASD voting members in support of its candidates. The amendment will also allow the NNC to respond in kind to vote solicitations and additional mailings by other candidates.

      The absolute prohibition on participation in the electoral process by the NASD Board, the staff, and other committees remains in place.

      National Nominating Committee - Nominees Proposed By Nasdaq And NASDR

      With the departure of Nasdaq as a wholly owned NASD subsidiary, there is no longer a need for NASD Regulation and Nasdaq to propose two candidates each to the NASD Board for appointment to the NNC. The requirement was originally put in place to ensure limited and balanced influence by the regulatory and market subsidiaries. With the departure of a Nasdaq representative from the NASD Board, the Board approved an amendment to eliminate this provision.

      Access To The Ballot By Petition

      The amendments revise the NASD By-Laws with regard to inclusion on the ballot by petition. Under the current process, Industry candidates seeking nomination by petition can "coattail" other Industry and/or Non-Industry candidates in the same petition-gathering process. This process essentially allows the creation of a "slate" through the use of a single set of petitions signed by three percent of the membership. The Board approved an amendment to allow the nomination by petition of an individual, signed by 3 percent of NASD's voting members, and to permit each member to endorse only one such nominee. The amendments do specifically recognize the validity of slate petitions, but require that the slate be endorsed by 10 percent of NASD's voting members. The Board's adoption of separate thresholds for petition candidates and slate petitions is reasonable given the size and diversity of NASD's membership and is consistent with the practice of other industry organizations, namely the New York Stock Exchange.

      Industry Segment Representation

      To more accurately represent the full range of relevant industry constituents, the Board approved a proposal to amend the NASD By-Laws and require representation by three additional industry segments: a national retail firm, a regional retail or independent financial planning member firm, and a clearing firm. These segments are in addition to required representation by an investment company, an insurance affiliate, and a small firm. The proposed By-Law amendments require that the Board periodically adopt resolutions establishing the criteria for national retail and regional retail or independent financial planning member representatives. By allowing the Board to establish the criteria for these categories through Board Resolutions, the Board will be better able to respond to changes in the industry structure and demographics.

      Changes To Board Or Committee Composition

      In order to ensure balanced representation, the Board approved a proposal to clarify that, when the NASD Regulation Board consists of nine Directors, at least two must be Public Directors. The Board also approved a proposal to provide that any committee appointed by the Board, which may exercise all powers and authority of the Board in the management of the business affairs of the NASD, be balanced.

      References To NASD Dispute Resolution And Nasdaq

      To set forth the new NASD corporate structure and the change in the NASD-Nasdaq relationship, the Board approved amendments that make several technical changes reflecting the current corporate structure. The changes primarily consist of adding references to the newly formed NASD Dispute Resolution subsidiary, and deleting references to Nasdaq.

      The Board asks that you vote in favor of these amendments.


      ATTACHMENT A

      Amendments To The NASD By-Laws

      Substantive changes to the NASD By-Laws are set forth below. Key changes related to the corporate governance of NASD and the new corporate structure are found in Article I; Article IV, Section 1; Article V, Section 2; Article VI, Section 1; Article VII, Sections 1, 3-5, 7, 9-11, 13-14; Article VIII, Section 6; Article IX, Sections 1 and 4; Article X, Section 1; Article XIII, Section 1; and Article XV, Section 4. Stylistic changes and other minor, nonsubstantive changes are not described.

      Article I. Definitions

      New definitions have been added, and the terms Industry, Non-Industry and Public "Director" "Governor" and "committee member" have been amended, to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution, Inc., within the family of companies and the changed NASD-Nasdaq relationship.

      Article IV. Membership

      Application for Membership

      Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.

      Article V. Registered Representatives and Associated Persons

      Application for Registration

      Section 2 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.

      Article VI. Dues, Assessments, and Other Charges

      Power of the NASD to Fix and Levy Assessments

      Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.

      Article VII. Board of Governors

      Powers and Authority of Board

      Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.

      Authority to Take Action Under Emergency or Extraordinary Market Conditions

      Section 3 has been amended to reflect the new corporate structure, namely, the changed NASD-Nasdaq relationship.

      Composition and Qualifications of the Board

      Section 4 has been amended to adjust the overall Board composition to no fewer than 17 nor more than 27 Governors, including no more than four staff Governors. This section has also been amended to require representation by three additional industry segments: a national retail firm, a regional retail or independent financial planning member firm and a clearing services firm. Finally, this section has been amended to allow the Board, by resolution, to specify the criteria for representatives of national retail and regional retail or independent financial planning firms.

      Term of Office of Governors

      Section 5 has been amended to reflect the changed NASD-Nasdaq relationship and to recognize the Board's discretion in limiting the term of a second NASD officer serving as a Governor.

      Filling of Vacancies

      Section 7 has been amended by clarifying that the provision applies to elected Governor positions.

      The National Nominating Committee

      Section 9 has been amended to specify that the NNC may support Governors in contested elections. This section has also been amended to reflect the new corporate structure and to eliminate the requirement that NASDR and Nasdaq propose two candidates each to the NASD Board for appointment to the NNC.

      Procedure for Nomination of Governors

      Section 10 has been amended to allow nomination by petition for individual ballots by three percent of NASD voting membership, to limit voting members from endorsing more than one individual nominee, and to allow nomination by petition for slates by ten percent of the NASD voting membership.

      Communication of Views

      Section 11 has been amended to detail the NNC's limited support of NNC nominees.

      Election of Governors

      Section 13 has been amended by clarifying that the provision applies to elected Governor positions.

      Maintenance of Compositional Requirements of the Board

      Section 14 has been amended by clarifying that the provision applies to elected Governor positions.

      Article VIII. Officers, Agents, and Employees

      Resignation and Removal of Officers

      Section 6 has been amended to allow the Board to remove an officer of the NASD by a resolution adopted by a majority of Governors or a consent adopted by all Governors.

      Article IX. Committees

      Appointment

      Section 1 has been amended to ensure that the Industry/Non-Industry balance of any committee given powers of the Board reflects the same balance of the Board.

      Executive Committee

      Section 4 has been amended to reflect the changed NASD-Nasdaq relationship.

      Article X. Compensation of Board and Committee Members

      Section 1 of this Article has been amended to allow member reimbursement of expenditures related to the limited NNC nominee support in contested elections.

      Article XIII. Powers of Board to Impose Sanctions

      Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.

      Article XV. Limitation of Powers

      Conflicts of Interest

      Section 4 has been amended to reflect the new corporate structure, and to allow a decision by majority vote of disinterested Governors, regardless of whether or not the disinterested Governors constitute a quorum.


      ATTACHMENT B

      Deletions appear as Overstrike text surrounded by { }. Additions appear as Bold text surrounded by [ ]. Unmodified sections have not been included.

      BY-LAWS OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

      ARTICLE I

      Definitions

      (n) "Industry Director" means a Director of the NASD Regulation Board or {Nasdaq} [NASD Dispute Resolution] Board (excluding the Presidents) who: (1) is or has served in the prior three years as an officer, director, or employee of a broker or dealer, excluding an outside director or a director not engaged in the day-to-day management of a broker or dealer; (2) is an officer, director (excluding an outside director), or employee of an entity that owns more than ten percent of the equity of a broker or dealer, and the broker or dealer accounts for more than five percent of the gross revenues received by the consolidated entity; (3) owns more than five percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed ten 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; (4) provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the Director or 20 percent or more of the gross revenues received by the Director's firm or partnership; (5) 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 Director or 20 percent or more of the gross revenues received by the Director's firm or partnership; or (6) has a consulting or employment relationship with or provides professional services to the NASD, NASD Regulation, [NASD Dispute Resolution,] Nasdaq, or Amex (and any predecessor), or has had any such relationship or provided any such services at any time within the prior three years;
      (o) "Industry Governor" or "Industry committee member" means a Governor (excluding the Chief Executive Officer {and Chief Operating Officer of the NASD, the Presidents of NASD Regulation and Nasdaq, and the Chief Executive Officer of Amex)} [of the NASD and the President of NASD Regulation)] or committee member who: (1) is or has served in the prior three years as an officer, director{,} or employee of a broker or dealer, excluding an outside director or a director not engaged in the day-to-day management of a broker or dealer; (2) is an officer, director (excluding an outside director), or employee of an entity that owns more than ten percent of the equity of a broker or dealer, and the broker or dealer accounts for more than five percent of the gross revenues received by the consolidated entity; (3) owns more than five percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed ten 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; (4) 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; (5) 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; (6) is a Floor Governor; or (7) has a consulting or employment relationship with or provides professional services to the NASD, NASD Regulation, [NASD Dispute Resolution,] Nasdaq or Amex (and any predecessor), or has had any such relationship or provided any such services at any time within the prior three years;
      (v) ["NASD Dispute Resolution" means NASD Dispute Resolution, Inc.;
      (w)] "Nasdaq" means The Nasdaq Stock Market, Inc.;
      {(w) "Nasdaq Board" means the Board of Directors of Nasdaq;
      (x) "Nasdaq Listing and Hearing Review Council" means a body appointed pursuant to Article V of the Nasdaq By-Laws;
      (y)}[(x)] "NASD Regulation" means NASD Regulation, Inc.;
      {(z)}[(y)] "NASD Regulation Board" means the Board of Directors of NASD Regulation;
      {(aa)}[(z)] "National Adjudicatory Council" means a body appointed pursuant to Article V of the NASD Regulation By-Laws;
      {(bb)}[(aa)] "National Nominating Committee" means the National Nominating Committee appointed pursuant to Article VII, Section 9 of these By-Laws;
      {(cc)}[(bb)] "Non-Industry Director" means a Director of the NASD Regulation Board or {Nasdaq} [NASD Dispute Resolution] Board (excluding the Presidents of NASD Regulation and {Nasdaq)} [NASD Dispute Resolution)] who is: (1) a Public Director; (2) an officer or employee of an issuer of securities listed on Nasdaq or Amex, or traded in the over-the-counter market; or (3) any other individual who would not be an Industry Director;
      {(dd)}[(cc)] "Non-Industry Governor" or "Non-Industry committee member" means a Governor (excluding the Chief Executive Officer and {Chief Operating Officer} [any other officer] of the NASD {and}[,] the {Presidents} [President] of NASD Regulation {and Nasdaq}, any Floor Governor, and the Chief Executive Officer of Amex) or committee member who is: (1) a Public Governor or committee member; (2) an officer or employee of an issuer of securities listed on Nasdaq or Amex, or traded in the over-the-counter market; or (3) any other individual who would not be an Industry Governor or committee member;
      {(ee)}[(dd)] "person associated with a member" or "associated person of a member" means: (1) a natural person who is registered or has applied for registration under the Rules of the Association; (2) a sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD under these By-Laws or the Rules of the Association; and (3) for purposes of Rule 8210, any other person listed in Schedule A of Form BD of a member;
      {(ff)}[(ee)] "Public Director" means a Director of the NASD Regulation Board or {Nasdaq Board} [NASD Dispute Resolution] who has no material business relationship with a broker or dealer or the NASD, NASD Regulation, [NASD Dispute Resolution,] or Nasdaq;
      {(gg)}[(ff)] "Public Governor" or "Public committee member" means a Governor or committee member who has no material business relationship with a broker or dealer or the NASD, NASD Regulation, [NASD Dispute Resolution,] or Nasdaq;
      {(hh)}[(gg)] "registered broker, dealer, municipal securities broker or dealer, or government securities broker or dealer" means any broker, dealer, municipal securities broker or dealer, or government securities broker or dealer which is registered with the Commission under the Act;

      {and
      (ii)}[(hh)] "Rules of the Association" or "Rules" means the numbered rules set forth in the NASD Manual beginning with the Rule 0100 Series, as adopted by the Board pursuant to these By-Laws, as hereafter amended or supplemented{.}[;]
      {(jj)}[(ii)] "Floor Governor" or "Amex Floor Governor" means a Floor Governor of Amex elected pursuant to Article II, Section .01(a) of the Amex By-Laws;
      {(kk) "Nasdaq-Amex" means Nasdaq-Amex Market Group, Inc.;
      (ll)}[(jj)] "Amex" means American Stock Exchange LLC; [and]
      {(mm)}[(kk)] "Amex Board" means the Board of Governors of Amex{;}[.]

      ARTICLE IV

      MEMBERSHIP

      Application for Membership

      Sec. 1.

      (a) Application for membership in the NASD, properly signed by the applicant, shall be made to the NASD via electronic process or such other process as the NASD may prescribe, on the form to be prescribed by the NASD, and shall contain:
      (1) an agreement to comply with the federal securities laws, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board and the Treasury Department, the By-Laws of the NASD, NASD Regulation, and {Nasdaq} [NASD Dispute Resolution], the Rules of the Association, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Rules of the Association;

      ARTICLE V

      REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

      Application for Registration

      Sec. 2.

      (a) Application by any person for registration with the NASD, properly signed by the applicant, shall be made to the NASD via electronic process or such other process as the NASD may prescribe, on the form to be prescribed by the NASD and shall contain:
      (1) an agreement to comply with the federal securities laws, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board and the Treasury Department, the By-Laws of the NASD, NASD Regulation, and {Nasdaq} [NASD Dispute Resolution], the Rules of the Association, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Rules of the Association; and

      ARTICLE VI

      DUES, ASSESSMENTS, AND OTHER CHARGES

      Power of the NASD to Fix and Levy Assessments

      Sec. 1. The NASD shall prepare an estimate of the funds necessary to defray reasonable expenses of administration in carrying on the work of the NASD each fiscal year, and on the basis of such estimate, shall fix and levy the amount of admission fees, dues, assessments, and other charges to be paid by members of the NASD and issuers and any other persons using any facility or system which the NASD, NASD Regulation {, or Nasdaq} [or NASD Dispute Resolution] operates or controls. Fees, dues, assessments, and other charges shall be called and payable as determined by the NASD from time to time; provided, however, that such admission fees, dues, assessments, and other charges shall be equitably allocated among members and issuers and any other persons using any facility or system which the NASD operates or controls. The NASD may from time to time make such changes or adjustments in such fees, dues, assessments, and other charges as it deems necessary or appropriate to assure equitable allocation of dues among members. In the event of termination of membership or the extension of any membership to a successor organization during any fiscal year for which an assessment has been levied and become payable, the NASD may make such adjustment in the fees, dues, assessments, or other charges payable by any such member or successor organization or organizations during such fiscal years as it deems fair and appropriate in the circumstances.

      ARTICLE VII

      BOARD OF GOVERNORS

      Powers and Authority of Board

      Sec. 1.

      (a) The Board shall be the governing body of the NASD and, except as otherwise provided by applicable law, the Restated Certificate of Incorporation, or these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the NASD and the promotion of the NASD's welfare, objects, and purposes. In the exercise of such powers, the Board shall have the authority to:
      (c) To the fullest extent permitted by applicable law, the Restated Certificate of Incorporation, and these By-Laws, the NASD may delegate any power of the NASD or the Board to a committee appointed pursuant to Article IX, Section 1, the NASD Regulation Board, the {Nasdaq} [NASD Dispute Resolution] Board, or NASD staff in a manner not inconsistent with the Delegation Plan.

      Authority to Take Action Under Emergency or Extraordinary Market Conditions

      Sec. 3. The Board, or such person or persons as may be designated by the Board, in the event of an emergency or extraordinary market conditions, shall have the authority to take any action regarding:

      (a) the trading in or operation of the over-the-counter securities market, the operation of any automated system owned or operated by the NASD{,} [or] NASD Regulation, {or Nasdaq,} and the participation in any such system of any or all persons or the trading therein of any or all securities; and

      Sec. 4.

      (a) The Board shall consist of [no fewer than 17 nor more than 27 Governors, comprising (i)] the Chief Executive {Officer and the Chief Operating} Officer of the NASD, {the Presidents of NASD Regulation and Nasdaq, }[(ii) if the Board of Governors determines, from time to time, in its sole discretion, that the appointment of a second officer of the NASD to the Board of Governors is advisable, a second officer of the NASD, (iii) the President of NASD Regulation, (iv)] the Chair of the National Adjudicatory Council, [(v)] the Chief Executive Officer {of Amex,} [and] one Floor Governor [of Amex], and [(vi)] no fewer than {16} [12] and no more than {28} [22] Governors elected by the members of the NASD. The Governors elected by the members of the NASD shall 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 representative of a national retail firm, a representative of a regional retail or independent financial planning member firm, a representative of a firm that provides clearing services to other NASD members], and a representative of an NASD member having not more than 150 registered persons. {A majority of the} [The number of Non-Industry] Governors shall {be Non-}[exceed the number of] Industry Governors. If the {Board consists of 23 Governors, at least five shall be} [number of Industry and Non- Industry Governors is 15 to 17, the Board shall include at least four] Public Governors. If the {Board consists of 24 to 27 Governors, at least six shall be} [number of Industry and Non-Industry Governors is 18 to 19, the Board shall include at least five] Public Governors. If the {Board consists of 28 to 31 Governors, at least seven shall be Public Governors. If the Board consists of 32 to 35 Governors, at least eight shall be} [number of Industry and Non-Industry Governors is 20-25, the Board shall include at least six] Public Governors.

      Term of Office of Governors

      Sec. 5.

      (a) The Chief Executive Officer and {the Chief Operating Officer}[, if appointed, the second officer] of the NASD[,] the {Presidents} [President] of NASD Regulation {and Nasdaq}, and the Chief Executive Officer of Amex shall serve as Governors until a successor is elected, or until death, resignation, or removal [(or, in addition, in the case of a second officer of the NASD, until the Board of Governors, in its sole discretion, determines that such appointment is no longer advisable)].
      (d) The Governors elected by the members of the NASD shall be divided into three classes and hold office for a term of no more than three years, such term to be fixed by the Board at the time of the nomination or certification of [each] such Governor, or until a successor is duly elected and qualified, or until death, resignation, disqualification, or removal. A Governor elected by the members of the NASD may not serve more than two consecutive terms. If a Governor is elected by the Board to fill a term of less than one year, the Governor may serve up to two consecutive terms following the expiration of the Governor's initial term. The term of office of Governors of the first class shall expire at the January 1999 Board meeting, of the second class one year thereafter, and of the third class two years thereafter. At each annual election, commencing January 1999, Governors shall be elected for a term of three years to replace those whose terms expire.

      Filling of Vacancies

      Sec. 7. If {a} [an elected] Governor position becomes vacant, whether because of death, disability, disqualification, removal, or resignation, the National Nominating Committee shall nominate, and the Board shall elect by majority vote of the remaining Governors then in office, a person satisfying the classification (Industry, Non-Industry, or Public Governor) for the governorship as provided in Section 4 to fill such vacancy, except that if the remaining term of office for the vacant Governor position is not more than six months, no replacement shall be required. If the remaining term of office for the vacant Governor position is more than one year, the Governor elected by the Board to fill such position shall stand for election in the next annual election pursuant to this Article.

      The National Nominating Committee

      Sec. 9.

      (a) The National Nominating Committee shall nominate [and, in the event of a contested election, may, as described in Section 11(b), support]: Industry, Non-Industry, and Public Governors for each vacant or new Governor position on the NASD Board for election by the membership; Industry, Non-Industry, and Public Directors for each vacant or new position on the NASD Regulation Board and the {Nasdaq} [NASD Dispute Resolution] Board for election by the {Board;} [stockholder; and] Industry, Non-Industry, and Public members for each vacant or new position on the National Adjudicatory Council for appointment by the NASD Regulation Board{; and Industry and Non-Industry members for each vacant or new position on the Nasdaq Listing and Hearing Review Council for appointment by the Nasdaq Board}.
      (d) Members of the National Nominating Committee shall be appointed annually by the Board and may be removed only by majority vote of the whole Board, after appropriate notice, for refusal, failure, neglect, or inability to discharge such member's duties.{ The NASD Regulation Board and the Nasdaq Board each shall propose two candidates to the NASD Board for appointment to the National Nominating Committee.}

      Procedure for Nomination of Governors

      Sec. 10. Prior to a meeting of members pursuant to Article XXI for the election of Governors, the NASD shall notify the members the names of each nominee selected by the National Nominating Committee for each governorship up for election, the classification of governorship (Industry, Non-Industry, or Public Governor) for which the nominee is nominated, the qualifications of each nominee, and such other information regarding each nominee as the National Nominating Committee deems pertinent. A person who has not been so nominated may be included on the ballot for the election of Governors if: (a) within {30} [45] days after the date of such notice {in 1997, or within 45 days after the date of such notice in 1998 and thereafter}, such person presents to the Secretary of the NASD [(i) in the case of petitions solely in support of such person,] petitions in support of his or her nomination duly executed by three percent of the members[, and no member shall endorse more than one such nominee, or (ii) in the case of petitions in support of one or more persons, petitions in support of the nominations of such persons duly executed by ten percent of the members]; and (b) the Secretary certifies that (i) the petitions are duly executed by the Executive Representatives of the requisite number of members{;}[,] and (ii) the person satisfies the classification (Industry, Non-Industry, or Public Governor) of the governorship to be filled, based on such information provided by the person as is reasonably necessary to make the certification. The Secretary shall not unreasonably withhold or delay the certification. Upon certification, the election shall be deemed a contested election. After the certification of a contested election or the expiration of time for contesting an election under this Section, the Secretary shall deliver notice of a meeting of members pursuant to Article XXI, Section 3(a).

      Communication of Views

      Sec. 11.

      [(a)] The NASD, the Board, {the National Nominating Committee,} a committee appointed pursuant to Article IX, Section 1, and NASD staff shall not take any position publicly or with a member or person associated with or employed by a member with respect to any candidate in a contested election or nomination held pursuant to these By-Laws or the NASD Regulation By-Laws. A Governor or a member of [any committee (other than] the National Nominating Committee {or any other committee}[)] may communicate his or her views with respect to any candidate if such Governor or committee member acts solely in his or her individual capacity and disclaims any intention to communicate in any official capacity on behalf of the NASD, the NASD Board, [or any committee (other than] the National Nominating Committee{, or any other committee}[)]. Except as provided herein, any candidate and his or her representatives may communicate support for the candidate to a member or person associated with or employed by a member.
      [(b) In a contested election, the National Nominating Committee may support its nominees under this Article by sending to NASD members eligible to vote up to two mailings of materials, in the manner set forth in Article VII, Section 12, in support of its nominees. In addition to such two mailings, in the event of mailings and or other communications to the NASD members by or on behalf of a candidate by petition in a contested election, the National Nominating Committee may respond in-kind, but shall not take a position unresponsive, to the contesting candidate's communications.]

      Election of Governors

      Sec. 13. Governors [that are to be elected by the members] shall be elected by a plurality of the votes of the members of the NASD present in person or represented by proxy at the annual meeting of the NASD and entitled to vote thereat. The annual meeting of the NASD shall be on such date and at such place as the Board shall designate pursuant to Article XXI. Any Governor so elected must be nominated by the National Nominating Committee or certified by the Secretary pursuant to Section 10.

      Maintenance of Compositional Requirements of the Board

      Sec. 14. Each [elected] Governor shall update the information submitted 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 of the NASD, and shall report immediately to the Secretary any change in such classification.

      ARTICLE VIII

      OFFICERS, AGENTS, AND EMPLOYEES

      Resignation and Removal of Officers

      Sec. 6.

      (b) Any officer of the NASD may be removed, with or without cause, by resolution adopted by a majority of the Governors then in office at any regular or special meeting of the Board or by a {written} consent {signed} [adopted] by all of the Governors then in office [in accordance with applicable law]. Such removal shall be without prejudice to the contractual rights of the affected officer, if any, with the NASD.

      ARTICLE IX

      COMMITTEES

      Appointment

      Sec. 1. Subject to Article VII, Section 1(c), the Board may appoint such committees or subcommittees as it deems necessary or desirable, and it shall fix their powers, duties, and terms of office. Any such committee or subcommittee consisting solely of one or more Governors, to the extent provided by these By-Laws or by resolution of the Board, shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the NASD. [Any committee having the authority to exercise the powers and authority of the Board shall have a percentage of Non-Industry committee members at least as great as the percentage of Non-Industry Governors on the Board and a percentage of Public committee members at least as great as the percentage of Public Governors on the Board.]

      Executive Committee

      Sec. 4.

      (b) The Executive Committee shall consist of no fewer than six and no more than nine Governors. The Executive Committee shall include the Chief Executive Officer of the NASD, at least one Director of NASD Regulation, {at least one Director of Nasdaq,} at least one Governor of Amex, and at least two Governors who are not members of either the NASD Regulation Board{, the Nasdaq Board, or the Amex Board. The number of Directors of the NASD Regulation Board and the number of Directors of the Nasdaq Board serving on the Executive Committee shall be equal at all times.} [or the Amex Board. ]The Executive Committee shall have a percentage of Non-Industry committee members at least as great as the percentage of Non-Industry Governors on the whole Board and a percentage of Public committee members at least as great as the percentage of Public Governors on the whole Board.

      ARTICLE X

      COMPENSATION OF BOARD AND COMMITTEE MEMBERS

      Sec. 1. The Board may provide for reasonable compensation of the Chair of the Board, the Governors, and the members of any committee. The Board may also provide for reimbursement of reasonable expenses incurred by such persons in connection with the business of the NASD[, including those expenses incurred in connection with the support of a candidate or candidates by the National Nominating Committee in contested elections in accordance with the By-Laws].

      ARTICLE XIII

      POWERS OF BOARD TO IMPOSE SANCTIONS

      Sec. 1. The Board is hereby authorized to impose appropriate sanctions applicable to members, including censure, fine, suspension, or expulsion from membership, suspension or bar from being associated with all members, limitation of activities, functions, and operations of a member, or any other fitting sanction, and to impose appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions, and operations of a person associated with a member, or any other fitting sanction, for:

      (b) violation by a member or a person associated with a member of any of the terms, conditions, covenants, and provisions of the By-Laws of the NASD, NASD Regulation, or {Nasdaq} [NASD Dispute Resolution], the Rules of the Association, or the federal securities laws, including the rules and regulations adopted thereunder, the rules of the Municipal Securities Rulemaking Board, and the rules of the Treasury Department;

      ARTICLE XV

      LIMITATION OF POWERS

      Conflicts of Interest

      Sec. 4.

      (b) No contract or transaction between the NASD and one or more of its Governors or officers, or between the NASD and any other corporation, partnership, association, or other organization in which one or more of its Governors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason if: (i) the material facts pertaining to such Governor's or officer's relationship or interest and the contract or transaction 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[, even though the disinterested governors be less than a quorum]; or (ii) the material facts are disclosed or become known to the Board or committee after the contract or transaction is entered into, and the Board or committee in good faith ratifies the contract or transaction by the affirmative vote of a majority of the disinterested Governors [even though the disinterested governors be less than a quorum]. Only disinterested Governors may be counted in determining the presence of a quorum at the portion of a meeting of the Board or of a committee that authorizes the contract or transaction. This subsection shall not apply to any contract or transaction between the NASD and {:} NASD Regulation, {Nasdaq-Amex, Nasdaq} [NASD Dispute Resolution], or Amex.

    • 00-89 NASD 2001 Holiday Schedule

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      INFORMATIONAL

      NASD Holiday Schedule

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making

      Holiday Schedule



      The National Association of Securities Dealers, Inc. (NASD®) will observe the following holiday schedule for 2001:

      January 1 New Year's Day
      January 15 Martin Luther King Jr. Day (Observed)
      February 19 Presidents' Day
      April 13 Good Friday
      May 28 Memorial Day
      July 4 Independence Day
      September 3 Labor Day
      November 22 Thanksgiving Day
      December 25 Christmas Day

      Questions regarding this holiday schedule may be directed to NASD Human Resources, at (240) 386-4869.

    • 00-88 Trade Date — Settlement Date Schedule For 2001

      View PDF File

      INFORMATIONAL

      Trade Date — Settlement Date

      SUGGESTED ROUTING

      KEY TOPIC

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making

      Holiday Trade Date — Settlement Date Schedule



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

      The Nasdaq Stock Market® and the securities exchanges will be closed on Monday, January 15, 2001, 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. 9 Jan. 12 Jan. 17
      10 16 18
      11 17 19
      12 18 22
      15 Markets Closed
      16 19 23

      Presidents Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 19, 2001, 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. 13 Feb. 16 Feb. 21
      14 20 22
      15 21 23
      16 22 26
      19 Markets Closed
      20 23 27

      Good Friday: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, April 13, 2001. "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 9 April 12 April 17
      10 16 18
      11 17 19
      12 18 20
      13 Markets Closed
      16 19 23

      Memorial Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 28, 2001, 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 22 May 25 May 30
      23 29 31
      24 30 June 1
      25 31 4
      28 Markets Closed
      29 June 1 5

      Independence Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Wednesday, July 4, 2001, 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 28 July 3 July 6
      29 5 9
      July 2 6 10
      3 9 11
      4 Markets Closed
      5 10 12

      Labor Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, September 3, 2001, 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. 28 Aug. 31 Sept. 5
      29 4 6
      30 5 7
      31 6 10
      Sept. 3 Markets Closed
      4 7 11

      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 8, 2001. 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. 5 Oct. 9
      3 9 10
      4 10 11
      5 11 12
      8 11 15
      9 12 16

      Note: October 8, 2001, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 8, will be combined with transactions made on the previous business day, October 5, for settlement on October 11. 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 8.

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

      The schedule of trade dates-settlement dates below reflects the observance of the financial community of Veterans Day, Monday, November 12, 2001, and Thanksgiving Day, Thursday, November 22, 2001. On Monday, November 12 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 22, 2001 in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 6 Nov. 9 Nov. 13
      7 13 14
      8 14 15
      9 15 16
      12 15 19
      13 16 20
      16 21 26
      19 23 27
      20 26 28
      21 27 29
      22 Markets Closed
      23 28 30

      Note: November 12, 2001, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

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

      Christmas Day And New Years Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Tuesday, December 25, 2001, in observance of Christmas Day, and Tuesday, January 1, 2002, in observance of New Years 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. 27
      20 26 28
      21 27 31
      24 28 Jan. 2, 2002
      25 Markets Closed
      26 31 3
      27 Jan. 2, 2002 4
      28 3 7
      31 4 8
      Jan. 1, 2002 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, the Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice, and the General and Floor Rules of the Rules of the Board of Governors of the American Stock Exchange®.

      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."

    • 00-87 Fixed Income Pricing SystemSM Additions, Changes, And Deletions As Of November 22, 2000

      View PDF File

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Senior Management
      Trading & Market Making

      FIPS



      As of November 22, 2000, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

      Symbol Name Coupon Maturity
      ACRP.GA Actuant Corp 13.000 05/01/09
      AGY.GC Argosy Gaming Co 10.750 06/01/09
      AKK.GB Armstrong World Inds Inc 6.500 08/15/05
      AKK.GC Armstrong World Inds Inc 6.350 08/15/03
      AKK.GD Armstrong World Inds Inc 7.450 05/15/29
      AZX.GA Azurix Corp 10.750 02/15/10
      AZX.GB Azurix Corp 10.375 02/15/07
      BRRY.GE Berry Plastics Corp 11.000 07/15/07
      BUNU.GA Buhrmann US Inc 12.250 11/01/09
      CKRN.GA CKE Restaurants Inc 9.125 05/01/09
      DCEL.GA Dobson Communications Corp 11.750 04/15/07
      DYSU.GA Dayton Superior Corp 13.000 06/15/09
      EXDS.GD Exodus Communications Inc 11.625 07/15/10
      FELP.GA Felcor Lodging LTD Partnership 9.500 09/15/08
      FLS.GA Flowserve Corp 12.250 08/15/10
      GBBL.GA GBB Capital IV 10.750 06/01/30
      GK.GA Gentek Inc 11.000 08/01/09
      HNPK.GB Huntsman Packaging Corp 13.000 06/01/10
      HWSV.GA Hollywood Casino Shreveport 13.000 08/01/06
      IMDW.GB Insight Midwest/Insight Cap 10.500 11/01/10
      INYC.GA Interact Systems Inc 14.000 08/01/03
      JLAU.GA JL French Auto Casting Ser B 11.500 06/01/09
      KNEC.GA Knowles Electronics Inc 13.125 10/15/09
      MICT.GA Microcell Telecommunications 12.000 06/01/09
      MOAC.GA Motor Coach Ind Intl Inc 11.250 05/01/09
      MPWR.GB MGC Communications Inc 13.000 04/01/10
      NHDG.GA Natg Hldgs LLC/Orius Cap Corp Ser B 12.750 02/01/10
      NRI.GA Nationsrent Inc 10.375 12/15/08
      REGL.GD Regal Cinemas Inc 8.875 12/15/10
      RLTP.GA Railamerica Transport Corp 12.875 08/15/10
      RTHM.GC Rhythms Netconnections Inc 12.750 04/15/09
      RVBH.GA Riviera Black Hawk Inc 13.000 05/01/05
      SEG.GA Seagate Technology Inc 7.125 03/01/04
      SEG.GB Seagate Technology Inc 7.370 03/01/07
      SEG.GC Seagate Technology Inc 7.875 03/01/17
      SJKI.GA St John Knits Intl Inc 12.500 07/01/09
      SRV.GL Service Corp Intl 6.500 03/15/08
      TLCP.GB Telecorp PCS Inc 10.625 07/15/10
      THC.GI Tenet Healthcare Corp Ser B 9.250 09/01/10
      TWRS.GF Crown Castle Intl Corp 9.500 08/01/11
      URS.GB URS Corp 12.250 05/01/09
      VYTL.GD Viatel Inc 11.500 03/15/09
      VLUM.GA Volume Services America Inc 11.250 03/01/09
      WLRR.GA Willis Corroon Corp 9.000 02/01/09
      WDFG.GA Worldwide Flight Service Inc 12.250 08/15/07
      WRMA.GA WRC Media Inc/Weekly Reader Corp 12.750 11/15/09
      WSMB.GA Windsor Woodmont Black Hawk 13.000 03/15/05

      As of November 22, 2000, the following bonds were deleted from the Fixed Income Pricing System.

      New Symbol Name Coupon Maturity
      ARCH.GB ARCO Chemical Co 9.900 11/01/00
      AXHM.GA Axiohm Transaction Solutions Inc 9.750 10/01/07
      BBBD.GA Blue Bird Body Co 11.750 04/15/02
      BVF.GA Biovail Corp Intl New 10.875 11/15/05
      BGFW.GB Big Flower Press Hldgs Inc 8.625 12/01/08
      CHCA.GE Chancellor Media Corp 9.000 10/01/08
      CHCA.GF Chancellor Media Corp 8.000 11/01/08
      DYPR.GA Drypers Corp 12.500 11/01/02
      LD.GA Louis Dreyfus Nat Gas 9.250 06/15/04
      PAGE.GB Paging Network Inc 8.875 02/01/06
      PAGE.GC Paging Network Inc 10.125 08/01/07
      PAGE.GD Paging Network Inc 10.000 10/15/08
      SCOM.GA Shared Tech Fairchild Com Corp 12.250 03/01/06
      UCO.GA Universal Compression Hldgs Inc 11.375 02/15/09

      As of November 22, 2000, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      EQIX.GA EQXC.GA Equinix Inc 13.000 12/01/07
      NWB.GA NWAC.GA Northwest Airlines Inc 8.375 03/15/04
      NWB.GB NWAC.GB Northwest Airlines Inc 8.700 03/15/07
      NWB.GD NWAC.GD Northwest Airlines Inc 7.875 03/15/08
      NWB.GE NWAC.GE Northwest Airlines Inc 8.520 04/07/04

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, Market Regulation, NASD Regulation, Inc., at (301) 590-6447.

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

    • 00-86 Review Of Decimalization Testing

      View PDF File

      ACTION REQUESTED

      Decimalization

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Technology
      Trading & Market Making

      Decimalization



      Executive Summary

      A review of the decimalization testing mandate and plans for Nasdaq® decimalization testing are included in this NASD Notice to Members. A select number of market makers and clearing firms have been mandated to perform decimalization testing with Nasdaq. This Notice provides test registration information, testing dates, and Nasdaq testing strategy. Also, a summary of the industry critical dates is provided.

      Questions/Further Information

      Questions regarding this Notice may be directed to the National Association of Securities Dealers, Inc. (NASD®) Decimalization Program Management Office (DPMO) toll free at: (888) 227-1330 or via e-mail at decimals@nasd.com.

      For the most recent decimalization news and developments, visit the NASD Web Site (www.nasd.com) and click on the decimalization link. Additional decimalization information is available on the Securities Industry Association's (SIA) Web Site located at www.sia.com.

      Decimalization Testing

      The Decimal Pricing Test Program is designed to fulfill the NASD mission of investor protection and market integrity, and to mitigate the risk of market disruptions after conversion to decimal pricing. Testing will be mandated for certain, selected member firms. Those member firms that are not mandated to conduct testing may do so on a voluntary basis. All firms are encouraged to test with Nasdaq, and any firms wishing to test on a voluntary basis should complete the registration process outlined below.

      Testing Mandate

      On Tuesday, June 27, 2000, the Securities and Exchange Commission (SEC) approved a Mandatory Decimal Pricing Testing Rule (NASD Rule 3420). This rule "establish[es] the NASD's specific authority to require certain members to participate in Decimal Pricing tests and to require reporting on the tests."

      The NASD is mandating decimal pricing testing, which is intended to ensure that all appropriate NASD member firms have completed designated levels of testing. The decimalization testing rule requires certain NASD members that are clearing firms and market makers to "conduct or participate in the testing of their computer systems to ascertain decimal pricing conversion compatibility of such systems in such manner and frequency as the Association may prescribe." Pursuant to this rule, impacted clearing firms and market makers identified by the Association to conduct or participate in testing of computer systems will provide to the NASD Decimalization Program Office reports relating to the testing required by the Association.

      The NASD will provide each firm with a list of the tests in which their participation has been mandated; this information will be made available by December 4, 2000 via the Internet at www.nasd.com. In addition, a notification letter will be mailed to NASD member firms mandated to test.

      Nasdaq Decimalization Testing

      Nasdaq has announced its initial plans for decimalization testing.

      Testing Registration

      Registration for Point-to-Point, Extended Point-to-Point, and Saturday Production testing is required. A registration form can be found by visiting the NASD Web Site (www.nasd.com), clicking on the decimalization link, and then the testing button. This form is also included in the Nasdaq Decimalization Guidelines found on the Nasdaq Trader Web Site (www.nasdaqtrader.com/trader/hottopics/decimalguidelines.pdf). Firms must register at least 48 hours in advance.

      Point-to-Point

      Point-to-Point testing in fractions will begin December 18, 2000, via the Customer Subscriber Test (CST) facility for CTCI and API/ NWII participants. Full testing with decimal-priced securities in both penny and nickel minimum price variations (MPVs), as well as fractional-priced securities, will begin January 2, 2001, and continue through April 6, 2001. Nasdaq will issue an Alert detailing the availability of the various decimal releases on CST at a later date.

      Extended Point-to-Point

      Testing will take place the mornings of January 27 and February 10, 2001, and will be scripted. Nasdaq will provide test scripts at a later date.

      Nasdaq Production Tests

      Testing will take place the afternoons of January 27 and February 10, 2001, and will be unscripted.

      Proxy Testing and Exemptions

      The NASD is accepting proxy testing where feasible for firms that rely on service providers or software purchased from vendors. Your firm's specific testing requirements, stated on the NASD Web Site or in the NASD letter your firm will receive, will show where proxy testing is acceptable.

      To the extent possible, firms should test their systems in their own environment. However, it is not always feasible for firms that rely on service providers (serviced firms) or software purchased from vendors (turnkey firms) to test in their own environment. For this reason, firms may rely on proxy tests conducted by service providers. Proxy testing is a term used to refer to testing that is conducted on like systems and with like interfaces for the purpose of not having to repeat identical tests that would provide the identical results. Firms utilizing the proxy should ensure that the proxy testing was conducted with a firm of similar complexity and size as their firm, using similar operating systems and software. Since the objective of mandated firms is to conduct all testing and preparations necessary to transition its business to decimal pricing, each member should evaluate and determine when and where proxy testing is appropriate for its organization and risk profile. Listed below are a few helpful hints that firms should consider when evaluating the applicability of proxy testing:

      • Proxy tests are conducted using the same version of decimal-ready software that will be used to service the firm.


      • Proxy tests are conducted using the same hardware and operating systems that are used by the firm. Where there are differences, the firm should verify and document how the differences would affect processing.


      • A firm also should test systems and interfaces under its direct control and those functions not covered in the proxy testing. These include items unique to the firm, as well as those for which there are an insufficient number of common users to develop acceptable proxy tests.

      Testing Strategy

      During full Point-to-Point testing, Extended Point-to-Point testing, and Production testing, Nasdaq will establish a list of securities for decimal testing with either an MPV of $0.05 or $0.01. The list of the Nasdaq 100 after the 2000 yearend re-ranking will be divided into two groups. The first 50, alphabetically, will be set with an MPV = $0.01 and the remaining 50 securities will be set to an MPV = $0.05. Nasdaq will issue a listing of the test securities with their associated MPVs after that time. Due to the possibility of additions and deletions, there is no guarantee that this list will remain static, and that all of these securities will be available for testing. If one of these securities is no longer available, it will not be replaced. Nasdaq is confident that such changes will be minimal and that a majority of these securities will be available.

      Requests for exemptions from the NASD testing mandate should be made in writing and forwarded to the NASD Decimalization Program Management Office at 9513 Key West Avenue, Rockville, MD 20850, no later than January 10, 2000. The request must be signed by an officer of the organization. The NASD Decimalization Program Management Office will review all requests and reply to each firm in writing.

      NASD & Exchanges' Decimalization Implementation Plan

      On June 8, 2000, the national securities exchanges and the NASD submitted a comprehensive phase-in plan for decimal pricing in equity securities and options. Details of the plan are shown in the table below:

      Checkpoint/Phase Action Date
      Checkpoint I Pre-Implementation Evaluation August 15, 2000
      Phase I Limited Exchange-Listed Issues and Options August 28, 2000
      Checkpoint II Determine Readiness for Additional Exchange-Listed Issues and Options September 19, 2000
      Phase IIA Additional Exchange-Listed Issues and Options September 25, 2000
      Checkpoint III Determine Readiness for Full Implementation of Exchange-Listed Issues and/or All Options November 1, 2000
      Phase IIA-21 Additional NYSE equities and associated options December 4, 2000
      Phase IIB Full Conversion Exchange-Listed Issues and/or All Options November 2000 - April 2001
      Checkpoint IV Limited Nasdaq Issues March 5, 2001
      Phase III Limited Nasdaq Issues On or Before March 12, 2001
      Checkpoint V Determine Readiness for All Markets, Full Implementation April 2, 2001
      Phase IV All Markets, Full Implementation On or Before April 9, 2001

      To view the complete plan submission visit the SEC Web Site located at www.sec.gov (www.sec.gov/rules/othern/decimalp.htm). The SEC has not given final approval to the plan.


      1 Phase IIA-2 was not part of the original submission to the SEC. At Checkpoint III, held November 1, 2000, a decision was made to begin trading additional New York Stock Exchange equities and their associated options in decimals.

    • 00-85 NASD To Deduct Delinquent Corporate Financing Filing Fees From CRD Account

      View PDF File

      INFORMATIONAL

      Corporate Financing

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Internal Audit
      Legal & Compliance
      Operations
      Senior Management

      Filing Fees
      NASD Rule 2710
      Underwriting Compensation



      Executive Summary

      Effective January 1, 2001, the National Association of Securities Dealers, Inc. (NASD®) will deduct delinquent Corporate Financing filing fees from funds maintained in a member's Central Registration Depository (CRDSM) account if payment is not received within 30 calendar days after the date of a second notice informing the member firm and counsel of record that Corporate Financing filing fees are due. 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/Further Information

      Questions regarding this Notice may be directed to Sheena Savoy, Corporate Financing Department, NASD Regulation, Inc., (NASD RegulationSM) at (240) 386-4645. Questions regarding the CRD Deductions Process may be directed to James Shelton, Regulator Billing/Collections Finance Department, NASD, Inc., at (240) 386-5386.

      Background

      A public offering filed with the Corporate Financing Department of NASD Regulation, Inc. for review must be accompanied by certain fees. Under Section 6 of Schedule A to the NASD By-Laws, Corporate Financing filing fees are $500 plus .01 percent of the proposed maximum aggregate offering price or other applicable value of all securities registered on a Securities and Exchange Commission (SEC) registration statement or included on any other type of offering document, with a maximum filing fee limitation of $30,500 per offering. An additional fee will be imposed if any amendment increases the maximum aggregate offering price or other applicable value of all securities included on the offering document. The fee imposed in connection with such amendments is .01 percent of the net increase, subject to the $30,500 limit.

      Deduction From Member's CRD Account

      Many members maintain funds on deposit with the NASD in order to expedite processing of employee registrations, examinations, and fingerprint processing. In addition, on-deposit funds are allocated for payment of Advertising Department fees, gross income assessment fees, arbitration and mediation fees, and for purchasing Media-SourceSM materials, such as fingerprint cards or other reference materials.

      The NASD sends out two notices regarding delinquent Corporate Financing filing fees. One notice is in the form of a letter and the other a letter with an attached invoice, both of which inform members and their counsel that Corporate Financing filing fees are due. The first notice is sent to the member firm and the counsel of record who submitted the public offering to the NASD's Corporate Financing Department for review. It provides 30 calendar days from the date of the notice for the member or counsel to pay the delinquent fee before a second notice is sent. If the fee is not paid within 30 days, the second notice is sent to the member firm and counsel of record, informing them that if the amount owed is not paid within 30 calendar days from the date of the notice, the delinquent fees will be deducted from the member's CRD account.

      As of January 1, 2001, the NASD will initiate the deduction of the filing fees from funds maintained in the member's CRD account. For delinquent filing fees incurred prior or subsequent to January 1, 2001, the NASD will initiate the procedure for deductions from the member's CRD account only after a member has received two notices in accordance with the time periods described above. If a payment is received prior to the established deadline, the NASD will not deduct funds from the member's CRD account. If a payment is received from a member firm or counsel of record after the fees have been deducted from the member's CRD account, the NASD will return the deducted fees back to the member's CRD account. Written confirmation of each CRD account deduction will be provided to the member's compliance officer after the funds have been deducted. The member is thereafter responsible for replenishing the funds on deposit to ensure that there are no delays in processing registration applications or any other CRDrelated obligations.

      Suspension/Cancellation Of Membership Or Registration

      On occasion, a member's CRD account may be depleted before all delinquent fees can be collected. If the NASD does not receive payment within 30 calendar days after the date of the second notice, and there are insufficient funds on deposit in the member's CRD account to cover the unpaid fees, the NASD will pursue the suspension or cancellation of the member's membership pursuant to the NASD Rule 9530 series. The NASD, after a 15-day notice in writing, may suspend or cancel the membership of any member that is delinquent in the payment of Corporate Financing filing fees, unless the member files a written request with the Office of Hearing Officers for a hearing within five days of receiving the notice.

    • 00-84 NASD Regulation Requests Comment On A Proposed Amendment To NASD Rule 2320(g) To Exclude Certain Transactions In Foreign Securities

      View PDF File

      ACTION REQUESTED

      Three Quote Rule

      Comment Period Expires: January 11, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Trading & Market Making

      Three Quote Rule
      NASD Rule 2320(g)



      Executive Summary

      NASD Regulation, Inc. (NASD Regulation®) requests comment from members, investors, and other interested parties on a proposed amendment to NASD Rule 2320(g) (the "Three Quote Rule") to exclude transactions in foreign securities effected by a National Association of Securities Dealers, Inc. (NASD®) member as agent or riskless principal on a foreign market that is the primary market for the security. Under the proposal, primary market would be defined as either: (1) the market with at least 50 percent of the worldwide trading volume in the particular foreign security during the three-month period preceding the date of the transaction in question; or (2) any market whose quotations are part of a consolidated quotation system that includes quotations from the market that had at least 50 percent of the worldwide trading volume in the particular foreign security during the three-month period preceding the date of the transaction in question.

      Included with this NASD Notice to Members are Attachment A (the text of the proposed rule change) and Attachment B (specific questions on which NASD Regulation requests comments from members and interested parties).

      Action Requested

      NASD Regulation is seeking comment on a proposed amendment to NASD Rule 2320(g) (the "Three Quote Rule") to exclude transactions in foreign securities effected by an NASD member as agent or riskless principal on a foreign market that is the primary market for the security. NASD Regulationencourages all members, investors, and other interested parties to comment on the proposed rule change. Comments must be received by, January 11, 2001.

      Comments should be mailed to:

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

      or e-mailed to: pubcom@nasd.com

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

      Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the Securities and Exchange Commission (SEC) following further public comment.

      Questions/Further Information

      As noted, written comments should be submitted to Joan C. Conley. Questions concerning this NASD Notice to Members—Request for Comments may be directed to the Legal Section, Market Regulation Department, at (240) 386-5126; or Stephanie M. Dumont, Associate General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Background

      Members have raised concerns regarding the potential adverse impact on obtaining best execution of customer orders in foreign securities as a result of the Three Quote Rule.1 Specifically, members have indicated that the application of the Three Quote Rule to customer transactions in foreign securities executed on a foreign market is unnecessary and potentially harmful to the customer's best interests when a member, using reasonable diligence, has determined that the best market for a foreign security is a foreign market and sends the customer order to that market as agent or riskless principal for execution.

      In this regard, the staff previously has granted exemptions from the requirements of the Three Quote Rule relating to transactions in foreign securities pursuant to its exemptive authority under Rule 2320(g)(5).2 For example, the staff granted exemptive relief to a member firm for customer transactions in Canadian securities executed on a Canadian exchange, under the following conditions:

      (1) the member periodically monitors and reviews customer executions to assure that the member is achieving best execution under NASD Rule 2320; and
      (2) the customer transactions in Canadian securities are handled on an agency or riskless principal basis.3

      The exemption granted was based on representations that executions on a Canadian exchange at theexchange price ordinarily result in customers obtaining best execution of their orders. In its letter seeking exemptive relief, the member stated that a recent analysis of dealer prices compared to exchange prices indicated that, in virtually all cases, the exchange had the best price. The member, therefore, concluded that, under these circumstances, the function of contacting and obtaining quotes from three dealers would result in significant delays and would be a hindrance to achieving best execution for the customer.4

      Proposed Rule

      To address these concerns, NASD Regulation is soliciting commenton a proposed rule change thatwould exclude from the Three Quote Rule's coverage transactions in foreign securities effected by an NASD member as agent or riskless principal on a foreign market that is the primary market for the security.

      Under the proposal, primary market would be defined as either: (1) the market with at least 50 percent of the worldwide trading volume in the particular foreign security during the three-month period preceding the date of the transaction in question; or (2) any market whose quotations are part of a consolidated quotation system that includes quotations from the market that had at least 50 percent of the worldwide trading volume in the particular foreign security during the three-month period preceding the date of the transaction in question.

      Among other issues, NASD Regulation staff is soliciting comment on whether the proposed definition of "primary market" adequately addresses the concerns raised in this area. For example, do active foreign markets exist, whereby no single market contains 50 percent of the worldwide trading volume, but where the transaction may be appropriate for exclusion from the requirements of the Three Quote Rule?

      As under the current requirements, compliance with the Three Quote Rule, in and of itself, does not mean the member has met its best execution obligations. Best execution requires each member 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.


      Endnotes

      1 The Three Quote Rule 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 interdealer market, unless two or more firm quotations are displayed in an interdealer quotation system that permits quotation updates on a real-time basis.

      2 The SEC, in its approval order granting NASD Regulation exemptive authority with respect to the Three Quote Rule, specifically indicated that exemptive relief may be appropriate for transactions executed on a foreign exchange. The SEC stated that exemptive relief may be appropriate in such circumstances because the foreign exchange market may constitute the best market for securities that are listed on that market and the time delay involved in contacting three dealers in that market may, therefore, hinder a member from obtaining best execution for the customers. See Securities Exchange Act Release No. 39266 (Oct. 22, 1997), 62 Fed. Reg. 56217 (Oct. 29, 1997).

      3 See letter dated May 29, 1998 to Mr. Kenneth W. Perlman, General Counsel, Mayer & Schweitzer, Inc. from Alden S. Adkins, Senior Vice President and General Counsel, NASD Regulation, Inc.

      4 The proposed rule change, if approved, would not supersede any exemptions that previously have been granted relating to the application of the Three Quote Rule to transactions in foreign securities. Further, the staff will continue to have exemptive authority with respect to the Three Quote Rule under Rule 2320(g)(5).


      ATTACHMENT A

      Proposed Rule Language

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

      2320. Best Execution and Interpositioning

      (a) through (f) No Change.
      (g)(1) Except as provided in subparagraph (3) below, [u]nless two or more priced quotations for a non-Nasdaq security (as defined in the Rule 6700 Series) are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis, in any transaction for or with a customer pertaining to the execution of an order in a non-Nasdaq security, a member or person associated with a member, shall contact and obtain quotations from three dealers (or all dealers if three or less) to determine the best inter-dealer market for the subject security.
      (2) Members that display priced quotations on a real-time basis for a non-Nasdaq security in two or more quotation mediums that permit quotation updates on a real-time basis must display the same priced quotations for the security in each medium.
      (3) In any transaction for or with a customer pertaining to the execution of an order in a non-Nasdaq security of a foreign issuer that is traded on a foreign securities market, a member or person associated with a member may execute the transaction without obtaining quotations from three dealers, provided that the member executes the transaction on an agency or a riskless principal basis in a foreign market that is the primary market for the security, as defined herein.
      (4) Definitions
      For purposes of this paragraph (g):
      (A) T[t]he term "inter-dealer quotation system" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers.
      (B) [For purposes of this paragraph] T[t]he term "quotation medium" means any interdealer quotation system or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
      (C) The term "primary market" means either:
      (i) the market that had a minimum of 50% of the worldwide trading volume in the security during the threemonth period preceding the date of the transaction; or
      (ii) any market whose quotations are part of a consolidated quotation system that includes quotations from the market that had at least 50% of the worldwide trading volume in the security during the three-month period preceding the date of the transaction.
      (5) Pursuant to the Rule 9600 Series, the staff, for good cause shown, after taking into consideration all relevant factors, may exempt any transaction or classes of transactions, either unconditionally or on specified terms, from any or all of the provisions of this paragraph if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.

      3110. Books and Records

      (a) No Change
      (b)
      (1) No Change
      (b)(2) A person associated with a member shall indicate on the memorandum for each transaction in a non-Nasdaq security, as that term is defined in the Rule 6700 Series, the name of each dealer contacted and the quotations received to determine the best inter-dealer market; however, the requirements of this subparagraph shall not apply if (A) two or more priced quotations for the security are displayed in an inter-dealer quotation system, as defined in Rule 2320(g), that permits quotation updates on a real-time basis for which NASD Regulation has access to historical quotation information; or (B) the transaction is effected in compliance with Rule 2320(g)(3).

      ATTACHMENT B

      Request for Comment Checklist

      The following list of questions provides a quick and easy means to comment on some of the provisions contained in the proposal. This list of questions does not cover all of the changes contained in the proposal; therefore, we encourage members and other interested parties to review the entire proposal and to comment separately on all aspects of the proposal.

      Instructions

      Comments must be received by January 11, 2001. Members and interested parties can submit their comments using the following methods:

      • mailing in this checklist


      • e-mailing written comments to pubcom@nasd.com


      • mailing in written comments


      • submitting comments online at the NASDR Web Site (www.nasdr.com)

      The checklist and/or written comments should be mailed to:

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

      Proposed Amendment To NASD Rule 2320(g) To Exclude Certain Transactions In Foreign Securities

      1. Do you support the proposed rule change described in the Notice?

        Yes   No   See my attached written comments
      2. To what extent, if any, does compliance with the Three Quote Rule hinder, rather than further, best execution with respect to customer transactions in foreign securities executed on a foreign market?

        See my attached written comments
      3. Does the proposed definition of "primary market" adequately address the concerns raised with respect to excluding certain transactions in foreign securities from the requirements of the Three Quote Rule?

        Yes   No   See my attached written comments

      Contact Information

      Name:
      Firm:
      Address:
      City/State/Zip:
      Phone:
      E-Mail:

      Are you:

        An NASD Member
        An Investor
        A Registered Representative
        Other: ________________________________________________

    • 00-83 NASD Regulation To Make Statutory Disqualification Decisions Publicly Available In Redacted Format

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      INFORMATIONAL

      Statutory Disqualification

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Eligibility and Qualification Standards
      Statutory Disqualification
      Rule 9520 Series



      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) has commenced an initiative to make publicly available the text of statutory disqualification decisions (decisions) issued by the NASD Regulation National Adjudicatory Council (NAC). NASD Regulation believes that the availability of the decisions will assist National Association of Securities Dealers, Inc. (NASD®) member firms to understand better the criteria that NASD Regulation uses in determining whether to permit disqualified member firms to retain their membership and in determining whether to permit disqualified persons to associate or to continue to associate with a member firm. The decisions will be issued in redacted format with the names of individuals, names of member firms, and other identifiying information removed.

      NASD Regulation intends to make all decisions issued after August 7, 1997, the effective date of the current NASD Code of Procedure, publicly available in redacted format. NASD Regulation will commence the release of the decisions to the public on January 10, 2001, or as soon thereafter as practicable. The decisions will be published on the NASD Regulation Web Site (www.nasdr.com).

      Questions/Further Information

      Questions concerning this Notice may be directed to Bradford Ali, Attorney, Department of Member Regulation, NASD Regulation, at (202) 728-8402, or by e-mail at bradford.ali@nasd.com; or Gregory Dean, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8159, or by e-mail at gregory.dean@nasd.com.

      Discussion

      Section 4 of Article III of the NASD By-Laws sets forth the circumstances that would make a member firm or a person subject to disqualification. Disqualified members that seek to retain their eligibility for membership must seek approval from NASD Regulation through NASD Regulation's Eligibility Proceedings pursuant to the NASD Procedural Rule 9520 Series (Eligibility Proceedings or Form MC-400 process). Similarly, persons subject to the disqualification are not permitted to associate or to continue to associate with a member firm unless the member firm seeks approval from NASD Regulation pursuant to the Form MC-400 process to permit the association despite the disqualification.

      Generally, under the EligibilityProceedings a review of and a hearing on the Form MC-400 application will be conducted by the NAC. If the NAC approves the continued eligibility of a member firm despite a disqualification, a notice will be filed by NASD Regulation with the SEC pursuant to Rule 19h-1 under the Securities Exchange Act of 1934 (Exchange Act). Similarly, if the NAC approves the association or continued association of a disqualified person with a member firm despite the disqualification, NASD Regulation also will file a notice with the SEC pursuant to Rule 19h-1. Generally, an approval becomes effective if the SEC does not object, within a specified time, to the approval.

      If after review of and a hearing on the Form MC-400 application the NAC decides not to permit the continued eligibility of a member firm due to a disqualification, NASD Regulation will file a notice with the SEC pursuant to Rule 19d-1 under the Exchange Act. Similarly, if the NAC decides not to permit a disqualified person to associate with or to continue their association with a member firm, NASD Regulation will file a notice with the SEC pursuant to Rule 19d-1. A member firm and/or disqualified person may appeal an adverse decision by NASD Regulation to the SEC.

      Historically, statutory disqualification decisions issued by NASD Regulation have not been made available to the general public.1 Under this initiative, NASD Regulation intends to make publicly available in redacted format the eligibility decisions issued by the NAC and filed with the SEC pursuant to Rules 19d-1 and 19h-1. NASD Regulation believes that there are three primary reasons for making the decisions publicly available:

      (1) The decisions will enable member firms and individuals to understand better the specific criteria used by NASD Regulation and the NAC in determining whether to permit a disqualified firm to retain its membership and in determining whether to permit a disqualified person to associate or to continue to associate with a member firm. In addition, the body of eligibility decisions may be one of the more useful tools for assisting members in considering whether to sponsor a disqualified person for association or continued association. Specifically, the decisions will assist member firms to understand under what conditions an approval is likely to be granted and the supervisory requirements and/or business restrictions that have been imposed in prior comparable decisions;
      (2) The NAC and its Statutory Disqualification Committee look to relevant precedent for guidance in evaluating and deciding cases. Accordingly, member firms will have access to decisions and benefit from the same relevant precedents to assist them in preparing for eligibility hearings before the NAC; and
      (3) Making the decisions publicly available will further promote consistency in the Eligibility Proceedings process and will give the general public a greater understanding of the decision-making process of the Eligibility Proceedings.

      To preserve the legitimate privacy concerns of member firms and persons involved in the Eligibility Proceedings, all of the publicly available decisions will be issued in redacted format. The names of the individuals, names of member firms, and other identifying information mentioned in the decisions will be redacted from the decisions.

      Recently, NASD Regulation has taken similar steps to make another decision-making process more open to the public. Effective July 10, 2000, NASD Regulation now makes publicly available in redacted format all final litigated disciplinary decisions issued by the Office of Hearing Officers, the NAC, and the NASD Board.2

      Under the current initiative, NASD Regulation intends to make all statutory disqualification decisions issued after August 7, 1997, the effective date of the current NASD Code of Procedure, publicly available. NASD Regulation will begin to release the redacted decisions to the public on January 10, 2001, or as soon thereafter as practicable. The decisions will be published on the NASD Regulation Web Site (www.nasdr.com).


      Endnotes

      1 Although NASD Regulation eligibility decisions have not been made available to the public, certain information contained in the decisions may be made public when an applicant appeals an adverse decision by NASD Regulation to the SEC and the SEC includes the information in its final order.

      2 See NASD Notice to Members 00-36 (June 2000). See also NASD IM-8310-2 (governing the publication of disciplinary decisions).

    • For Your Information (December)

      View PDF File

      Filing Due Dates For Web-Based FOCUS, Annual Audits, Customer Complaint Information, And Short Interest Reporting

      NASD Regulation, Inc. would like to remind member firms of their obligation to file the appropriate FOCUS reports, Annual Audits, Customer Complaint information, and Short Interest Reporting by their due dates. The following schedule outlines due dates for 2001. Questions regarding the information to be filed can be directed to the appropriate District Office. Business questions as to how to file the FOCUS report, resetting passwords & technical questions concerning system requirements, file uploads, submission problems for Web-Based FOCUS and Customer Complaints can all be directed to (800) 321-NASD. Business questions regarding the 2001 Short Interest Reporting deadlines should be directed to Yvonne Huber at (240) 386-5034 or Jocelyn Rena at (240) 386-5091.

      2001 FOCUS Due Dates

      Annual Schedule I for 2000 Year End Due Date
      2000 FOCUS Schedule I January 25, 2001
      Annual Schedule I for 2001 Year End Due Date
      2001 FOCUS Schedule I January 25, 2002
      Quarterly FOCUS Part II/IIA for 2000
      Period Ending Due Date
      December 31, 2000 January 25, 2001

      Monthly And Fifth FOCUS II/IIA Filings For 2001

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

      Period Ending Due Date
      January 31, 2001 February 26, 2001
      February 28, 2001 March 23, 2001
      April 30, 2001 May 23, 2001
      May 31, 2001 June 25, 2001
      July 31, 2001 August 23, 2001
      August 31, 2001 September 26, 2001
      October 31, 2001 November 26, 2001
      November 30, 2001 December 26, 2001

      Quarterly FOCUS Part II/IIA Filings For 2001

      Quarter Ending Due Date
      March 31, 2001 April 25, 2001
      June 30, 2001 July 25, 2001
      September 30, 2001 October 23, 2001
      December 31, 2001 January 25, 2002

      2001 Annual Audit Filings Due Dates 2001 Customer Complaint Due Dates
      Period End Due Date  
      January 31, 2001 April 1, 2001 January 16, 2001 (January 15th is Martin Luther King Day)
      February 28, 2001 April 29, 2001 April 16, 2001
      March 31, 2001 May 30, 2001 July 16, 2001
      April 30, 2001 June 29, 2001 October 15, 2001
      May 31, 2001 July 30, 2001  
      June 30, 2001 August 29, 2001
      July 31, 2001 September 29, 2001
      August 31, 2001 October 30, 2001
      September 30, 2001 November 29, 2001
      October 31, 2001 December 30, 2001
      November 30, 2001 January 29, 2002
      December 31, 2001 March 1, 2002

      Market Regulation Department—2001 Short Interest Reporting Deadlines

      Trade Date Settlement Date Exchange-Listed Short Interest Due* Nasdaq Short Interest Due*
      Tues. January 9 Fri. January 12 Wed. January 17 1:00 p.m. Wed. January 17 6:00 p.m.
      Mon. February 12 Thurs. February 15 Tues. February 20 1:00 p.m. Tues. February 20 6:00 p.m.
      Mon. March 12 Thurs. March 15 Mon. March 19 1:00 p.m. Mon. March 19 6:00 p.m.
      Mon. April 9 Thurs. April 12 Tues. April 17 1:00 p.m. Tues. April 17 6:00 p.m.
      Thurs. May 10 Tues. May 15 Thurs. May 17 1:00 p.m. Thurs. May 17 6:00 p.m.
      Tues. June 12 Fri. June 15 Tues. June 19 1:00 p.m. Tues. June 19 6:00 p.m.
      Tues. July 10 Fri. July 13 Tues. July 17 1:00 p.m. Tues. July 17 6:00 p.m.
      Fri. August 10 Wed. August 15 Fri. August 17 1:00 p.m. Fri. August 17 6:00 p.m.
      Tues. September11 Fri. September 14 Tues. September 18 1:00 p.m. Tues. September 18 6:00 p.m.
      Wed. October 10 Mon. October 15 Wed. October 17 1:00 p.m. Wed. October 17 6:00 p.m.
      Mon. November 12 Thurs. November 15 Mon. November 19 1:00 p.m. Mon. November 19 6:00 p.m.
      Tues. December 11 Fri. December 14 Tues. December 18 1:00 p.m. Tues. December 18 6:00 p.m.

      *Eastern Standard Time

      Correction To Notice to Members 00-73

      On page 571, the second sentence under the subhead Updated Financial Information should read: "The updated information shall be prepared as of a date that is within 45 days before the interview." The online version of this Notice has been corrected.

    • 00-82 Christmas Day And New Year's Day: Trade Date — Settlement Date Schedule

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      INFORMATIONAL

      Trade Date — Settlement Date

      SUGGESTED ROUTING

      KEY TOPIC

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making

      Holiday Trade Date — Settlement Date Schedule



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

      The Nasdaq Stock Market® and the securities exchanges will be closed on Monday, December 25, 2000, in observance of Christmas Day, and Monday, January 1, 2001, 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. 22 Dec. 27
      20 26 28
      21 27 29
      22 28 Jan. 2, 2001
      25 Markets Closed
      26 29 3
      27 Jan. 2, 2001 4
      28 3 5
      29 4 8
      Jan. 1, 2001 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."

    • 00-81 Fixed Income Pricing System Additions, Deletions, And Changes As Of October 23, 2000

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      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Senior Management
      Trading & Market Making

      FIPS



      As of October 23, 2000, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      CHB.GA Champion Enterprises Inc. 7.625 05/15/09
      CMS.IK CMS Energy Corp. 9.875 10/15/07
      DCEL.GB Dobson Communications Corp. 10.875 07/01/10
      FNVC.GA Finova Capital Corp. 9.125 02/27/02
      FNVC.GB Finova Capital Corp. 6.625 09/15/01
      FNVC.GC Finova Capital Corp. 7.400 05/06/06
      FNVC.GD Finova Capital Corp. 7.125 05/01/02
      FNVC.GE Finova Capital Corp. 7.125 05/17/04
      FNVC.GF Finova Capital Corp. 7.400 06/01/07
      FNVC.GG Finova Capital Corp. 6.900 06/19/04
      FNVC.GH Finova Capital Corp. 6.500 07/28/02
      FNVC.GI Finova Capital Corp. 6.375 05/15/05
      FNVC.GJ Finova Capital Corp. 5.875 10/15/01
      FNVC.GK Finova Capital Corp. 6.250 11/01/02
      FNVC.GL Finova Capital Corp. 6.750 03/09/09
      FNVC.GM Finova Capital Corp. 6.125 03/15/04
      FNVC.GN Finova Capital Corp. 0.000 11/08/02
      FNVC.GO Finova Capital Corp. 7.250 11/08/04
      FRPT.GA Fairpoint Communications 12.500 05/01/10
      HCA.GB HCA - The Healthcare Co. 0.000 09/19/02
      HPC.GA Hercules Inc. 6.625 06/01/03
      HPC.GB Hercules Inc. 6.600 08/01/27
      LEN.GB Lennar Corp Ser B 9.950 05/01/10
      MBG.GA Mandalay Resort Group 9.500 08/01/08
      MBG.GB Mandalay Resort Group 10.250 08/01/07
      NXTP.GC Nextel Partners Inc. 11.000 03/15/10
      PFCU.GA PF.NET Communications Inc. 13.250 05/15/10

      As of October 23, 2000, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      ACNI.GE American Medical Intl Inc. 11.000 10/15/00
      ACPV.GA Advanta Corp. 7.100 10/23/00
      BRCG.GA Bresnan Comms Group LLC 8.000 02/01/09
      BRCG.GB Bresnan Comms Group LLC 9.250 02/01/09
      CIC.GA Carson Inc. 10.375 11/01/07
      CSK.GA Chesapeake Corp. 10.375 10/01/00
      FLER.GA Big Flower Press Inc. 10.750 08/01/03
      LOEH.GA Loehmanns Inc New 11.875 05/15/03
      MEGF.GA Megafoods Stores Inc. 10.250 10/15/00
      NMK.GB Niagara Mohawk Power Corp. 7.000 10/01/00
      OSI.GC Outdoor Systems Inc. 10.750 08/15/03
      PMK.GB Primark Corp. 9.250 12/15/08
      PNM.GC Public Service Co New Mexico 8.125 09/15/01
      PNM.GF Public Service Co New Mexico 8.125 06/15/07
      PNM.GG Public Service Co New Mexico 9.000 05/01/08
      SRV.GD Service Corp Intl 6.375 10/01/00
      WXMN.GA Waxman USA Inc. 11.125 09/01/01

      As of October 23, 2000, changes were made to the symbols of the following FIPS bonds.

      New Symbol Old Symbol Name Coupon Maturity
      FRN.GA FRND.GA Friendly Ice Cream Corp. 10.500 12/01/07

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, Market Regulation, NASD RegulationSM, at (301) 590-6447.

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

    • 00-80 Nasdaq Decimalization Testing & Decimalization Implementation Phase-In Plan

      View PDF File

      Decimalization

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Technology
      Trading & Market Making

      Decimalization



      Executive Summary

      Initial plans for Nasdaq® decimalization testing are included in this Notice to Members. Also, a summary is provided of the industry critical dates.

      Questions/Further Information

      Questions regarding this Notice to Members may be directed to the National Association of Securities Dealers, Inc. (NASD®) Decimalization Program Management Office (DPMO) toll free at: (888) 227-1330 or via e-mail at decimals@nasd.com.

      For the most recent decimalization news and developments, visit the NASD Web Site (www.nasd.com) and click on the decimalization link. Additional decimalization information is available on the Securities Industry Association (SIA) Web Site (www.sia.com).

      Nasdaq Decimalization Testing

      In accordance with NASD Rule 3420, some market makers and clearing firms must conduct decimalization testing. Selected firms will be notified in December 2000 by the NASD and will be given more information at that time on their testing requirements.

      Point-to-Point - Limited point-topoint testing will begin mid-December 2000 with full testing beginning January 2001 and continuing through April 6, 2001.

      Extended Point-to-Point - Testing will take place on January 27 and February 10, 2001. In order to participate, firms will need to successfully complete point-to-point testing and will be required to register at least 48 hours in advance. Testing will be scripted in the morning, and unscripted in the afternoon.

      Full testing information will be available by December 1, 2000.

      NASD & Exchanges' Decimalization Implementation Plan

      On July 24, 2000, the national securities exchanges and the NASD submitted a comprehensive phase-in plan for decimal pricing in equity securities and options.

      Details of the plan are shown in the table below.

      To view the complete plan, visit the Securities and Exchange Commission (SEC) Web Site located at www.sec.gov (www.sec.gov/rules/othern/decimalp.htm).

      The SEC has not given final approval to the plan.

      Checkpoint/Phase Action Date
      Checkpoint I Pre-Implementation Evaluation August 15, 2000
      Phase I Limited Exchange-Listed Issues and Options August 28, 2000
      Checkpoint II Determine Readiness for Additional Exchange-Listed Issues and Options September 19, 2000
      Phase IIA Additional Exchange-Listed Issues and Options September 25, 2000
      Checkpoint III Determine Readiness for Full Implementation of Exchange-Listed Issues and/or All Options November 1, 2000
      Phase IIB Full Conversion Exchange-Listed Issues and/or All Options November 2000 - April 2001
      Checkpoint IV Limited Nasdaq Issues March 5, 2001
      Phase III Limited Nasdaq Issues On or before March 12, 2001
      Checkpoint V Determine Readiness for All Markets, Full Implementation April 2, 2001
      Phase IV All Markets, Full Implementation On or before April 9, 2001

    • 00-79 Nasdaq Adopts Alternative Approach For Complying With Riskless Principal Trade-Reporting Rules And Issues Net Trading Interpretation

      View PDF File

      INFORMATIONAL

      Riskless Principal Trade Reporting

      Riskless Principal Trade-Reporting Rules Will Be Implemented On February 1, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education/Testing/Qualifications
      Institutional
      Legal & Compliance
      Operations
      Senior Management
      Systems
      Technology
      Trading & Market Making
      Training

      Riskless Principal
      Trade Reporting



      Executive Summary

      The Nasdaq Stock Market, Inc. (Nasdaq®) has adopted an alternative approach for reporting riskless principal transactions in Nasdaq, over-the-counter (OTC), and exchange-listed securities. Nasdaq also has adopted an interpretation with respect to the use of negative consent letters for net trading of Nasdaq and OTC securities. The Riskless Principal Trade-Reporting Rules will be implemented on February 1, 2001. NOTE: This Notice should be read in conjunction with Notices to Members 99-65 and 99-66.

      Amendments to the Riskless Principal Trade-Reporting Rules are contained in Attachment A.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Nasdaq Office of General Counsel at (202) 728-8294; Nasdaq MarketWatch at (800) 211-4953; and the Legal Section, Market Regulation Department, NASD Regulation, Inc. (NASD RegulationSM), at (240) 386-5126.

      Background

      On March 24, 1999 and July 8, 1999, the Securities and Exchange Commission (SEC) approved proposals to amend the National Association of Securities Dealers, Inc. (NASD®) trade-reporting rules relating to riskless principal transactions (Riskless Principal Trade-Reporting Rules or Rules) in Nasdaq National Market®, Nasdaq SmallCap MarketSM, and Nasdaq convertible debt securities (Nasdaq securities); non-Nasdaq OTC equity securities, including OTC Bulletin Board® and pink sheet securities (OTC securities); and exchangelisted securities traded in the Nasdaq InterMarketSM (exchangelisted securities).1 Under the new Riskless Principal Trade-Reporting Rules, riskless principal transactions effected by market makers must now be reported as one transaction, as was previously the case for riskless principal transactions effected by non-market makers. Specifically, a "riskless" principal transaction is one in which an NASD member, after having received an order to buy (sell) a security, purchases (sells) the security as principal at the same price to satisfy the order to buy (sell). The Rules require a firm to report a riskless principal trade as one transaction.

      Original Approach To Riskless Principal Trade Reporting

      Notices to Members 99-65 (discussing the trade-reporting rules for riskless principal transactions effected by market makers in Nasdaq and OTC securities) and 99-66 (discussing, among other things, the trade-reporting rules for riskless principal transactions in exchangelisted securities occurring in the Nasdaq InterMarket) were published in August 1999. The Notices provided guidance on compliance with the new Rules, and stated that market makers must report the initial leg of a riskless principal transaction to the Automated Confirmation Transaction ServiceSM (ACTSM) and mark the ACT report "riskless principal." The Rules also provide that market makers must not report to ACT the offsetting transaction with the customer. This is the original approach to riskless principal trade reporting by market makers.

      After the Notices were issued, a number of NASD member firms raised concerns about tradereporting problems presented by the Rules.2 The firms represented that the approach to riskless principal trade reporting by market makers described in Notices to Members 99-65 and 99-66, which requires market makers to report the first leg of a riskless principal transaction to ACT and mark the report "riskless principal," would be problematic and would result in inaccurate and/or late reporting of the initial leg of a riskless principal transaction. Specifically, the firms identified the following problems:

      • Trades reported by a third party (e.g., an electronic communications network) on behalf of a broker/dealer cannot be properly marked "riskless principal" because market makers do not know whether a particular order will trigger a riskless principal execution at the time the broker/dealer sends the order for execution.


      • To the extent Small Order Execution SystemSM (SOESSM) and SelectNet® executions trigger a riskless principal execution (for example, as a result of Manning limit order protection), the principal capacity assumed by Nasdaq's systems will be inaccurate.


      • Systemic delay would be introduced into the tradereporting process for trades executed within a market maker's own trading system because the system would be required to determine if Manning protection is owed to any orders on the books before the first trade is reported as riskless principal.

      The implementation date of the Riskless Principal Trade-Reporting Rules was delayed several times to provide Nasdaq with an opportunity to work with the firms to address these issues.

      Alternative Approach To Riskless Principal Trade Reporting

      After reviewing concerns raised by the firms, and consultation with the SEC and NASD Regulation, Nasdaq has adopted a different method for reporting riskless principal trades that can be used as an alternative to the original approach set forth in the Notices.3 This new approach can be utilized by both market makers, which for the first time must adhere to Riskless Principal Trade-Reporting Rules, and by non-market makers, which have been subject to the Rules for some time.

      Under the alternative approach, member firms may report a riskless principal transaction by submitting either one or two reports to ACT. The first report would be required only if the member is the party with a reporting obligation under the relevant Nasdaq trade-reporting rule. The second report, representing the offsetting, "riskless" portion of the transaction with the customer, must be submitted by all members electing to use the alternative method for riskless principal trade reporting, regardless of whether the firm has a reporting obligation, when the firm effects the offsetting trade with its customer. This report will be either a non-tape, non-clearing report (if there is no need to submit clearing information to ACT) or a clearingonly report.4 In either case, the report must be marked with a capacity indicator of "riskless principal." Because this is not a last sale report, it does not have to be submitted within 90 seconds after the transaction is executed, but should be submitted as soon as practicable after the trade is executed but no later than by the time ACT closes for the trading day (currently 6:30 p.m., Eastern Time). The effect of the new rule can be illustrated by the following examples.

      Example 1

      A market maker (MM1) holds a customer limit order to sell 1,000 shares of ABCD at $10 that is displayed in its quote. MM1 sells 1,000 shares to a second market maker (MM2) at $10. (MM2's bid represents proprietary interest, not a customer order.) When there is a trade between two market makers, the Nasdaq trade-reporting rules require the member representing the sell side to report the transaction.5 MM1, the seller in this transaction, reports the sale of 1,000 shares by submitting a last sale report to ACT marked "principal." MM1 then fills its customer order for 1,000 shares. Under the new alternativeapproach, MM1 would submit either one of the two following reports marked "riskless principal" to ACT for the offsetting, riskless portion of the transaction:

      • a clearing-only report if necessary to clear the transaction with the customer; or


      • a non-tape, non-clearing report (if a clearing entry is not necessary because, for example, the trade is internalized).

      This submission is not entered for reporting purposes and thus there will be no public trade report for this leg of the transaction. Because MM2 did not enter into a riskless principal transaction, MM2 does not have an obligation to submit the second report.

      Example 2

      Both MM1 and MM2 hold customer limit orders: MM1 holds a marketable customer limit order to sell 1,000 shares of ABCD and MM2 holds a customer limit order to buy 1,000 shares of ABCD, both of which are displayed in the market makers' quotes. MM1 sells 1,000 shares to MM2 at $10. MM1 and MM2 then fill both of their customer orders. MM1 submits two reports to ACT—a last sale report and either a clearing-only report or a non-tape, non-clearing report—as described above. MM2 does not have a reporting obligation under the Nasdaq trade-reporting rules because it bought 1,000 shares from MM1. Therefore, it does not submit a last sale report for the transaction with MM1. However, for the offsetting transaction with its customer, MM2 is obligated to submit to ACT either a clearing-only report or a non-tape, non-clearing report marked "riskless principal."

      Firm's Discretion On Which Approach To Use

      Firms can use either the original approach described in Notices to Members 99-65 and 99-66 or this new alternative approach for reporting riskless principal trades. Also, firms can use either approach for all trades or on a trade-by-trade basis. While the new alternative approach is voluntary, firms that elect not to use this approach must comply with the original approach or they will be in violation of the trade-reporting rules. NOTE: The alternative approach is available for transactions in Nasdaq and OTC securities, and for transactions in exchange-listed securities executed off an exchange, but is not available for transactions in exchange-listed securities executed on an exchange, which are reported by the exchange.

      All necessary enhancements have been made to ACT to enable firms to report riskless principal trades according to the new Rules.6 No ACT fee will be assessed for the non-tape, non-clearing report. An ACT fee will be assessed for the clearing-only report, however, because the firm is receiving clearing services in connection with the report.

      Notices to Members 99-65 and 99-66 provide useful guidance on riskless principal trade reporting, including how to determine whether transactions are at the "same price"; what constitutes a "riskless" transaction in whole or in part; Order Audit Trail System compliance; and SEC Rule 10b-10 compliance. This guidance is valid whether a firm uses the original approach or the alternative approach to riskless principal trade reporting. Firms should review these Notices in their entirety prior to the implementation of the new Rules.

      Net Trading Interpretation—Customer Negative Consent Letters

      Nasdaq also has adopted an interpretation regarding a statement from Notice to Members 99-65 with respect to net trading of Nasdaq and OTC securities.7 Notice to Members 99-65 announced SEC approval of the Riskless Principal Trade-Reporting Rules and included an attachment containing questions and answers regarding the rule change. A number of the questions and answers in the Notice discusses net trading. For example, question and answer 4 states the following:

      How does a member determine whether transactions are at the "same price"?

      [If] a member is working an order for an institutional account . . . or of a block size . . . and the member finds the other side of the order, the presumption will be that the orders will be matched off at the same price (exclusive of any markup or markdown, commission equivalent, or other fee) and reported as riskless principal, unless the customer has specifically requested that the order be traded on a net basis at a different price.

      Questions and answers 3, 6, 7, 19, and 20 also address net trading.

      After Notice to Members 99-65 was issued, a number of firms raised concerns about the stated presumption that members, which are working an order for an institutional customer and find the other side, will "match off" those orders at the same price. The firms were concerned that the presumption did not reflect the fact that institutional customers have historically expected firms to trade with them on a net basis. The firms also were concerned that such a presumption would place them in the difficult position of having to rebut it on nearly every institutional trade. The firms requested guidance on how to document this understanding, and asked for permission to use "negative consent" letters, citing difficulties with obtaining affirmative consent from customers.

      After thorough consideration of this issue, and after consultation with both the SEC and NASD Regulation, Nasdaq has concluded that firms may use negative consent letters to evidence a customer's request to trade on a net basis, as long as the letter meets the following conditions.

      • A firm using a negative consent letter to demonstrate a customer request to trade on a net basis should send a letter to the customer clearly disclosing the terms and conditions for handling the customer's orders.


      • Only one letter must be sent to each customer; a letter is not required for each transaction.


      • The customer must be provided with a meaningful opportunity to object to any statements in the letter.


      • If no objection is received, the firm may reasonably conclude that the customer has consented to the terms and conditions in the letter and has requested that the firm trade for the customer on a net basis.

      Technical Changes To Rules

      Nasdaq also has made certain technical changes to the trade-reporting rules. Nasdaq has amended Rule 6130(d)(7) to explicitly include "riskless principal" as a symbol on an ACT trade report, in addition to the principal and agent capacity indicators. The riskless principal symbol already is utilized in Nasdaq systems and in ACT trade reports, so this is not a new requirement; it is merely a technical change that adds this capacity indicator to the current list of symbols in the rule.

      Nasdaq also has made technical changes to Rule 6420(d)(3)(B), the trade-reporting rule for exchange-listed securities, to conform the language in that rule to language in Rules 4632(d)(3)(B), 4642(d)(3)(B), 4652(d)(3)(B), and 6620(d)(3)(B), the trade-reporting rules for Nasdaq and OTC securities. In particular, Nasdaq proposes to delete language from Rule 6420(d)(3)(B) to ensure consistent application of the Riskless Principal Trade-Reporting Rules to any order received by a member, regardless of the person or entity from which it was received. Specifically, while the current rule refers to orders received from a "customer," the proposed rule simply refers to "an order." Thus, a transaction can be defined as riskless when a market maker is holding an order from a customer, another member, the customer of another member, or any other entity, including nonmember broker/dealers. Furthermore, Nasdaq has amended the text of the rule to more clearly provide that riskless principal trades are reported exclusive of any fee, not just markups and markdowns. Identical revisions previously were made to Rules 4632(d)(3)(B), 4642(d)(3)(B), 4652(d)(3)(B), and 6620(d)(3)(B).

      Implementation Date

      The Riskless Principal Trade-Reporting Rules, both the original and the alternative approach, will be implemented on February 1, 2001. At that time, NASD firms that effect riskless principal transactions in Nasdaq, OTC, and exchangelisted securities must report the transaction in conformance with the new Rules, using either the original approach or the alternative approach, or will be in violation of the trade-reporting rules.


      Endnotes

      1 See Securities Exchange Act Release Nos. 41208 (Mar. 24, 1999), 64 Fed. Reg. 15386 (Mar. 31, 1999) (File No. SR-NASD-98-59) and 41606 (July 8, 1999), 64 Fed. Reg. 38226 (July 15, 1999) (File No. SR-NASD-98-08).

      2 See letter to Belinda Blaine, Associate Director, SEC, dated February 18, 2000 from Automated Securities Clearance, Ltd. and the following NASD member firms: Bernard L. Madoff Securities; CIBC World Markets; Credit Suisse First Boston; Deutsche Banc Alex. Brown; Donaldson, Lufkin & Jenrette; Goldman Sachs & Co.; Jefferies & Company, Inc.; Lehman Bros.; Merrill Lynch, Pierce, Fenner & Smith, Inc.; Morgan Stanley Dean Witter; and Salomon Smith Barney Inc.

      3 The SEC announced the effectiveness of this approach in Securities Exchange Act Release No. 43303 (September 19, 2000), 65 Fed. Reg. 57853 (September 26, 2000) (File No. SR-NASD-00-52).

      4 A non-tape, non-clearing report is a new type of ACT report being introduced in conjunction with the implementation of the alternative approach. As discussed below, there are no fees associated with these reports and they are not reported to the public.

      5 See Rules 4632(b), 4642(b), 4652(b), 6420(b), and 6620(b).

      6 See Technical Update dated September 6, 2000, available at: www.nasdaqtrader.com/Trader/News/technicalupdates/090600.stm.

      7 The SEC announced the effectiveness of this interpretation in Securities Exchange Act Release No. 43103 (August 1, 2000), 65 Fed. Reg. 48774 (August 9, 2000) (File No. SR-NASD-00-44).


      ATTACHMENT A

      Text Of Rule Changes

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

      Rule 4630. Reporting Transactions in Nasdaq National Market Securities

      Rule 4632. Transaction Reporting

      (a) through (c) No Change
      (d) Procedures for Reporting Price and Volume
      Members which are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
      (1) through (3)
      (A) No Change
      (3)(B) Exception. A "riskless" principal transaction in which a member, after having received an order to buy a security, purchases the security as principal at the same price to satisfy the order to buy or, after having received an order to sell, sells the security as principal at the same price to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the markup or mark-down, commissionequivalent, or other fee. Alternatively, a member may report a riskless principal transaction by submitting the following report(s) to ACT:
      (i) The member with the obligation to report the transaction pursuant to paragraph (b) above must submit a last sale report for the initial leg of the transaction.
      (ii) Regardless of whether a member has a reporting obligation pursuant to paragraph (b) above, the firm must submit, for the offsetting, "riskless" portion of the transaction, either:
      a. a clearing-only report with a capacity indicator of "riskless principal," if a clearing report is necessary to clear the transaction; or
      b. a non-tape, non-clearing report with a capacity indicator of "riskless principal," if a clearing report is not necessary to clear the transaction.
      Example:
      SELL as a principal 100 shares to another member at 40 to fill an existing order;
      BUY as principal 100 shares from a customer at 40 minus a mark-down of $12.50;
      REPORT 100 shares at 40 by submitting to ACT either a single trade report marked with a "riskless principal" capacity indicator or by submitting the following reports:
      (1) where required by this Rule, a tape report marked with a "principal" capacity indicator; and
      (2) either a non-tape, non-clearing report or a clearing-only report marked with a "riskless principal" capacity indicator.
      (e) through (f) No Change

      Rule 4640. Reporting Transactions in Nasdaq SmallCapSM Market Securities

      Rule 4642. Transaction Reporting

      (a) through (c) No Change
      (d) Procedures for Reporting Price and Volume
      Members which are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
      (1) through (3)
      (A) No Change
      (3)(B) Exception. A "riskless" principal transaction in which a member, after having received an order to buy a security, purchases the security as principal at the same price to satisfy the order to buy or, after having received an order to sell, sells the security as principal at the same price to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the markup or mark-down, commission-equivalent, or other fee. Alternatively, a member may report a riskless principal transaction by submitting the following report(s) to ACT:
      (i) The member with the obligation to report the transaction pursuant to paragraph (b) above must submit a last sale report for the initial leg of the transaction.
      (ii) Regardless of whether a member has a reporting obligation pursuant to paragraph (b) above, the firm must submit, for the offsetting, "riskless" portion of the transaction, either:
      a. a clearing-only report with a capacity indicator of "riskless principal," if a clearing report is necessary to clear the transaction; or
      b. a non-tape, non-clearing report with a capacity indicator of "riskless principal," if a clearing report is not necessary to clear the transaction.
      Example:
      SELL as a principal 100 shares to another member at 40 to fill an existing order;
      BUY as principal 100 shares from a customer at 40 minus a mark-down of $12.50;
      REPORT 100 shares at 40 by submitting to ACT either a single trade report marked with a "riskless principal" capacity indicator or by submitting the following reports:
      (1) where required by this Rule, a tape report marked with a "principal" capacity indicator; and
      (2) either a non-tape, non-clearing report or a clearingonly report marked with a "riskless principal" capacity indicator.
      (e) through (f) No Change

      Rule 4650. Reporting Transactions in Nasdaq Convertible Debt Securities

      Rule 4652. Transaction Reporting

      (a) through (c) No Change
      (d) Procedures for Reporting Price and Volume
      Members which are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
      (1) through (3)
      (A) No Change
      (3)(B) Exception. A "riskless" principal transaction in which a member, after having received an order to buy a security, purchases the security as principal at the same price to satisfy the order to buy or, after having received an order to sell, sells the security as principal at the same price to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the markup or mark-down, commission-equivalent, or other fee. Alternatively, a member may report a riskless principal transaction by submitting the following report(s) to ACT:
      (i) The member with the obligation to report the transaction pursuant to paragraph (b) above must submit a last sale report for the initial leg of the transaction.
      (ii) Regardless of whether a member has a reporting obligation pursuant to paragraph (b) above, the firm must submit, for the offsetting, "riskless" portion of the transaction, either:
      a. a clearing-only report with a capacity indicator of "riskless principal," if a clearing report is necessary to clear the transaction; or
      b. a non-tape, non-clearing report with a capacity indicator of "riskless principal," if a clearing report is not necessary to clear the transaction.
      Example:
      SELL as a principal 100 shares to another member at 40 to fill an existing order;
      BUY as principal 100 shares from a customer at 40 minus a mark-down of $12.50;
      REPORT 100 shares at 40 by submitting to ACT either a single trade report marked with a "riskless principal" capacity indicator or by submitting the following reports:
      (1) where required by this Rule, a tape report marked with a "principal" capacity indicator; and
      (2) either a non-tape, nonclearing report or a clearingonly report marked with a "riskless principal" capacity indicator.
      (e) through (f) No Change

      Rule 6000. NASD SYSTEMS AND PROGRAMS

      Rule 6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)

      Rule 6130. Trade Report Input

      (a) through (c) No Change
      (d) Trade Report To Be Input
      (7) A symbol indicating whether the trade is as principal, riskless principal, or agent
      (e) No Change

      Rule 6400. REPORTING TRANSACTIONS IN LISTED SECURITIES

      Rule 6420. Transaction Reporting

      (a) through (c) No Change
      (d) Procedures for Reporting Price and Volume
      Members which are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
      (1) through (3)
      (A) No Change
      (3)(B) Exception. A "riskless"principal transaction in which a member, after having received [from a customer] an order to buy a security, purchases the security as principal [from another member or customer] at the same price to satisfy the order to buy or, after having received [from a customer] an order to sell, sells the security as principal [to another member] at the same price to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down, commission-equivalent, or other fee. Alternatively, a member may report a riskless principal transaction by submitting the following report(s) to ACT:
      (i) The member with the obligation to report the transaction pursuant to paragraph (b) above must submit a last sale report for the initial leg of the transaction.
      (ii) Regardless of whether a member has a reporting obligation pursuant to paragraph (b) above, the firm must submit, for the offsetting, "riskless" portion of the transaction, either:
      a. a clearing-only report with a capacity indicator of "risklessprincipal," if a clearing report is necessary to clear the transaction; or
      b. a non-tape, non-clearing report with a capacity indicator of "riskless principal," if a clearing report is not necessary to clear the transaction.
      A riskless principal transaction in which a member purchases or sells the security on an exchange to satisfy a customer's order will be reported by the exchange and the member shall not report.
      Example:
      BUY as principal 100 sharesfrom another member at 40 to fill an existing order;
      SELL as principal 100 shares to a customer at 40 plus mark-up of $12.50;
      REPORT 100 shares at 40 by submitting to ACT either a single trade report marked with a "riskless principal" capacity indicator or by submitting the following reports:
      (1) where required by this Rule, a tape report marked with a "principal" capacity indicator; and
      (2) either a non-tape, non-clearing report or a clearing-only report marked with a "riskless principal" capacity indicator.
      Example:
      BUY as principal 100 shares on an exchange at 40 to fill an existing order;
      SELL as principal 100 shares to a customer at 40 plus a markup of $12.50;
      DO NOT REPORT (will be reported by exchange).
      (e) No Change

      Rule 6600. REPORTING TRANSACTIONS IN OVER-THE-COUNTER EQUITY SECURITIES

      Rule 6620. Transaction Reporting

      (a) through (c) No Change
      (d) Procedures for Reporting Price and Volume
      Members which are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
      (1) through (3)
      (A) No Change
      (3)(B) Exception. A "riskless" principal transaction in which a member, after having received an order to buy a security, purchases the security as principal at the same price to satisfy the order to buy or, after having received an order to sell, sells the security as principal at the same price to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the markup or mark-down, commission-equivalent, or other fee. Alternatively, a member may report a riskless principal transaction by submitting the following report(s) to ACT:
      (i) The member with the obligation to report the transaction pursuant to paragraph (b) above must submit a last sale report for the initial leg of the transaction.
      (ii) Regardless of whether a member has a reporting obligation pursuant to paragraph (b) above, the firm must submit, for the offsetting, "riskless" portion of the transaction, either:
      a. a clearing-only report with a capacity indicator of "riskless principal," if a clearing report is necessary to clear the transaction; or
      b. a non-tape, non-clearing report with a capacity indicator of "riskless principal," if a clearing report is not necessary to clear the transaction.
      Example:
      SELL as a principal 100 shares to another member at 40 to fill an existing order;
      BUY as principal 100 shares from a customer at 40 minus a mark-down of $12.50;
      REPORT 100 shares at 40 by submitting to ACT either a single trade report marked with a "riskless principal" capacity indicator or by submitting the following reports:
      (1) where required by this Rule, a tape report marked with a "principal" capacity indicator; and
      (2) either a non-tape, non-clearing report or a clearing-only report marked with a "riskless principal" capacity indicator.
      (e) through (f) No Change

    • 00-78 SEC Approves Proposed Changes To The NASD Three Quote Rule And Related Recordkeeping Requirements

      View PDF File

      INFORMATIONAL

      Three Quote Rule

      Effective Date: November 24, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Trading & Market Making

      Best Execution
      NASD Rule 2320
      NASD Rule 3110
      Trading



      Executive Summary

      On September 21, 2000, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD®) Rules 2320(g) and 3110(b), which:

      1) require that members executing a customer order in a non-Nasdaq® security contact and obtain quotations from three dealers (or all dealers if three or fewer) to determine the best inter-dealer market for the security, unless two or more priced quotations are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis (such as the OTC Bulletin Board® (OTCBB) or the electronic pink sheets);
      2) require that members displaying priced quotations for the same non-Nasdaq security in two or more quotation mediums that permit quotation updates on a real-time basis display the same priced quotations for the security in each quotation medium;
      3) no longer require that a member indicate on the order ticket for each transaction in a non-Nasdaq security the name of each broker/dealer contacted and the quotations received if two or more priced quotations are displayed and NASD Regulation has access, on a historical basis, to the quotation data; and
      4) define the terms "inter-dealer quotation system" and"quotation medium" for the purposes of the proposed rule change.1

      The amendments become effective on November 24, 2000. The amendments to Rules 2320 and 3110 are provided in Attachment A.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Legal Section, Market Regulation Department, NASD Regulation, Inc. (NASD RegulationSM), at (240) 386-5126; or Stephanie M. Dumont, Associate General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Background And Discussion

      Rule 2320(g) (Three Quote Rule) originally was adopted on May 2, 1988,2 as an amendment to the NASD's best execution interpretation. As originally adopted, the Three Quote Rule required 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 fewer) and obtain quotations in determining the best inter-dealer market.3

      The Three Quote Rule is intended to create a standard to help ensure that members fulfill their best execution responsibilities to customers in non-Nasdaq securities, particularly in transactions involving relatively illiquid securities with nontransparent prices. The Three Quote Rule is a minimum standard, and compliance with the rule, in and of itself, does not mean a member has met its best execution obligations. Best execution requires each member to use reasonable diligence to ascertain the best interdealer 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.4

      Since the adoption of the Three Quote Rule, the market for non-Nasdaq securities has changed dramatically. For example, from 1996 to 1999, the OTCBB has experienced growth of 72 percent in market maker positions, 421 percent in average daily share volume, and 65 percent in average daily dollar volume. Because of the rapid growth in the market for non-Nasdaq securities, in some instances, the existing Three Quote Rule has hindered, rather than furthered, investor protection by causing significant delays in obtaining executions of customer orders.

      Rule Amendments

      Accordingly, the amendments to Rule 2320(g) will require members to obtain quotations from three dealers (or all dealers if three or fewer) only when there are fewer than two priced quotations displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis (such as the OTCBB or the electronic pink sheets). The amendments define the term "interdealer quotation system" as any system of general circulation to broker/dealers that regularly disseminates quotations of identified broker/dealers. Quotations by the same dealer in more than one inter-dealer quotation system are considered one quotation for the purposes of this rule. As with the existing rule, the amendments do not limit or change a member's general best execution obligations.

      In addition, Rule 3110(b)(2) currently requires that members indicate on the order ticket for each transaction in a non-Nasdaq security the name of each dealer contacted and the quotations received to determine the best inter-dealer market. Under the amendments, members are not required to note such information on the order ticket if two or more priced quotations are displayed in an inter-dealer quotation system and NASD Regulation has access to the quotation data. As a result, members are relieved of certain recordkeeping burdens in which NASD Regulation can validate and confirm compliance with applicable requirements directly through its internal historical data. Currently, NASD Regulation has access to such data with respect to the OTCBB securities; however, it does not have access to historical quotation data for the electronic pink sheets.5

      Finally, the amendments require members that display pricedquotations for the same security in two or more quotation mediums that permit quotation updates on a real-time basis to display the same priced quotations in each system. This obligation exists even where the quotation displayed represents a customer limit order. "Quotation medium" is defined as any interdealer quotation system or any publication or electronic communications network (ECN) or other device that is used by broker/dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.

      NASD Regulation believes that members that display different priced quotations in different quotation mediums for the same security can be confusing and misleading to other market participants and, more importantly, to public investors. Moreover, requiring that members display consistent priced quotations in multiple quotation mediums will enhance the ability of other market participants to ascertain the best inter-dealer market for a security.


      Endnotes

      1 See Securities Exchange Act Release No. 43319 (September 21, 2000), 65 Fed. Reg. 58589 (September 29, 2000) (File No. SR-NASD-00-20).

      2 See Exchange Act Release No. 25637 (May 2, 1988).

      3 If three firm quotations are displayed, a broker/dealer is not required to call the three market makers to verify the firm quotations that are displayed on the screen. A broker/dealer need only note on the order ticket the identity of the broker/dealers and the firm quotations displayed.

      4 See NASD Rule 2320(a).

      5 NASD Regulation has filed a proposed rule change with the SEC that generally would require members to record their quotation data in the electronic pink sheets or similar quotation systems and report such data to NASD Regulation. See Exchange Act Release No. 43367 (September 27, 2000), 65 Fed. Reg. 59482 (October 5, 2000) (File No. SR-NASD-00-42). Where priced quotations are displayed in an inter-dealer quotation system for which NASD Regulation does not have access to historical quotation information, although the member is not required under Rule 2320(g) to call the market maker to verify the firm quotation that is displayed, the member is required to note on the order ticket the identity of the broker/dealer, the firm priced quotation displayed, and the inter-dealer quotation system in which the quotation was displayed.


      ATTACHMENT A

      Text Of Rule Changes

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

      Rule 2320. Best Execution and Interpositioning

      (a) through (f) No Change
      (g)
      (1) Unless two or more priced quotations for a non-Nasdaq security (as defined in the Rule 6700 Series) are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis, [I]in any transaction for or with a customer pertaining to the execution of an order in a non-Nasdaq security [(as defined in the Rule 6700 Series)], a member or person associated with a member, shall contact and obtain quotations from three dealers (or all dealers if three or less) to determine the best inter-dealer market for the subject security.
      (2) Members that display priced quotations on a real-time basis for a non-Nasdaq security in two or more quotation mediums that permit quotation updates on a real-time basis must display the same priced quotations for the security in each medium.
      (3) For purposes of this paragraph, the term "inter-dealer quotationsystem" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers.
      (4) For purposes of this paragraph, the term "quotation medium" means any inter-dealer quotation system or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
      (5) Pursuant to the Rule 9600 Series, the staff, for good cause shown, after taking into consideration all relevant factors, may exempt any transaction or classes of transactions, either unconditionally or on specified terms, from any or all of the provisions of this paragraph if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.

      Rule 3110. Books and Records

      (a) No Change
      (b)(1) No Change
      (b)(2) A person associated with a member shall indicate on the memorandum for each transaction in a non-Nasdaq security, as that term is defined in the Rule 6700 Series, the name of each dealer contacted and the quotations received to determine the best inter-dealer market; however, the requirements of this subparagraph shall not apply if two or more priced quotations for the security are displayed in an inter-dealer quotation system, as defined in Rule 2320(g), that permits quotation updates on a real-time basis for which NASD Regulation has access to historical quotation information.

    • 00-77 Thanksgiving Day: Trade Date — Settlement Date Schedule

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      INFORMATIONAL

      Trade Date — Settlement Date

      SUGGESTED ROUTING

      KEY TOPIC

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making

      Holiday Trade Date — Settlement Date Schedule



      Thanksgiving Day: Trade Date-Settlement Date Schedule

      The Nasdaq Stock Market® and the securities exchanges will be closed on Thursday, November 23, 2000, in observance of Thanksgiving 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*
      Nov. 17 Nov. 22 Nov. 27
      20 24 28
      21 27 29
      22 28 30
      23 Markets Closed
      24 29 Dec. 1


      *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."

    • 00-76 Fixed Income Pricing System Additions, Deletions, And Changes As Of September 22, 2000

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      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Senior Management
      Trading & Market Making

      FIPS



      As of September 22, 2000, the following bonds were added to the Fixed Income Pricing System,SM (FIPS®).

      Symbol Name Coupon Maturity
      ADLA.GQ Adelphia Communications Corp. 10.875 10/01/10
      ADLT.GA Advanced Lighting Tech 8.000 03/15/08
      AESO.GA AES Corp. 9.375 09/15/10
      BRWI.GA Broadwing Communications Inc. 12.500 08/15/09
      BYOP.GA Bradley Oper Ltd Partnership 7.000 11/15/04
      BYOP.GB Bradley Oper Ltd Partnership 7.200 01/15/08
      BYOP.GC Bradley Oper Ltd Partnership 8.875 03/15/06
      CKE.GA Carmike Cinemas Inc. 9.375 02/01/09
      DHI.GE D.R. Horton Inc. 9.750 09/15/10
      EHWT.GA Earthwatch Inc. 13.000 07/15/07
      GAP.GC Great Atlantic & Pac Tea Inc. 7.700 01/15/04
      HCA.GA The Healthcare Co. 8.750 09/10/10
      HVDM.GA Hvide Marine Inc. 12.500 06/30/07
      IPCS.GA IPCS Inc. 14.00 07/15/10
      LEVI.GA Levi Strauss & Co. 6.800 11/01/03
      MVRM.GA Madison River Cap LLC/ Mad River Finl 13.250 03/01/10
      NXTP.GB Nextel Partners Inc. 11.000 03/15/10
      PPE.GC Park Place Entertainment Corp. 8.875 09/15/08
      RYL.GE Ryland Group Inc. 9.750 09/01/10
      SPF.GE Standard Pacific Corp. 9.500 09/15/10
      TKPX.GC Tekni-Plex Inc. 12.750 06/15/10
      TNPE.GA TNP Enterprises Inc. 10.250 04/10/10
      TTE.GB Autotote Corp. 12.500 08/15/10
      WCG.GC Williams Communications Group Inc. 11.700 08/01/08
      WCG.GD Williams Communications Group Inc. 11.875 08/01/10

      As of September 22, 2000, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      CALA.GA Contl Airlines Inc. 9.500 12/15/01
      CKE.GA Carmike Cinemas Inc. 9.375 02/01/09
      CNDS.GA Cellnet Data Systems Inc. 13.000 06/15/05
      CNDS.GB Cellnet Data Systems Inc. 14.000 10/01/07
      CUIA.GA Casino Magic Louisiana Corp. 13.000 08/15/03
      DEEP.GA Deeptech Intl 12.000 12/15/00
      GBCH.GA Global Crossing Hldg Ltd 9.625 05/15/08
      GPTK.GA Geotek Communications Inc. 15.000 07/15/05
      IRUC.GA Intramericas Comm Corp. 14.000 10/27/07
      MDM.GB Med Partners Inc. 6.875 09/06/00
      OLYM.GC Olympic Finl Ltd 10.125 03/15/01
      PENN.GA Penn National Gaming Inc. 10.625 12/15/04
      PSRI.GA Phase Metrics Inc. 10.750 02/01/05
      QWST.GA Quest Communications Intl Inc. 9.470 10/15/07
      QWST.GB Quest Communications Intl Inc. 10.875 04/01/07
      QWST.GC Quest Communications Intl Inc. 8.290 02/01/08
      QWST.GD Quest Communications Intl Inc. 7.500 11/01/08
      QWST.GF Quest Communications Intl Inc. 7.250 11/01/08
      RGRO.GD Ralphs Grocery Co New 11.000 06/15/05
      SVRN.GB Sovereign Bancorp Inc. 6.750 09/01/00
      SWEC.GB Sweetheart Cup Inc. 9.625 09/01/00
      TCOM.GB Tele-Commun Inc Ser E 10.250 09/30/00
      TEXN.GG Texas New Mexico Power Co. 10.750 09/15/03

      As of September 22, 2000, changes were made to the symbols of the following FIPS bonds.

      New Symbol Old Symbol Name Coupon Maturity
      BBX.GA BANC.GA Bankatlantic Bancorp Inc. 9.000 10/01/05
      CALA.GB CAI.GB Contl Airlines Inc. 8.000 12/15/05
      CBH.GA COBA.GA Commerce Bancorp Inc. NJ 8.375 07/15/03
      FCEA.GA FRCE.GA Forest City Enterprises Inc. 8.500 03/15/08
      HDR.GA HPSC.GA HPSC Inc. 11.000 04/01/07
      ICY.GA ICED.GA Packaged Ice Inc. 9.750 02/01/05
      MPWR.GA MGCN.GA MGC Communications Inc. 13.000 10/01/04
      NXTP.GA NXPS.GA Nextel Partners Inc. 14.000 02/01/09
      PACW.GA PWCM.GA Pac-West Telecomm Inc. 13.500 02/01/09
      UNWR.GA USUW.GA US Unwired Inc. 13.375 11/01/09

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, Market Regulation, NASD RegulationSM, at (301) 590-6447.

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

    • 00-75 Industry/Regulatory Council On Continuing Education Issues Firm Element Advisory

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      INFORMATIONAL

      Continuing Education

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education Testing/Qualifications
      Legal & Compliance
      Senior Management

      Continuing Education
      Firm Element



      Executive Summary

      The Securities Industry/Regulatory Council on Continuing Education (Council) has issued a Firm Element Advisory, a guide for firms to use when developing their Continuing Education Firm Element training plans. The attached Firm Element Advisory lists topics that the Council considers to be particularly relevant to the industry at this time. The list is based on a review of recent regulatory events, as well as advisories issued by industry self-regulatory organizations (SROs) since the last Firm Element Advisory of September 1999.

      Firms should review the training topics listed in the Firm Element Advisory in conjunction with their annual Firm Element Needs Analysis in which firms identify training issues to be addressed by their written Firm Element Training Plan(s). The Council is providing this advisory so that Firm Element Continuing Education may be as pertinent and enriching as possible to financial professionals in the securities industry.

      Questions/Further Information

      Questions about this Notice may be directed to John Linnehan, Director, Continuing Education, NASD Regulation, Inc. (NASD RegulationSM), at (240) 386-4684; or Daniel Sibears, Senior Vice President, Member Regulation, NASD Regulation, at (202) 728-6911.

      Background

      The Council includes 13 members representing a cross-section of securities firms and six SROs.1 Both the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA) have appointed liaisons to the Council.

      The Council facilitates industry/regulatory coordination of the administration and future development of the Continuing Education Program. Council duties include recommending and helping to develop specific content and questions for the Regulatory Element programs and minimum core curricula for the Firm Element. One responsibility of the Council is to identify and recommend pertinent regulation and sales practice issues for inclusion in Firm Element training plans.


      Endnote

      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


      CEP — The Securities Industry Continuing Education Program

      Firm Element Advisory

      Each year the Securities Industry/Regulatory Council on Continuing Education (Council) identifies and recommends to firms pertinent regulation and sales practice issues for possible inclusion in Firm Element training plans. Included in this Firm Element Advisory are topics which the Council considers to be particularly relevant to the industry at this time. The list is based on a review of recent regulatory events, as well as advisories issued by industry self-regulatory organizations (SROs) since the last Firm Element Advisory of September 1999.

      The Council recommends using the Firm Element Advisory when undertaking your annual Firm Element Needs Analysis to identify training topics. Select the training topics from the Firm Element Advisory that are relevant to your firm's business and use the related training point and reference material (available on the SRO Web Sites) as part of the training specified in your written Firm Element training plan. Other training topics may be prompted by a review of previous issues of the Firm Element Advisory, new rules, customer complaints, regulatory examination findings, or new products or services your firm plans to offer to investors. Remember that the topics included in your written training plan should be relevant to your firm's unique situation including any supervisory needs you identify. Training programs should be appropriate to your firm's size and structure.

      The Council will periodically highlight additional relevant regulatory areas to assist the industry and it invites your assistance. Please direct your comments, suggestions or questions about this and future issues of the Firm Element Advisory to either Roni Meikle, Continuing Education Manager, the New York Stock Exchange (NYSE), at (212) 656-2156; or John Linnehan, Director, Continuing Education, NASD Regulation, Inc. (NASD RegulationSM), at (240) 386-4684.

      Training Topic Relevant Training Point(s) and Reference(s)
      Decimalization The securities industry is preparing to convert to decimal pricing. The industry began conversion on apilot basis in August 2000, consistent with the timetable set by Securities and Exchange Commission (SEC) order.

      Decimal trading will ultimately increase the number of possible trading increments within a dollar from 16 to 100.

      Decimal pricing should make prices more easily understood by individual investors. Spreads in highly liquid stocks may tighten, thereby providing potential savings for investors, particularly if the minimum price variation is reduced to a penny. Decimalization may also improve the competitiveness of U.S. markets on a global basis.

      See SEC Release No. 34-42914, "Order Directing the Exchanges and the National Association of Securities Dealers, Inc. to Submit a Phase-In Plan to Implement Decimal Pricing in Equity Securities and Options Pursuant to Section 11 (a)(3)(B) of the Securities Exchange Act of 1934," dated June 8, 2000.

      Also see these Web Sites: NASD Regulation (www.nasdr.com); New York Stock Exchange (www.nyse.com/decimalization); Securities Industry Association (www.sia.com/decimalization)
      Foreign Jurisdictions

      Sales Practices
      It has come to the attention of the SROs that persons associated with broker/dealers may be soliciting business in the regulators' jurisdictions in violation of local foreign laws. Members considering soliciting business in foreign jurisdictions should ensure that such activities comply with all applicable laws. The consequences of breaching applicable foreign laws can be far-reaching, and broker/dealers in violation of particular foreign laws may be committing a criminal offense and be liable to prosecution.

      See NASD Notice to Members 00-02, NASD Alerts Members To Their Obligations Concerning Soliciting Business In Foreign Jurisdictions, January 2000.
      Investment Banking

      Securities Offerings Under SEC Rule 504 And Intra-State Offerings
      SEC Rule 504 provides an exemption from registration under Section 5 of the Securities Act of 1933 (Securities Act) for offerings of up to $1 million of securities. The SEC amended Rule 504 in early 1992 to provide that securities sold under Rule 504 will be deemed "restricted securities" under SEC Rule 144, and general solicitation and advertising will be prohibited unless the offering is:
      1) registered in at least one state that requires public filing and delivery of a disclosure document before sale; or
      2) offered exclusively in states that provide exemptions from registration and permit general solicitation and advertising, but that require that sales be made only to "accredited investors."
      Securities deemed to be "restricted securities" under SEC Rule 144 may only be sold into the public market in compliance with the holding period, manner of sale, and volume restrictions of that rule.

      The NASD has amended its rules to clarify that Rule 504 offerings that are public offerings of unrestricted securities are required to be filed with NASD Regulation for review of underwriting terms and arrangements under NASD Rules 2710 and 2810, and compliance with the requirements of NASD Rule 2720.

      See NASD Notice to Members 00-12, Amendments Adopted To Clarify The Application Of NASD Rules To Offerings Under SEC Rule 504 And Intra-State-Only Offerings, February 2000.
      Margin

      Options
      Changes to Option Margin Rules - Effective January 20, 2000, the SEC approved changes to the margin rules of the Chicago Board Options Exchange (CBOE) and NYSE. Some of the changes include, but are not limited to, loan value on long-term options (LEAPS); reduced maintenance requirements for stock hedged with options; certain spreads, if comprised of European style index options, can be carried in a cash account.

      The significant changes are summarized below:

      • The types of option strategies eligible for cash accounts have been expanded;


      • The amendments establish reduced maintenance margin requirements for certain hedged option strategies;


      • The amendments also allow for loan value on certain LEAPS;


      • The minimum margin requirement on short, uncovered puts is now based on the exercise price of the option; and


      • New definitions of butterfly spreads and box spreads have been added.

      See CBOE Regulatory Circular RG00-22, Option Margin Rule Changes, and NYSE Information Memo No. 99-59, "Amendments to Rule 431("Margin Requirements") Regarding Options", December 31, 1999.
      Municipal Securities

      Consultants
      Municipal Securities Rulemaking Board (MSRB) Rule G-38 defines a consultant as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on the dealer's behalf where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the dealer or any other person. Dealers must disclose to issuers certain information about their consultants and report certain information about their consultants to the MSRB on Form G-37/G-38, including certain of their consultants' political contributions to issuer officials and payments to state and local political parties.

      See MSRB Rule G-38: Consultants, MSRB Rule Book.
      Municipal Securities

      Delivery Of Official Statements And Advance Refunding Documents To The MSRB
      Managing underwriters are required to deliver to the MSRB, among other things, copies of final official statements for most primary offerings of municipal securities, if such documents are prepared by or on behalf of the municipal securities issuer. For refunding issues, dealers must send to the MSRB two copies of the refunding escrow agreement, or its equivalent, if prepared by or on behalf of the municipal securities issuer. Dealers must send these documents to the MSRB using the appropriate form—Form G-36(OS) to be sent with official statements and Form G-36(ARD) to be sent with advance refunding documents.

      See MSRB Rule G-36: Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee, MSRB Rule Book. See also Form G-36 Manual published by the MSRB.
      Municipal Securities

      Delivery Of Official Statements To Customers And Other Dealers
      During the underwriting period, a dealer is prohibited from selling new issue municipal securities (other than commercial paper) to a customer unless the dealer delivers to the customer by settlement of the transaction a copy of the final official statement if one is prepared by or on behalf of the issuer. If a municipal securities issuer will prepare only a preliminary official statement and not a final official statement, a dealer must deliver the preliminary version along with a written notice to customers that no final official statement will be prepared.

      See MSRB Rule G-32: Disclosures in Connection with New Issues, MSRB Rule Book.
      Municipal Securities

      Political Contributions And Prohibitions On Municipal Securities Business
      Dealers are prohibited from engaging in municipal securities business with a municipal securities issuer within two years after any contribution to an official of such issuer made by the dealer, any municipal finance professional associated with such dealer, or any political action committee controlled by the dealer or any municipal finance professional. The only exception to this absolute prohibition on municipal securities business is for certain contributions made to issuer officials by municipal finance professionals, but only if the municipal finance professional is entitled to vote for such official and provided any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. Dealers must report certain information about political contributions, political party payments, municipal securities business, and consultants to the MSRB on Form G-37/G-38 or, if appropriate, dealers may file a Form G-37x with the MSRB.

      See MSRB Rule G-37: Political Contributions and Prohibitions on Municipal Securities Business, MSRB Rule Book.
      Mutual Funds

      Advertising Recent Performance
      Broker/dealers have a responsibility to present fund performance information in a fair and balanced manner and not to create unrealistic investor expectations with regard to future fund performance. Recent unusually strong equity market performance helped some mutual funds, particularly those that are heavily invested in technology stocks, to achieve extraordinary total return figures during the last year (or shorter period). Some members are using advertisements that promote this total return information to attract new investors. Broker/dealers have a responsibility to base their communications on principles of fair dealing and good faith and to avoid statements that are exaggerated, unwarranted, or misleading.

      See NASD Notice to Members 00-21, NASD Regulation Reminds Members Of Their Responsibilities When Advertising Recent Mutual Fund Performance, April 2000. [This Notice cautions NASD members that if they choose to present extraordinary recent fund performance information, they should do so in a manner designed to lessen the possibility that investors will have unreasonable expectations concerning the future performance of these mutual funds.]
      Mutual Funds

      Bond Fund Volatility Ratings
      Bond mutual fund volatility ratings describe the sensitivity of bond mutual fund portfolios to changing market conditions. Previously, NASD Regulation interpreted its rules to prohibit members from using bond mutual fund volatility ratings in supplemental sales literature. New NASD Rule IM-2210-5 permits members and associated persons to include bond mutual fund volatility ratings in supplemental sales literature for an 18-month pilot period. The pilot program expires August 31, 2001, unless extended or permanently approved by the NASD at or before such date.

      See NASD Notice to Members 00-23, SEC Approves New Rules Relating To Bond Mutual Fund Volatility Ratings, April 2000.
      Mutual Funds

      Sales Charges Of Investment Companies And Variable Contracts
      On October 20, 1999, the SEC approved amendments to NASD Rules 2820 (Variable Contracts Rule) and 2830 (Investment Company Rule) that regulate the sales charges imposed by investment companies and variable annuity contracts sold by broker/dealers. Generally, the amendments revise the Investment Company Rule to:

      • provide maximum aggregate sales charge limits for fund-of-funds arrangements;


      • permit mutual funds to charge installment loads;


      • prohibit loads on reinvested dividends;


      • impose redemption order requirements for shares subject to contingent deferred sales loads (CDSLs); and


      • eliminate duplicate prospectus disclosure.

      The amendments revise the Variable Contracts Rule to eliminate the specific sales charge limitations in the rule and a filing requirement relating to changes in sales charges.

      See NASD Notice to Members 99-103, SEC Approves Rule Change Relating To Sales Charges For Investment Companies And Variable Contracts; Effective Date: April 1, 2000. December 1999.
      Options

      Communications With The Public
      Options Worksheets - On February 1, 2000, the SEC approved a rule change permitting the use of worksheets that are not standardized throughout a member organization provided such worksheets meet the requirements applicable to sale literature. This change gives broker/dealers or their associated persons the ability to tailor worksheets to specific prospective or existing clients, to utilize worksheets that may be commercially available, or to use industry developed worksheets.

      See CBOE Regulatory Circular RG00-43 "Communications to Customers."
      Options

      Order Entry
      Access to Retail Automatic Execution System (RAES)

      It is a violation of CBOE rules to enter, at or about the same time and for the same account (or for accounts with any common ownership), multiple RAES orders in the same or similar options series for the purpose of circumventing the limitation on RAES order size. It is also a violation of CBOE rules to enter a limit order for placement on the Exchange's limit order book, or on the book of a competing exchange, for the purpose of effecting the execution price of a RAES transaction. If a member grants a non-member direct access to the Exchange's limit order book or to RAES through the member's order routing systems, it is a violation for such member either to knowingly facilitate the nonmember's violation of Exchange rules through such systems and/or to fail to establish procedures reasonably designed to prevent the non-member's access to such systems from being used to effect such violations.

      See CBOE Regulatory Circular RG00-27 "Access to Retail Automatic Execution System (RAES)."
      Options

      Sales Practices
      Day Trades Exceeding Account Approval Level - The CBOE has issued guidelines that its member organizations are required to follow with respect to proper identification of options day trades that exceed an account's approved strategy level. As part of a member organization's supervisory program, member organizations are required to establish and maintain reasonable procedures to identify, on at least a post-trade date basis, options day trades in customer accounts that exceed an account's approved strategy level.

      See CBOE Regulatory Circular RG00-08 "Options Day Trades Exceeding Account Approval Level."
      Short Selling A long-standing position of NASD Regulation and Nasdaq® states that broker/dealers must comply with the rules concerning short sales regardless of how a short-sale order is received, e.g., through the telephone, an electronic transmission, the Internet, or otherwise. Accordingly, firms must comply with the bid test, make affirmative determinations, and identify short sales in the Automated Confirmation Transaction ServiceSM (ACTSM) for all proprietary and customer short-sale orders that are received electronically through proprietary electronic order routing systems, the Internet, or otherwise.

      See NASD Notice to Members 99-98, NASD Regulation Reiterates That Members Must Comply With All Short Sale Rules When Receiving Orders Through Electronic Order Systems Or The Internet And Reiterates The Operation Of The Affirmative Determination Rule, December 1999.
      Suitability & Disclosure Of Risk






      Callable Common Stock
      Suitability and disclosure of risk are relevant topics for all Firm Element training plans. Applicable SRO rules are NASD Conduct Rule 2310 — Recommendations to Customers (Suitability) and NYSE 405 - Diligence as to Accounts. The specific training topics listed in this Firm Element Advisory should also be considered.

      An investor purchasing callable common stock is subject to unique risks not typically associated with ownership of common stock, even when such stock is called away at a premium. Moreover, the ability of an issuer's common stock to be called away from a shareholder generally will be a material fact to an investor. Accordingly, high standards of commercial honor and just and equitable principles of trade require that any member that provides a written confirmation for a transaction involving callable common stock must disclose on the confirmation that the security is callable and that the customer may contact the member for more information.

      Interpretive Material (IM-2110-6) states that a member that provides a confirmation pursuant to SEC Rule 10b-10 in connection with any transaction in callable common stock shall disclose on such confirmation that the security is callable and that the customer may wish to contact the member for more information regarding the security. Disclosure of the call feature on the confirmation in no way relieves a member of its obligation to consider the callable nature of the security when complying with any applicable suitability obligations.

      See NASD Notice to Members 00-33, NASD Regulation Adopts New Rule Interpretation To Require Confirmation Disclosure Of Callable Common Stock, May 2000.
      Suitability & Disclosure Of Risk

      Certificates Of Deposit
      Broker/dealers that offer brokered certificates of deposit to investors have an obligation to disclose all relevant features of these investments, such as variable rates, call features, early withdrawal penalties, liquidity, etc.

      See "Certificates of Deposit: Tips for Investors," SEC Web Site at www.sec.gov/consumer/certific.htm, and NASD Regulation Regulatory & Compliance Alert, "Regulatory Short Takes — Investment Instruments Offered By CD Brokers," Summer 2000.
      Suitability & Disclosure Of Risk

      Extended Hours Disclosures
      Broker/dealers have an obligation under just and equitable principles of trade and the advertising rule to disclose to customers the material risks of extended hours trading.

      See NASD Notice to Members 00-07, Disclosure To Customers Engaging In Extended Hours Trading, January 2000. [A model disclosure statement is included with this Notice.]
      Suitability & Disclosure Of Risk

      Joint Regulatory Advisory On Margin Debt
      The NYSE and NASD issued a Joint Statement concerning the continuing growth of investor margin debt. The Joint Statement asked NYSE and NASD members to review their maintenance margin policies for any necessary changes and to take the following steps relative to the extension of margin credit:

      • Continue to advise individual investors about the risk of investing on margin.


      • Advise sales managers and account executives of the appropriate steps to be taken when and if individual investors significantly change their levels of margin borrowings.


      • Carefully review and curtail any account executive incentive programs that would promote the solicitation of margin accounts, if appropriate.

      See NYSE Information Memo No. 00-5, "Joint Statement by NYSE and NASD on the Continuing Growth in Investor Margin Debt," dated February 28, 2000.
      Supervision

      Municipal Securities

      Review And Retention Of Correspondence With The Public
      Each dealer is required to develop written policies and procedures for review of correspondence with the public relating to its municipal securities activities, and tailored to its structure and the nature and size of its business and customers.

      See MSRB Rule G-27: Supervision, and related recordkeeping requirements in rules G-8(a)(xx) and G-9(b)(xiv), MSRB Rule Book.
      Supervision

      Research Reports That Are Independently Prepared
      Many independent research firms publish reports that analyze and provide information about a wide variety of investment companies, including their performance, fees, and expenses, and a description and narrative analysis of their investment strategies and portfolio management style.

      Broker/dealers use these independently prepared research reports in a number of ways. For example, a member may make an independent research firm's entire research service available to customers at a branch office. A member may also distribute or make available an independently prepared research report concerning a particular investment company as part of its selling process.

      Amendments to NASD Rule 2210, which governs member communications with the public, exempt from Rule 2210's filing requirements certain types of independently prepared research reports concerning investment companies.

      See NASD Notice to Members 00-15, SEC Approves Rule Change Relating To Filing Requirements For Independently Prepared Research Reports, March 2000.
      Supervision

      Risk Management Practices
      The SEC, NASD Regulation, and the NYSE issued a joint statement regarding broker/dealer risk management practices. Risk management is the identification, management, measurement, and oversight of various business risks and is part of a firm's internal control structure. These risks typically arise in such areas as proprietary trading, credit, liquidity, and new products.

      The examination staffs from these organizations formed a task force several years ago to assess risk management practices. Among the goals of the task force was to assess the industry's awareness of the need for stringent risk management supervisory systems, and compile a compendium of sound practices and weaknesses noted during task force members' review of risk management systems.

      The task force's statement emphasizes the importance of maintaining an appropriate risk management system. The statement also provides examples of weaknesses and strengths in various broker/dealers' risk management policies and practices.

      See NASD Notice to Members 99-92, and NYSE Information Memo 99-42, SEC, NASD Regulation, And NYSE Issue Joint Statement On Broker/Dealer Risk Management Practices, November 1999.
      Trade Reporting

      Municipal Securities

      Reports Of Sales Or Purchases
      MSRB Rule G-14 requires dealers to report all transactions in municipal securities to the MSRB by midnight of trade date. The dealer must obtain and use an NASD-assigned symbol to identify itself in reporting its transactions. Dealers report their transactions with other dealers as a consequence of their submission of trade information to the automated comparison system operated by National Securities Clearing Corporation (NSCC). Dealers report their transactions with customers to the MSRB using file formats designed solely for customer trade data. While dealers may employ an agent or use a clearing/introducing broker arrangement to report transactions, the primary responsibility for timely and accurate submission of data remains with the dealer that effected the transaction.

      See MSRB Rule G-14: Reports of Sales or Purchases, and associated procedures, MSRB Rule Book; User's Manual for Customer Transaction Reporting and various notices on the MSRB Web Site (www.msrb.org) and NASD Notice to Members 00-08, NASD Reminds Members Of Their Obligations Regarding Municipal Securities Transaction Reporting, January 2000.
      Trade Reporting

      Order Audit Trail (OATSSM) Information
      When recording and reporting information on certain customer orders, members must indicate whether the customer provided instructions concerning the display or non-display of limit orders. It has come to the attention of NASD Regulation staff that several broker/dealers consistently misreport this information to the NASD's OATS.

      See NASD Notice to Members 00-26, NASD Regulation Reiterates Requirement That Members Correctly Report Order Audit Trail Information, May 2000.
      Trade Reporting

      Riskless Principal Transactions
      On March 24, 1999, the SEC approved amendments to NASD rules regarding trade reporting of riskless principal transactions by market makers. The rule change permits market makers in Nasdaq and other over-the-counter securities to report trades under the current riskless principal rules that exist for non-market makers. The effect of the change is that instead of reporting both "legs" of a riskless principal transaction, market makers (like non-market makers currently) now will only report one portion of the transaction if it meets the definition of riskless principal. The rule defines riskless principal as a trade in which a member, after having received an order to buy (sell) a security, buys (sells) the security at the same price, as principal, in order to satisfy the order to buy (sell).

      See NASD Notice to Members 99-65, SEC Approves Rule Changes To NASD Trade-Reporting Rules For Riskless Principal Transactions In Nasdaq And OTC Securities, August 1999.
      Trading

      Trading Collars And Circuit Breakers
      NYSE Rule 80A (Index Arbitrage Trading Restrictions) addresses the change in the Dow Jones Industrial Average (DJIA) that triggers the Rule's tick restrictions.

      NYSE Rule 80B (Trading Halts Due to Extraordinary Market Volatility) addresses halt provisions and circuit breakers levels.

      The NYSE changes the trading collars and circuit
      breaker levels on a quarterly basis.

      See NYSE Information Memo Nos. 00-1, 00-7, and 00-17, "New Rule 80A collars and Rule 80B Circuit Breaker Levels," dated January 3, 2000, April 3,
      2000, and July 3, 2000
      .
      Trading/Markets

      Blank Check Companies
      In most, if not all, cases, the resale of securities of blank check companies1 is restricted and such securities can only be resold through registration under the Securities Act. In addition, Rule 144 is not available to promoters or affiliates of blank check companies or to their transferees either before or after a business combination with an operating company or other person.

      NASD Regulation staff requires a market maker, when seeking NASD Regulation clearance pursuant to NASD Rule 6740 to initiate or resume quotation of a security of a blank check company, to provide an independent opinion from its own counsel detailing why the sale of such securities would not violate the registration requirements of the Securities Act. NASD Regulation staff will continue to scrutinize closely such filings and will vigorously pursue disciplinary action and/or refer the staff's findings to the SEC for further action.

      See NASD Notice to Members 00-49, SEC Issues Staff Interpretation On The "Free Trading" Status Of Blank Check Company Securities Under Certain Scenarios, July 2000.
      Trading/Markets

      Limit Order Display Obligations
      The NASD, after consultation with the staff of the SEC, is reiterating the limit order display obligations imposed on members under SEC Rule 11Ac1-4 (Display Rule). One of the primary purposes of this Notice is to reiterate that the 30-second requirement to display limit orders does not operate as a safe harbor.

      See NASD Notice to Members 99-99, NASD Reiterates Obligations To Display Customer Limit Orders Pursuant To SEC Rule 11Ac1-4, December 1999.
      Trading/Markets

      Locked And Crossed Markets
      On February 7, 2000, the SEC approved changes to NASD Rule 4613(e), which relates to the entering of locking and crossing quotes by Nasdaq market participants (market makers and electronic communications networks (ECNs)). The rule change alters market participants' obligations regarding the entry of locking/crossing quotes prior to the opening of the Nasdaq market at 9:30 a.m. Eastern Time (ET), and sets out specific obligations for parties to a lock/cross, which are determined based on the time the locked/crossed market occurs.

      See NASD Notice to Members 00-29, SEC Approves Changes To Nasdaq Locked/Crossed Markets Rule; Effective Date: June 5, 2000, May 2000, and Special NASD Notice to Members 00-42, NASD Regulation, Inc. Reiterates The Obligation Of Member Firms To Comply With Trading Rules, Particularly Immediately Prior To The Close On Expiration Fridays And Index Rebalancing Days, June 2000.
      Trading/Markets

      Records Of Orders
      NYSE Rule 410 requires that, before an order is executed on the Floor, the name or designation of the account for which the order is to executed must be placed upon the record of the order. Similarly, SEC Rule 17a-3(a)(6) requires a record of each order to be prepared at the time of the transaction and that it include the account name.

      It has come to the SROs' attention that member organization employees are, in some instances, delaying entry of account designation on order tickets. Broker/dealers must ensure that each order is documented prior to, or simultaneous with, the order's entry. Records must include account designations as well as the number of shares to be allocated per account.

      See NYSE Information Memo No. 00-19, Timely Designation and Allocation of Account Information - Record of Orders, dated July 21, 2000.
      Variable Contracts

      Sales Of Variable Life Insurance
      Variable life insurance and variable annuity contracts (Variable Contracts) are securities, and accordingly, their distribution is subject to NASD rules. Of particular importance are:

      • Rule 3010 (Supervision), which requires each member to establish and maintain systems to supervise the activities of each registered representative and associated person in order to achieve compliance with the securities laws, regulations, and NASD rules; and


      • Rule 2310 (Suitability), which requires that a member, when recommending the purchase, sale, or exchange of any security to a customer, have reasonable grounds for believing that the recommendation is suitable for the customer upon the basis of the facts disclosed by the customer.

      See NASD Notice to Members 00-44, The NASD Reminds Members Of Their Responsibilities Regarding The Sale Of Variable Life Insurance, July 2000. [This Notice focuses on retail sales of variable life insurance, including both scheduled premium and flexible premium products, and provides a set of guidelines to assist members in developing sales-related supervisory procedures.]
      Variable Contracts

      Variable Annuities
      Guidelines intended to assist broker/dealers in developing appropriate procedures relating to variable annuity sales to customers. The guidelines identify areas of concern such as customer information, product information, liquidity and earnings accrual, customer's income and net worth, contract size thresholds, investments in tax-qualified accounts, and variable annuity replacements expected to be addressed in the procedures of broker/dealers that offer and sell variable annuities.

      See NASD Notice to Members 99-35, The NASD Reminds Members Of Their Responsibilities Regarding The Sales Of Variable Annuities, May 1999.

      See also "Variable Annuities: What You Should Know," SEC Web Site at: www.sec.gov/consumer/varannty.htm
      1 A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger acquisition with an unidentified company or companies, or other entity or person.


      To Obtain More Information

      For more information about publications, contact the SROs at these addresses:

      American Stock Exchange
      NASD MediaSource
      P.O. Box 9403
      Gaithersburg, MD 20898-9403
      (301) 590-6142
      www.nasd.com
      National Association of Securities Dealers
      NASD MediaSource
      P.O. Box 9403
      Gaithersburg, MD 20898-9403
      (301) 590-6142
      www.nasd.com
      Chicago Board Options Exchange
      Investor Services
      Chicago Board Options Exchange
      400 S. LaSalle Street
      Chicago, IL 60605
      (800) OPTIONS
      www.cboe.com
      New York Stock Exchange
      Publications Department
      11 Wall Street
      18th Floor
      New York, NY 10005
      (212) 656-5273, or (212) 656-2089
      www.nyse.com
      Municipal Securities Rulemaking Board
      Publications Department
      1640 King Street
      Suite 300
      Alexandria, VA 22314
      (202) 223-9503
      www.msrb.org
      Philadelphia Stock Exchange
      Marketing Department
      1900 Market Street
      Philadelphia, PA 19103
      (800) THE PHLX, or (215) 496-5158
      www.phlx.com
      or info@phlx.com

    • 00-74 NASD Announces Election Results For District Committees And District Nominating Committees

      View PDF File

      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management

      District Elections



      Executive Summary

      Through this Notice, the National Association of Securities Dealers, Inc. (NASD®) announces the election results for the District Committees and the District Nominating Committees. The newly elected District Committee members will serve until 2004.

      The members of the District Committees and the District Nominating Committees are included in Attachment A.

      Questions/Further Information

      Questions concerning this Notice may be directed to the District Director noted or to Joan Conley, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8381 or via e-mail at: joan.conley@nasd.com.


      Attachment A

      District Committee And District Nominating Committee Members

      District 1
      Elisabeth P. Owens, District Director
      525 Market Street, Suite 300
      San Francisco, CA 94105
      (415) 882-1200

      District 1 Committee

      Committee Members

      To Serve Until January 2001
      Steven R. Aaron Chase Securities Inc., San Francisco, CA
      Janet W. Campbell Protected Investors of America, Walnut Creek, CA
      Douglas C. Heske U.S. Bancorp Piper Jaffray, Inc., San Francisco, CA
      To Serve Until January 2002
      John H. Chung First Security Van Kasper, San Francisco, CA
      Steven D. Piper Epoch Securities, Inc., San Francisco, CA
      To Serve Until January 2003
      Sally G. Aelion Emmett A. Larkin Co., Inc., San Francisco, CA
      David A. Baylor Thomas Weisel Partners LLC, San Francisco, CA
      Henry W. Carter E*Trade Securities, Inc., Menlo Park, CA
      To Serve Until January 2004 (newly elected members)
      Carol Van Bruggen Securities Service Network, Inc., Sacramento, CA
      Susan K. Campbell Protected Investors of America, San Francisco, CA
      William C. Pack Salomon Smith Barney Inc., San Francisco, CA

      District 1 Nominating Committee

      Committee Members

      Steven R. Aaron Chase Securities Inc., San Francisco, CA
      Stephen R. Adams First Security Van Kasper, San Francisco, CA
      Nicholas C. Cochran American Investors Company, Dublin, CA
      John C. Helmer Caldwell Securities, Inc., Danville, CA
      William A. Svoboda Morgan Stanley Dean Witter Reynolds, San Jose, CA


      District 2
      Lani M. Sen Woltmann, District Director
      300 South Grand Avenue, Suite 1600
      Los Angeles, CA 90071
      (213) 627-2122

      District 2 Committee

      Committee Members

      To Serve Until January 2001
      James B. Guillou, Sr. Sutro & Co., Incorporated, La Jolla, CA
      Andrew E. Haas Bear Stearns & Co., Inc., Los Angeles, CA
      Richard E. Wiseley CIBC Oppenheimer & Co., Inc., Los Angeles, CA
      Richard P. Woltman Spelman & Co., Inc., San Diego, CA
      To Serve Until January 2002
      Margaret M. Black Morgan Stanley Dean Witter, Beverly Hills, CA
      Diane P. Blakeslee Blakeslee and Blakeslee, Inc., San Luis Obispo, CA
      Jack R. Handy, Jr. Financial Network Investment Corporation, Torrance, CA
      Dean A. Holmes American General Financial Group, Anaheim, CA
      To Serve Until January 2003
      Kellen M. Flanigan Dabney Flanigan, LLC, Los Angeles, CA
      William H. Howard, Jr. Hagerty, Stewart & Associates, Irvine, CA
      James R. Kruger Dreyfus Brokerage Services, Inc., Beverly Hills, CA
      Stephen P. Maguire Maguire Investments, Inc., Santa Maria, CA
      To Serve Until January 2004 (newly elected members)
      James E. Biddle The Securities Center Incorporated, Chula Vista, CA
      Chris M. Kanoff Jefferies & Company, Inc., Los Angeles, CA
      Steven K. McGinnis National Planning Corporation, Santa Monica, CA
      Neal E. Nakagiri Associated Securities Corporation, Los Angeles, CA

      District 2 Nominating Committee

      Committee Members

      Murray L. Finebaum Trading Edge, Inc., Santa Monica, CA
      Jerry M. Gluck Jefferies & Company, Inc., Los Angeles, CA
      James B. Guillou Sutro & Co., Incorporated, La Jolla, CA
      Joan B. Seidel Morton Seidel & Company, Inc., Beverly Hills, CA
      Kaye M. Woltman Girard Securities, Inc., San Diego, CA


      District 3  
      Frank J. Birgfeld, District Director
      Republic Plaza Building
      370 17th Street, Suite 2900
      Denver, CO 80202-5629
      (303) 446-3100
      James G. Dawson, District Director
      Two Union Square
      601 Union Street, Suite 1616
      Seattle, WA 98101-2327
      (206) 624-0790

      District 3 Committee

      Committee Members

      To Serve Until January 2001
      Thomas R. Hislop Peacock, Hislop, Staley & Given, Inc., Phoenix, AZ
      Gerald Meyer D. A. Davidson & Co., Great Falls, MT
      John Morton Morton Clarke Fu & Metcalf, Inc., Seattle, WA
      Terry Lee Richards PaineWebber, Inc., Salt Lake City, UT
      To Serve Until January 2002
      James Barnyak Salomon Smith Barney Inc., Seattle, WA
      David Griswold Frank Russell Securities, Inc., Tacoma, WA
      James E. Stark Charles Schwab & Co., Phoenix, AZ
      To Serve Until January 2003
      J. Pamela Dawson WM Financial Services, Inc., Seattle, WA
      Steven M. Fishbein American Fronteer Financial Corporation, Denver, CO
      Bruce Kramer Prudential Securities Incorporated, Seattle, WA
      To Serve Until January 2004 (newly elected members)
      Richard B. Bequette CUE, Phoenix, AZ
      George Diachok Multi-Financial Securities Corp., Denver, CO
      John M. Rose Seattle-Northwest Securities Corp., Seattle, WA
      Kathryn A. Supko Robert W. Baird & Co., Inc., Boise, ID

      District 3 Nominating Committee

      Committee Members

      J. Wendell Garrett J.W. Garrett & Company, Phoenix, AZ
      Thomas R. Hislop Peacock, Hislop, Staley & Given, Inc., Phoenix, AZ
      John Morton Morton Clarke Fu & Metcalf, Inc., Seattle, WA
      Thomas Petrie Petrie Parkman & Co., Inc., Denver, CO
      Douglas Strand Strand, Atkinson, Williams & York, Inc., Portland, OR


      District 4
      Thomas D. Clough, District Director
      120 W. 12th Street, Suite 900
      Kansas City, MO 64105
      (816) 421-5700

      District 4 Committee

      Committee Members

      To Serve Until January 2001
      Antonio J. Cecin U.S. Bancorp Piper Jaffray, Inc., Minneapolis, MN
      Cheryl Cook-Schneider Edward Jones, St. Louis, MO
      Brent M. Weisenborn Security Investment Company of Kansas City, Kansas City, MO
      Vacancy  
      To Serve Until January 2002
      Robert M. Chambers Robert W. Baird & Co. Incorporated, Des Moines, IA
      John R. Lepley Princor Financial Services Corporation, Des Moines, IA
      William M. Lyons American Century Investment Services, Inc., Kansas City, MO
      To Serve Until January 2003
      E. John Moloney Moloney Securities Co., Inc., St. Louis, MO
      Rodger O. Riney Scottsdale Securities, Inc., St. Louis, MO
      Jeffrey A. Schuh Marquette Financial Group, Inc., Minneapolis, MN
      Gail Werner-Robertson GWR Investments, Inc., Omaha, NE
      To Serve Until January 2004 (newly elected members)
      Gene M. Diedrich A.G. Edwards & Sons, Inc., Overland Park, KS
      Jonathan M. Harris Dain Rauscher, Inc., Minneapolis, MN
      Timothy J. Lyle Trusted Securities Advisors Corp., Minnetonka, MN
      Pamela Kay Reinitz Ziermann Dougherty & Company, Minneapolis, MN

      District 4 Nominating Committee

      Committee Members

      Antonio J. Cecin U.S. Bancorp Piper Jaffray Inc., Minneapolis, MN
      John D. Cleland Security Distributors, Inc., Topeka, KS
      Cheryl Cook-Schneider Edward Jones, St. Louis, MO
      Wayne H. Peterson Cap Pro Brokerage Services, Inc., Minneapolis, MN
      Brent Weisenborn Security Investment Company of Kansas City, Kansas City, MO


      District 5
      Warren A. Butler, Jr., District Director
      1100 Poydras Street
      Energy Centre, Suite 850
      New Orleans, LA 70163-0802
      (504) 522-6527

      District 5 Committee

      Committee Members

      To Serve Until January 2001
      Benjamin D. Capshaw, III Morgan Stanley Dean Witter, New Orleans, LA
      James S. Jones Crews & Associates, Inc., Little Rock, AR
      Dene R. Shipp SunTrust Equitable Securities, Nashville, TN
      John C. West First Union Securities, Inc., Memphis, TN
      To Serve Until January 2002
      James D. Hudgins SouthTrust Securities, Inc., Birmingham, AL
      LeRoy H. Paris, II Invest Linc Securities, Inc., Jackson, MS
      Duncan F. Williams Duncan-Williams, Inc., Memphis, TN
      To Serve Until January 2003
      David A. Daugherty James Baker & Associates, A Limited Partnership, Oklahoma City, OK
      James M. Rogers J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, KY
      W. Lucas Simons PaineWebber Incorporated, Nashville, TN
      To Serve Until January 2004 (newly elected members)
      Norman Frager Capital West Securities, Inc., Oklahoma City, OK
      David A. Knight Stephens Inc., Little Rock, AR
      Lawrence J. Sisung Sisung Securities Corporation, New Orleans, LA
      David W. Wiley, III Wiley Bros., Aintree Capital, LLC, Nashville, TN

      District 5 Nominating Committee

      Committee Members

      Benjamin D. Capshaw, III Morgan Stanley Dean Witter, New Orleans, LA
      V. Hugo Marx, III Hugo Marx & Co., Inc., Birmingham, AL
      Colin A. P. McNease PaineWebber Incorporated, Jackson, MS
      Jerry Roberts Sterne, Agee & Leach, Inc., Little Rock, AR
      Dene R. Shipp SunTrust Equitable Securities, Inc., Nashville, TN


      District 6
      Bernerd Young, District Director
      12801 N. Central Expressway, Suite 1050
      Dallas, TX 75243
      (972) 701-8554

      District 6 Committee

      Committee Members

      To Serve Until January 2001
      Daniel C. Dooley Maplewood Investment Advisors, Inc., Dallas, TX
      Ronald J. Gard Salomon Smith Barney, Inc., Dallas, TX
      Jim G. Rhodes Rhodes Securities, Inc., Ft. Worth, TX
      To Serve Until January 2002
      Frederick W. McGinnis PaineWebber Inc., Houston, TX
      Sue H. Peden SWS Financial Services, Inc., Dallas, TX
      Joseph H. Storthz Transamerica Financial Resources, Houston, TX
      To Serve Until January 2003
      G. Clyde Buck Sanders Morris Harris, Inc., Houston, TX
      Bryan T. Forman First Financial Investment Securities, Inc., Austin, TX
      Richard L. Sandow Southlake Capital, L.L.C., Southlake, TX
      To Serve Until January 2004 (newly elected members)
      Christopher R. Allison M.E. Allison & Co., Inc., San Antonio, TX
      David W. Turner First Union Securities Inc., Fort Worth, TX
      R. Dwayne Whitehead Coastal Securities, L.P., Houston, TX

      District 6 Nominating Committee

      Committee Members

      Jane E. Bates The Variable Annuity Marketing Company, Houston, TX
      William D. Connally Greenman Parker Connally Greenman, Inc., Fort Worth, TX
      Malcolm L. Cooper Dain Rauscher, Inc., Austin, TX
      Daniel C. Dooley Maplewood Investment Advisors, Inc., Dallas, TX
      William H. Lowell Lowell & Company, Inc., Lubbock, TX


      District 7
      Alan M. Wolper, District Director
      One Securities Centre, Suite 500
      3490 Piedmont Road, NE
      Atlanta, GA 30305
      (404) 239-6100

      District 7 Committee

      Committee Members

      To Serve Until January 2001
      Robert M. Balentine Balentine & Company, Atlanta, GA
      James J. Buddle Capital Brokerage Corporation, Richmond, VA
      M. Anthony Greene Raymond James Financial Services, Inc., Atlanta, GA
      J. Lee Keiger, III Davenport & Company, LLC, Richmond, VA
      Raymond W. Snow Deutsch Banc Alex. Brown, Palm Beach, FL
      To Serve Until January 2002
      James W. Hamilton, Jr. Morgan Keegan & Co., Atlanta, GA
      Edward R. Hipp, III Centura Securities, Inc., Rocky Mount, NC
      Roark A. Young Young, Stovall and Company, Miami, FL
      To Serve Until January 2003
      Michael D. Hearn, Esq. Wachovia Securities, Inc., Charlotte, NC
      Collie W. Lehn A. G. Edwards & Sons, Inc., Laurens, SC
      Charles E. Scarlett, Esq. J. W. Genesis Securities, Inc., Boca Raton, FL
      John W. Waechter William R. Hough & Co., St. Petersburg, FL
      To Serve Until January 2004 (newly elected members)
      Kenneth W. McGrath Popular Securities, Inc., Hato Rey, PR
      Sharon K. Milligan Morgan Stanley Dean Witter, Tampa, FL
      C. John O'Bryant, III Legg Mason Wood Walker, Inc., Raleigh, NC
      Charles R. Roberts Branch, Cabell & Co., Inc., Richmond, VA

      District 7 Nominating Committee

      Committee Members

      Robert M. Balentine Balentine & Co., Atlanta, GA
      Robert J. Brietz Marion Bass Securities Corp., Charlotte, NC
      M. Anthony Greene Raymond James Financial Services, Inc., Atlanta, GA
      R. Charles Shufeldt SunTrust Banks, Inc., Atlanta, GA
      Raymond W. Snow Merrill Lynch, Palm Beach, FL


      District 8

      Carlotta A. Romano, District Director
      10 South LaSalle, 20th Floor
      Chicago, IL 60603-1002
      (312) 899-4400
      William H. Jackson, Jr., District Director
      Renaissance on Playhouse Square
      1350 Euclid Avenue, Suite 650
      Cleveland, OH 44115
      (216) 694-4545

      District 8 Committee

      Committee Members

      To Serve Until January 2001
      William C. Alsover Centennial Securities Company, Inc., Grand Rapids, MI
      Wallen L. Crane Salomon Smith Barney, Inc., Ann Arbor, MI
      Alan H. Newman J.J.B. Hilliard, W.L. Lyons, Inc., Evansville, IN
      Bruce J. Young Mesirow Financial, Inc., Chicago, IL
      To Serve Until January 2002
      R. Jack Conley VESTAX Securities Corporation, Hudson, OH
      Mary D. Esser Cressman Esser Securities, Inc., Naperville, IL
      Glen Hackmann Robert W. Baird & Co., Inc., Milwaukee, WI
      Robert A. Perrier Butler, Wick & Co., Inc., Cleveland, OH
      Kathleen A. Wieland William Blair & Company, LLC, Chicago, IL
      To Serve Until January 2003
      Carol Podesta Foley Podesta & Company, Chicago, IL
      Renee M. Rombaut Sage, Rutty & Co., Inc., Rochester, NY
      To Serve Until January 2004 (newly elected members)
      George E. Bates Bates Securities, Inc., Rockford, IL
      Gregory W. Goelzer Goelzer Investment Management, Inc., Indianapolis, IN
      John A. Hawke Howe Barnes Investments, Inc., Chicago, IL
      Jay B. MacKenzie Prudential Securities Incorporated, Kalamazoo, MI

      District 8 Nominating Committee

      Committee Members

      Leonard L. Anderson Stifel Nicolaus & Company, Incorporated, Grand Haven, MI
      David L. Baker Baker & Company, Inc., Cleveland, OH
      Thomas Harenburg Carl M. Hennig, Inc., Oshkosh, WI
      David Slavik Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, Oak Brook, IL
      G. Donald Steel Planned Investment Co., Inc., Indianapolis, IN


      District 9

      John P. Nocella, District Director
      11 Penn Center 581
      1835 Market Street, Suite 1900
      Philadelphia, PA 19103
      (215) 665-1180
      Gary K. Liebowitz, District Director
      Main Street, 7th floor
      Woodbridge, NJ 07095
      (732) 596-2000

      District 9 Committee

      Committee Members

      To Serve Until January 2001
      Victor M. Frye Calvert Distributors, Inc., Bethesda, MD
      Jerome J. Murphy Janney Montgomery Scott LLC, Philadelphia, PA
      Vacancy  
      Vacancy  
      To Serve Until January 2002
      A. Louis Denton Philadelphia Corporation for Investment Services, Philadelphia, PA
      Thomas W. Neumann Sherwood Securities Corp., Jersey City, NJ
      Joseph S. Rizzello Vanguard Marketing Corporation, Valley Forge, PA
      Gregory R. Zappala RRZ Public Markets, Inc., Cranberry Township, PA
      To Serve Until January 2003
      James D. Lamke Spear, Leeds & Kellogg Capital Markets, Inc., Jersey City, NJ
      John P. Meegan Parker/Hunter Incorporated, Pittsburgh, PA
      Lance A. Reihl 1717 Capital Management Co., Newark, DE
      Lenda P. Washington GRW Capital Corporation, Washington, DC
      To Serve Until January 2004 (newly elected members)
      Jerry V. Duhovic Datek Online Brokerage Services LLC, Iselin, NJ
      Kimberly Tillotson Fleming Hefren-Tillotson, Inc., Pittsburgh, PA
      Howard B. Scherer Janney Montgomery Scott LLC, Philadelphia, PA
      Mark Thomas Whaley Gibraltar Securities Co., a division of Tucker Anthony Incorporated, Florham Park, NJ

      District 9 Nominating Committee

      Committee Members

      Philip S. Cottone Rutherford, Brown & Catherwood, LLC, Philadelphia, PA
      Victor M. Frye Calvert Distributors, Inc., Bethesda, MD
      Allen S. Jacobson Gibraltar Securities Co., a division of Tucker Anthony Incorporated, Florham Park, NJ
      James J. Malespina Herzog, Heine, Geduld, Inc., Jersey City, NJ
      Jerome J. Murphy Janney Montgomery Scott LLC, Philadelphia, PA


      District 10

      David A. Leibowitz, District Director
      NASD Financial Center
      33 Whitehall Street
      New York, NY 10004
      (212) 858-4000
      David A. Leibowitz, District Director
      Two Jericho Plaza
      Jericho, NY 11753
      (516) 949-4200

      District 10 Committee

      Committee Members

      To Serve Until January 2001
      Arthur S. Ainsberg Brahman Securities Inc., New York, NY
      William P. Behrens Investec Ernst & Co., New York, NY
      Laurence H. Bertan Sanford C. Bernstein & Co. Inc., New York, NY
      Mark D. Madoff Bernard L. Madoff Investment Securities, New York, NY
      Stuart L. Sindell Datek On-Line Brokerage Services Corp., New York, NY
      To Serve Until January 2002
      John Iachello ING Baring Furman Selz, New York, NY
      Philip V. Oppenheimer Oppenheimer & Close Inc., New York, NY
      Gary Salamone Schroder & Co. Inc., New York, NY
      Eugene A. Schlanger Nomura Securities International Inc., New York, NY
      Tom M. Wirtshafter Nathan & Lewis Securities Inc., New York, NY
      To Serve Until January 2003
      Kevin J. Browne Banc of America Securities, New York, NY
      Judith R. MacDonald Rothschild, Inc., New York, NY
      Stephen C. Strombelline Barclays Capital Inc., New York, NY
      To Serve Until January 2004 (newly elected members)
      Constantine Gus Economos Sandler O'Neill & Partners LP, New York, NY
      Ruth S. Goodstein Paine Webber Inc., New York, NY
      Patrick Remmert Credit Suisse First Boston Corporation, New York, NY
      Charles V. Senatore Merrill Lynch Pierce Fenner & Smith Inc., New York, NY
      Jeffrey Zuckerman Salomon Smith Barney Inc., New York, NY

      District 10 Nominating Committee

      Committee Members

      Arthur S. Ainsberg Brahman Securities, Inc., New York, NY
      Laurence H. Bertan Sanford C. Bernstein & Co. Inc., New York, NY
      Frank F. DiGregorio Credit Suisse First Boston Corporation, New York, NY
      Vicki Z. Holleman Loeb Partners Corporation, New York, NY
      Harold G. Ognelodh Salomon Smith Barney Inc., New York, NY


      District 11
      Fred McDonald, District Director
      260 Franklin Street, 16th Floor
      Boston, MA 02110
      (617) 261-0800

      District 11 Committee

      Committee Members

      To Serve Until January 2001
      Michael J. Dell'Olio Investment Management and Research, Inc., South Portland, ME
      Frank V. Knox, Jr. Fidelity Distributors Corporation, Boston, MA
      Laurie Lennox SunLife of Canada (U.S.) Distributors, Inc., Boston, MA
      Kenneth Unger Boston Capital Services, Inc., Boston, MA
      To Serve Until January 2002
      Stephen O. Buff Fleetboston Robertson Stephens Inc., Boston, MA
      Dennis R. Surprenant Cantella & Co., Inc., Boston, MA
      To Serve Until January 2003
      Elena Dasaro H.C. Wainwright & Co., Inc., Boston, MA
      John D. Lane Mercer Partners Incorporated, Westport, CT
      Deborah G. Ullman American Skandia Marketing, Inc., Shelton, CT
      Peter T. Wheeler Commonwealth Financial Network, Waltham, MA
      To Serve Until January 2004 (newly elected members)
      Stephen Anikewich, Jr. Warburg Dillon Read LLC, Stamford, CT
      John I. Fitzgerald American General Funds Distributors, Inc., Boston, MA
      Robert V. Rodia People's Securities, Inc., Bridgeport, CT
      Gregory D. Teese Equity Services Inc., Montpelier, VT

      District 11 Nominating Committee

      Committee Members

      Harry H. Branning Advest, Inc., Hartford, CT
      Stephanie Brown Linsco/Private Ledger Corp., Boston, MA
      Sheldon Fechtor Fechtor, Detwiler & Co., Inc., Boston, MA
      Arthur F. Grant Cadaret, Grant & Co., Inc., Syracuse, NY
      Frank V. Knox, Jr. Fidelity Distributors Corporation, Boston, MA

    • 00-73 SEC Approves Amendments To NASD Membership Rules (Correction: On page 571, the 2nd sentence should read: "The updated information shall be prepared as of a date that is within 45 days before the interview." Online version amended)

      View PDF File

      Correction: On page 571, the second sentence under the subhead Updated Financial Information should read: "The updated information shall be prepared as of a date that is within 45 days before the interview." The online version of this Notice has been corrected.

      INFORMATIONAL

      Membership Rules

      Effective Date: November 15, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      IM-1011-1
      Membership Rules
      New Member Applicants
      Membership Agreements
      Rule 1011
      Rule 1012
      Rule 1013
      Rule 1014
      Rule 1015
      Rule 1016
      Rule 1017
      Rule 1018
      Rule 1140



      Executive Summary

      On August 15, 2000, the Securities and Exchange Commission (SEC) approved rule changes by the National Association of Securities Dealers, Inc. (NASD® or Association) that amend the Rule 1010 Series (Membership Rules or Rules) which governs the NASD membership application process. The amendments are designed to streamline and reorganize the current rules to make them more efficient for member firms and new applicants while preserving their investor protection function.

      The amendments include the, following changes:

      • adopting new definitions under Rule 1011 for "material change in business operations," "principal place of business," and "sales practice event";


      • adopting Interpretive Material 1011-1, which creates a safe harbor for certain business expansions that are presumed not to be material changes and therefore do not require a firm to file an application pursuant to amended Rule 1017;


      • simplifying administrative procedures for submitting an application and calculating the various applicable time limits;


      • permitting the staff to immediately reject applications that are not substantially complete; and


      • adopting new requirements for applicants to submit information concerning communications and operational systems to ensure business continuity.

      In addition, current Rules 1017, "Removal or Modification of Business Restriction," and 1018, "Change in Ownership, Control or Operations," are consolidated into an amended Rule 1017.

      Revisions also will be made to the reference documents, How To Become A Member Of The National Association of Securities Dealers, Inc. and A Guide to Areas of Inquiry in Continuing Membership Applications and Applications to Remove or Modify Restrictions to conform them to the amended rules. Both revised documents will be found on the NASD Regulation, Inc. (NASD RegulationSM) Web Site (www.nasdr.com) after the rule amendments become effective.

      The rule changes are included with this Notice (see Attachment A). These changes become effective on November 15, 2000.

      Questions/Further Information

      Questions concerning this Notice may be directed to Jeffrey S. Holik, Vice President and Director of Regulation Policy, Department of Member Regulation, NASD Regulation, at (202) 728-8387, or by e-mail at: jeffrey.holik@nasd.com; Allison Reid, Membership Manager, Department of Member Regulation, NASD Regulation, at (202) 728- 6954, or by e-mail at: allison.reid@nasd.com; or Gregory Dean, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8159, or by e-mail at: gregory.dean@nasd.com.

      Background

      Beginning in August 1998, NASD Regulation staff worked with the Membership Admission Review Committee (Committee),1 an adhoc committee convened to identify and recommend changes, if appropriate, to the Membership Rules in order to clarify and streamline the Rules while preserving their investor protection function. The Committee's recommendations were published in Notice to Members 99-67, "NASD Requests Comment On Proposed Amendments To Membership Rules" (August 1999).

      Based upon comments received, the proposals were revised and submitted to the SEC. The SEC approved the publication of the proposals for comment on June 1, 2000.2 On August 15, 2000, the SEC issued an order approving the proposed amendments to the Membership Rules.3

      The most significant changes are as follows:

      • reorganizing and consolidating some of the current rules to make them easier to use;


      • clarifying the rules and policies for members' business expansions that are intended to provide more certainty to members regarding the types of expansions not requiring approval, while at the same time, preserving flexibility to allow NASD Regulation staff to review the more significant changes in members' businesses. This is achieved by:


        • adopting a policy of building members' expansion plans into membership agreements;


        • providing more guidance in the rules about the types of "material changes in business operations" that wil require a member to file a application for approval wit NASD Regulation; and


        • providing a safe harbor for certain business expansions that will be presumed not to be material changes, and therefore, do not require members to file an application for approval;

      • requiring applicants to submit information concerning communications and operational systems to ensure business continuity;


      • simplifying administrative procedures for submitting an application and calculating the various applicable time limits that apply to the process;


      • permitting the staff to reject immediately applications that are not substantially complete; and


      • rescinding permanently the National Adjudicatory Council's (NAC) authority to review membership decisions that are not appealed by an applicant.

      Below are the detailed explanations of the amendments.

      Rule 1011 - Definitions

      The definition of "Associated Person" is amended to clarify that it includes only natural persons.

      The term "principal place of business" is defined for the first time. An applicant's principal place of business determines which NASD Regulation District Office (District Office) will process its application. "Principal place of business" means the location where the officers, partners, or managers direct and control the activities of the applicant, unless NASD Regulation staff designates a different location based upon where the largest number of associated persons are located or where the books and records are kept. This definition will provide more consistency and certainty regarding which District Office will process a firm's application.

      NASD Regulation has redefined "sales practice violations" as "sales practice event." A sales practice event is one of the factors that NASD Regulation considers in determining whether an applicant satisfies the admission standard in Rule 1014(a)(3), which requires a showing that the applicant and its associated persons are capable of complying with, among other things, the federal securities laws and the Association rules. The new term is intended to encompass matters, including any customer complaint, arbitration, or civil litigation, that have been or are required to be reported to the Central Registration Depository (CRDSM) or otherwise are required to be reported to NASD Regulation (e.g., via reports pursuant to Rule 3070).4 This change is in response to concerns that some items required to be reported to CRD or pursuant to Rule 3070 are not considered to be formal violations. While this change does not affect the existing review standards under Rule 1014, it does provide clarification to amended Rule 1014(a)(3)(B).

      The terms "Applicant" and "Interested Association Staff" are also amended to conform them to other rule changes.

      The term "material change in business operations" is beingdefined for the first time. The term is defined to include, but is not limited to, removing or modifying a membership agreement restriction;5 market making, underwriting, or acting as a dealer for the first time; or adding business activities that require a higher minimum net capital. All other expansions, including those categories of new business lines identified on Form BD, are to be evaluated on a facts and circumstances, case-by-case basis.

      NASD Regulation does not believe that it is possible to develop a exhaustive definition of the term "material change in business operations."6 If a change in a member's business falls outside of the definition or the safe harbor provisions described below in Interpretive Material 1011-1 (IM- 1011-1) (e.g., because it exceeded the safe harbor limits or the member has disciplinary history), then the member must determine whether, based upon all facts and circumstances, the change is material. A member may, but is not required to, contact the District Office to obtain guidance on this issue. Ultimately, the member is responsible for compliance with amended Rule 1017. If the staff determines that the change is indeed material, then the member potentially could be subject to disciplinary action for failure to file an application under Rule 1017.

      In instances when a member intends to add a line of business, staff experience has shown that this type of expansion is often a significant event that has an impact on the firm's supervisory and compliance infrastructure, personnel, and/or finances. When such an impact occurs, NASD Regulation staff is required under the rules to verify that the member continues to meet each of the membership criteria identified in Rule 1014.7 However, NASD Regulation recognizes that the characterization of any proposed new business line as a "material change in business operations" ultimately depends on an assessment of all relevant facts and circumstances, including:

      • the nature of the proposed expansion;


      • the relationship, if any, between the proposed new business line and the firm's existing business;


      • the effect the proposed expansion is likely to have on the firm's capital;


      • the qualifications and experience of the firm's personnel; and


      • the degree to which the firm's existing financial, operational, supervisory, and compliance systems can accommodate the proposed new business line.

      Based upon these factors, we believe that at least some proposed expansions by member firms into new areas of business would not constitute a material change and thus not trigger a review under amended Rule 1017. Certain proposed new business lines, such as market making, underwriting, and acting as a dealer for the first time, will invariably constitute a material change in business operations.

      Interpretive Material 1011-1 (IM-1011-1)

      IM-1011-1 is added to create a safe harbor for certain changes that are presumed not to be a "material change in business operations," and therefore do not require a member to submit an application pursuant to amended Rule 1017 for approval of the change. The safe harbor was created out of the recognition that firms need to be able to grow while essential investor protections are maintained.

      The safe harbor is intended to balance these needs while allowing firms to file and NASD Regulation staff to review those proposed business expansions that are most likely to affect the financial, compliance, and/or internal control systems of firms. Firms with certain membership agreement restrictions or a disciplinary history would not be able to use the safe harbor.

      The safe harbor is available to those firms that do not have a membership agreement and to those firms that have a membership agreement but the agreement does not contain a restriction on thepermissible expansion areas of the safe harbor (number of associated persons involved in sales, number of offices, and number of markets made). The safe harbor is not available to a firm that has a specific restriction in its membership agreement on any one of those three areas of expansion. Similarly, if a firm has a membership agreement that already permits greater expansion levels than permitted by the safe harbor, then membership agreement levels take precedence over the safe harbor levels. In both of these situations, NASD Regulation staff have already evaluated a firm's systems and procedures and the staff have incorporated the restrictions or expansion plans into the membership agreement.

      If a proposed expansion is outside of the safe harbor provisions, it does not necessarily mean that the expansion is a "material change in business operations." The safe harbor provisions are meant to provide guidance on what changes will not be considered material. Whether changes and expansions outside of the safe harbor provisions are material will need to be determined on a case-by-case NASD Notice to Members 00-73 October 2000 570 NASD Notice to Members 00-73 basis by reviewing the particular facts and circumstances. A member may, but is not required to, contact its District Office to obtain guidance on this issue.

      In addition, the safe harbor would not be available to members that have a defined "disciplinary history."8 A member with a disciplinary history as defined by IM-1011-1 does not necessarily need to apply under amended Rule 1017 for every business expansion. Again, whether changes and expansions to be undertaken by a firm with "disciplinary history" are material would be determined on a case-by-case basis.

      Rule 1012 - Filing By Applicant Or Service By The Association

      NASD Regulation has amended the service and filing provisions to permit additional methods of delivery and to use consistent terminology for calculating deadlines. The term "commercial courier" is replaced with "overnight courier" to clarify that applicants and NASD Regulation staff may use the overnight delivery service offered by the United States PostalService. NASD Regulation interprets the term "overnight courier" to refer to any entity that regularly provides overnight delivery services, such as Federal Express, DHL, or the United States Postal Service. Use of the term "overnight courier" is not intended to imply that only actual overnight delivery may be used under the Rule. Overnight delivery should be used if it is available. However, if overnight delivery is not available for a particular location, the applicant or NASD Regulation staff may use the most rapid delivery option available (e.g., two-day service) from the overnight courier and still be in compliance with the Rule.

      Throughout the amended Rules, the term "file" is used uniformly to refer to submissions by an applicant, and the term "serve" is used uniformly to refer to delivery of requests, decisions, and the like by the Association. These terms replace other terms, such as "issuance" and "receipt."9 These changes provide greater clarity and consistency in calculating deadlines in accordance with amended Rule 1012(a).

      "Lapse Of Application"Provisions

      The "lapse of application" provisions are consolidated and moved from existing Rules 1013(b), 1017(c), and 1018(d) to amended Rule 1012(b) for ease of reference. The lapse rule permits the staff to discontinue processing an application if an applicant does not timely provide requested information or documents. If the information or documents are not timely provided, then the rule permits the staff to "lapse" the application. The staff then notifies the applicant that the application has lapsed, all fees are forfeited, and the applicant is required to start over with the application process if it still wants to pursue the application.

      The changes to the lapse rule also are designed to permit the staff and the applicant to agree on a submission date for the executed membership agreement, ratherthan requiring that all signed agreements be submitted within 25 days. In addition, the changes clarify that application fees are notrefunded for lapsed applications.

      Rule 1013 - New Member Application And Interview

      Application Submission Procedures

      One of the major changes to amended Rule 1013 is to simplify the application submission procedures. Currently, Rule 1013 requires applicants to submit their applications in two parts. Part One, which includes primarily forms and fees (e.g., the initial Forms BD and U-4), is sent directly to the CRD in Rockville, Maryland, for processing. Part Two, which includes all remaining documents required for member admission, is sent to the District Office that will review the application. At the time the Rule was initially adopted, the staff thought it would be more efficient to send each part to the location where it would be processed. In practice, this has created problems when both parts of the application are not submitted at the same time, or one or both parts are incomplete, making it difficult to determine when the application should be treated as filed. Determining the application filing date is critical in order to meet the requirement that a decision on the application be rendered within 180 days.

      To alleviate this problem, Rule 1013 has been amended to create one point of entry for the entire application, the District Office.

      Procedures For Applications That Are Not Substantially Complete

      NASD Regulation has added subparagraph (a)(4) to amended Rule 1013 for handling applications that are not substantially complete at the time of submission.Currently, the staff does not have any express authority in the existing rule to refuse to begin processing NASD Notice to Members 00-73 October 2000571 NASD Notice to Members 00-73 an incomplete application. Instead, NASD Regulation staff attempts tobegin processing such an application by sending a request forfurther information to the applicant.

      Under the amended rule, if an application is so deficient upon initial submission that the staff cannot begin conducting a meaningful review, then the staff may reject the application and deem it to not have been filed. The staff must make this determination within 30 days after submission, and is required to provide reasons for its action in writing. NASD Regulation will assess a $350 processing fee for the rejection of an application that is not substantially complete. NASD Regulation considered but rejected defining the term "substantially complete" because the determination will vary depending on, among other things, the type and complexity of the proposed business.

      Amended Rule 1013 also is simplified for applicants by removing requirements that they submit information that has already been provided to CRD becauseDistrict Office staff has full access to CRD. This change will make the application process simpler for applicants by eliminating duplicate submissions.

      Initial And Subsequent Document Filings

      Under Rule 1013(a)(2), an applicant will continue to submit only its initial Forms BD and U-4 in paper along with the rest of the application. Under amended Rule 1013(a)(3), the applicant must make all subsequent Form filings and amendments electronically via Web CRDSM. Prior to making electronic filings, an applicant must seek and receive approval of the Web CRD entitlement request form by NASD Regulation. This process is in conformity with SEC requirements for the submission of Form BD and amendments to it.10 Conforming amendments have been made to Rule 1140.

      New Membership Application Requirements

      Adequacy of Communication and Operational Systems

      New subparagraph (a)(2)(F)(xii) of amended Rule 1013 adds a new requirement for applicants to provide a description of the communications and operational systems that they will use to conduct business as well as plans and procedures they will employ to ensure business continuity. Included with the documentation should be information about the capacity to handle anticipated usage, contingency plans, and disaster recovery plans, among other things. In addition, this requirement has been formulated into a new standard for membership admission and has been added to requirements contained in Rule 1014. This new standard in amended Rule 1014 requires that such systems are adequate and provide reasonably for the business' continuity for each area set forth in amended Rule 1013(a)(2)(F)(xii).

      It is not the staff's intention to investigate the adequacy of the systems, plans, and procedures; rather applicants, in order to demonstrate that their systems are adequate and will reasonably provide for business continuity, must file a certification as part of their application. The applicant may self-certify or may choose to rely on a third party (e.g., a vendor of such a system) to provide such certification. 11

      Updated Financial Information

      Rule 1013 is amended by adding new subparagraph (b)(5) to require applicants to provide updated financial information at the time of their membership interview. The updated information shall be prepared as of a date that is within 45 days before the interview.

      Rule 1014 - Department Decision

      Standards For Admission

      As described above, Rule 1013 has been amended to require that the applicant submit a description of the communications and operational systems that the applicant will employ to conduct business and the plan and procedures to ensure business continuity. The amended Rule 1014 requires that such systems must be adequate and reasonably provide for business continuity before an application is approved.

      In addition, Rule 1014 is amended to require that an applicant's supervisory procedures must specifically include procedures to ensure that proper registrations for principals and representatives are obtained by the firm.

      The Committee and NASD Regulation also reevaluated the requirement of current Rule 1014(a)(9)(C) (amended Rule 1014(a)(10)(D)) that prospective supervisors have at least one year of direct experience or at least two years of related experience in the subject area to be supervised. It was determined that the supervisory experience requirements should not be increased at this time. Interpretive guidance on this matter has been published in How To Become A Member Of The National Association of Securities Dealers, Inc., which is available in the area for members on the NASD Regulation Web Site (www.nasdr.com).

      Submission Of Membership Agreements

      Rule 1014(c), which concerns the submission of membership agreements, is amended by deleting the requirement in subsection (c)(1) that all membership agreements contain an undertaking binding the member to "engage only in the business set forth in the business plan and the membership agreement." NASD Regulation believes that the current rule was too restrictive, particularly for firms with no disciplinary history. The provision also puts members with a membership agreement at a disadvantage to members that do not have a membership agreement.12 Henceforth, whether business expansions require approval by NASD Regulation will be governed solely by the requirements of amended Rule 1017.

      When the amended Rules become effective, to ensure that members are treated equally, NASD Regulation will permit members that are eligible for the safe harbor to use it even if their membership agreement includes a general requirement to obtain approval from NASD Regulation of any change in business outside the terms of the agreement. When NASD Regulation examines a member, the membership agreement will be updated to reflect the new Rule.

      In addition, when the Rule amendments become effective, NASD Regulation will begin, to the extent practicable, including business expansion plans in membership agreements. Members that have not been through the membership review process or examined under the Rules adopted by the Association in August of 1997 and have existing restrictions in membership agreements, may want to contact their District Office to see if it would be appropriate to have the restriction removed.

      Rule 1015 - Review By National Adjudicatory Council

      Under Rule 1015, an applicant can appeal an adverse District Office decision to the NAC. In addition, the NAC or the NAC Review Subcommittee may call for review a District Office decision on a membership application, even though no appeal has been filed by an applicant. NASD Regulation considered at length whether procedures or policies could effectively be developed to implement the call for review provision when no appeal was taken, but ultimately determined that developing such procedures and policies was not practicable.

      NASD Regulation believes that the oversight function envisioned for the call for review provision is effectively performed through a variety of other existing mechanisms. The Department of Member Regulation (Department) employs a full time Membership Manager to coordinate and oversee the national program. Included in the Manager's responsibilities is a quality control function. This function is carried out in several ways: maintenance of a Membership Procedures Manual; periodic advice memoranda sent to District Office staff (MAP Bulletins); regularly scheduled telephone conferences with District Office staff to discuss procedural and substantive issues arising in the program; and periodic training sessions for new and incumbent staff.

      To supplement these tools, the Department's Office of Quality Assurance conducts periodic peer reviews of the membership application program. The purpose of these peer reviews is to assess the District Offices' application of the membership rules andprocedures. The reviews include, among other things, spot checks of source documents to confirm the facts underlying the decisions.

      In light of NASD Regulation's national coordination and internal review procedures, Rule 1015 has been amended to delete the provision whereby the NAC or theNAC Review Subcommittee maycall for review of a decision on a membership application made by the Department staff, even if theapplicant does not appeal the decision.13

      Rule 1015 has been amended to include a new paragraph (h) for dismissing appeals that are abandoned by an applicant, which includes, among other things, failing to appear at a hearing as set forth in current Rule 1015(f)(5), among other things.

      Rule 1016 - Discretionary Review by NASD Board

      Conforming amendments are being made to Rule 1016.

      Rule 1017 - Application For Approval Of Change In Ownership, Control, Or Business Operations

      Current Rule 1017, "Removal or Modification of Business Restriction," and Rule 1018, "Change in Ownership, Control or Operations," are consolidated in the amended Rule 1017. This change is being made to assist firms in filing and NASD Regulation staff in reviewing applications for a change in firm ownership or control, or for a material change in the firm's business operations. Currently, a member may initiate business changes that involve both Rule 1017 and Rule 1018. This hascreated some confusion as to which rule should be used. Byconsolidating these rules, NASD Regulation anticipates making the process more efficient and effective for applicants and thus eliminating any confusion that may arise from the previously overlapping provisions. The consolidation of the two rules is achieved in part by defining, for the first time, the term "material change in business operations," in amended Rule 1011(i) to include certain types ofbusiness expansions as well as the removal or modification of a membership agreement restriction.

      Amended Rule 1017 also sets forth additional documentation requirements for the review of an application (detailed below).

      As provided in current Rules 1017 and 1018, an application and its accompanying documents need to be filed with the member's District Office. In the event of a merger between two members with principal places of business in two or more districts, the application must be filed and processed by the District Office where the surviving firm's principal place of business is located.

      Change In Ownership Or Control

      One type of change that triggers an application under amended Rule 1017 is a change in the equity ownership or partnership capital of the member that results in one person or entity owning or controlling 25 percent or more of the equity or partnership capital. NASD Regulation wishes to clarify that a group of individuals acting in concert to obtain control of 25 percent or more of the equity or partnership capital of a member willbe deemed to be an "entity" for purposes of the Rule, and as such, will trigger the requirement to submit an application to obtainapproval of the ownership change.

      In addition, NASD Regulation will discontinue its review of certain other types of changes. Under amended Rule 1017, NASD Regulation will discontinue review of member mergers and acquisitions that are reviewed by the New York Stock Exchange. This will eliminate duplicate reviews by self-regulatory organizations.

      Filing And Content Of Application Requirements

      Amended Rule 1017(b) sets forth for the first time what type of information should be included in an application for approval of a change in ownership, control, or business operations.

      Paragraph (b) of amended Rule 1017 contains the initial content requirements and specifies where the application should be filed. Generally, this paragraph incorporates NASD Regulation's standard practices under current Rules 1017 and 1018. However, subparagraph (b)(2), for the first time, identifies items that must be included with an application. Specifically, the items include details on the change in ownership, control or business operations, including a business plan, pro forma financial statements, an organizational chart, and written supervisory procedures that reflect the change.

      For applications requesting removal or modification of a membership agreement restriction, the content requirements of current Rule 1017(a) are carried forward in the amended rule and will, therefore, still apply. In addition, the new documentation requirements of paragraph (b)(2) of amended Rule 1017 (detailed in the above paragraph) must be supplied with an application.

      Effecting Change And Imposition Of Interim Restrictions

      In addition, amended Rule 1017(c) sets forth the timing and conditions for effecting a change under amended Rule 1017. For a member that is filing an application for approval of a change in ownership or control, amended Rule 1017(c)(1) states that the application shall be filed at least 30 days before the event. A member may effect a change prior to the conclusion of NASD Regulation's review of the application or issuance of the Department's decision on the application;however, NASD Regulation mayplace new interim restrictions on the member based upon the standards contained in Rule 1014pending final action.

      For a member that is filing an application for the removal or modification of a restriction contained in a membership agreement, amended Rule 1017(c)(2) states that the change may not be effected until NASD Regulation has reached a decision. Until a decision has been reached, all existing restrictions must remain in place.

      For a member's application seeking approval of a material change in business operations (other than for the removal or modification of a membership agreement restriction), the change will be effective upon the Department's decision approving the application. In addition, Rule 1017(c)(3) does allow the member to effect the change prior to NASD Regulation's decision, but only with prior agreement of the Department.

      Lapse Or Denial Of Application For Approval Of Change In Ownership

      NASD Regulation is adopting a new paragraph (k) to Rule 1017 to clarify the courses of action when an application for approval of a change in ownership lapses or is denied and all appeals are exhausted or waived. The rule change provides the member with a fixed period of time, 60 days, to submit a new application, 14 unwind the transaction, or file a Form BDW.

      The Department may shorten the 60-day period for the protection of investors. In addition, the Department may lengthen the 60- day period upon good cause shown by the applicant. The Department may continue to place interim restrictions on the member during the 60-day (or extended) period. The purpose of the rule change is to clarify NASD Regulation's procedures and to ensure that proper investor protections are maintained. If a member operates outside or beyond the specified time period, then NASD Regulation may bring an action and/or seek the suspension or cancellation of the membership, as appropriate.

      Rule 1018 - Reserved

      NASD Regulation has deleted the provisions contained in Rule 1018 and reserves this Rule number for future use.

      Rule 1140 - Electronic Filing Rules

      Conforming amendments are being made to Rule 1140 to clarify that the initial filing of Forms under amended Rule 1013(a)(2) must be filed in paper form. All subsequent filings must be filed through an electronic process.

      Additional Guidance

      Revisions also will be made to the reference documents, How To Become A Member Of The National Association of Securities Dealers, Inc. and A Guide to Areas of Inquiry in Continuing Membership Applications and Applications to Remove or Modify Restrictions in order to conform them to the amended rules. Both revised documents will be found on the NASD Regulation Web Site www.nasdr.com) after November 15, 2000.


      Endnotes

      1 Members of the Committee were: Faith Colish, New York, New York; Linda Lerner, All-Tech Investment Group, Inc., Montvale, New Jersey; Brian T. Shea, Pershing, Division of Donaldson, Lufkin & Jenrette Securities Corporation, Jersey City, New Jersey; Theodore W. Urban, Ferris, Baker & Watts, Incorporated, Washington, D.C.; and Richard P. Woltman, Spelman & Co., Inc., San Diego, California. Mr. Urban chaired the Committee.

      2 Exchange Act Release No. 42885 (June 1, 2000), 65 Fed. Reg. 36860 (June 12, 2000), (File No. SR-NASD-99-67).

      3 Exchange Act Release No. 43157 (August 15, 2000), 65 Fed. Reg. 51377 (August 23, 2000).

      4 NASD Regulation has not made any changes to the definition of "sales practice violation" on the Form U-4.

      5 NASD Regulation included removing or modifying a restriction in this definition to facilitate the consolidation of current Rules 1017 and 1018. The rationale for the consolidation is set forth in the section titled "Rule 1017," below.

      6 Efforts were made during the Committee's deliberations to devise a comprehensive definition of "material change in business operations" that would provide members with greater certainty about when an application is required while affording staff the opportunity to review those proposed business expansions that were most likely to affect the financial, compliance, and/or internal control systems of the firm. After much thought and discussion, Committee members and NASD Regulation staff concluded that it was preferable not to develop a comprehensive definition of the term. Instead, the Committee recommended, and the amended rules provide, two measures designed to add greater clarity to the process and still preserve flexibility in applying the rule to individual situations: the adoption of IM-1011-1 to create a safe harbor for certain changes that are presumed not to be material and therefore do not require a member to submit an application; and the adoption of a nonexhaustive definition of "material change in business operations" that would alert members to some of the types of business expansions that can be expected to trigger the need to file an application.

      7 NASD Regulation staff tailors the scope of its review of proposed business expansions to the particular circumstances presented. In some cases, for example, when a firm seeks to expand into an area in which it already has relevant experience and comprehensive supervisory and internal controls, NASD Regulation's review would be more limited. In other cases, when a firm seeks to add a completely new business line unrelated to its current business mix, the scope of review could be more extensive.

      8 "Disciplinary history" means a finding of a violation by the member or a principal of the member in the past five years by the SEC, a self-regulatory organization, or a foreign financial regulatory authority of one or more of the following provisions (or comparable foreign provisions) or rules or regulations thereunder:

      Sections 15(b)(4)(E) and 15(c) of the Securities Exchange Act of 1934 (failure to supervise; fraud and NASD Notice to Members 00-73 October 2000 575 NASD Notice to Members 00-73 manipulation); Section 17(a) of the Securities Act of 1933 (fraudulent interstate transactions); SEC Rules 10b-5 (fraud and manipulation), and 15g-1 through 15g-9 (penny stock rules); NASD Rules 2110 (just and equitable principles of trade), 2120(fraud and manipulation), 2310 (suitability), 2330 (protection of customer securities and funds), 2440 (fair prices and commissions), 3010 (failure to supervise only), 3310 (manipulative and deceptive quotations), and 3330 (payments to influence market prices); and MSRB Rules G-19 (suitability), G-30 (prices and commissions), and G-37(b) & (c) (political contributions).

      9 See, e.g., Rule 1013(a)(5) and (b)(1), Rule 1014(c)(3).

      10 See Exchange Act Release No. 41594 (Jul. 2, 1999), 64 Fed. Reg. 37586 (Jul. 12, 1999).

      11 See Exchange Act Release No. 42885 (June 1, 2000), 65 Fed. Reg. 36860 (June 12, 2000) at page 36874.

      12 In 1984, the SEC approved a codification of the NASD's member admission procedures, which included a requirement that any restriction on a member's business be included in a membership agreement executed by the member. See Exchange Act Release No. 21159, 49 Fed. Reg. 30268 (Jul. 27, 1984) (File No. SR-NASD-82-24). Thus, a member admitted before 1984 or a member admitted without any restriction from 1984 to 1997 may not have a membership agreement. In 1997, NASD Regulation began requiring all new members to execute a membership agreement, regardless of whether NASD Regulation imposed any restriction. See NASD Rule 1014(c); Exchange Act Release No. 38908 (Aug. 7, 1997); 62 Fed. Reg. 43385 (Aug. 13, 1997) (File No. SR-NASD-97-28).

      13 Until these rule amendments go into effect, NASD Regulation has temporarily suspended calls for review of membership decisions and proposes to delete this provision. See Exchange Act Release No. 41311 (Apr. 20, 1999), 64 Fed. Reg. 20347 (Apr. 26, 1999) (File SR-NASD-99-15), for further explanation of this decision.

      14 A lapsed applicant may propose the same owners; a denied applicant must propose new owners.


      ATTACHMENT A

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

      1010. Membership Proceedings

      1011. Definitions

      Unless otherwise provided, terms used in the Rule 1010 Series shall have the meaning as defined in Rule 0120.
      (a) "Applicant"
      The term "Applicant" means a person [or entity] that applies for membership in the Association under Rule 1013[,] or a member that files an application [to remove or modify a restriction under Rule 1017, or files a notice and application for continuance in membership under Rule 1018] for approval of a change in ownership, control, or business operations under Rule 1017.
      (b) "Associated Person"
      The term "Associated Person" means: (1) a natural person registered under the Rules of the Association; or (2) a sole proprietor, partner, officer, director, branch manager, or other natural person occupying a similar status or performing similar functions who will be or is anticipated to be associated with the Applicant, or a natural person engaged in the investment banking or securities business who will be or is anticipated to be directlyor indirectly controlling or controlled by the Applicant, whether or not any such person is registered or exempt from registration under the NASD By-Laws or the Rules of the Association.
      (c) "Department"
      The term "Department" means the Department of Member Regulation of NASD Regulation.
      (d) "Director"
      The term "Director" means a member of the NASD Regulation Board.
      (e) "district"
      The term "district" means a district established by the NASD Regulation Board.
      (f) "district office"
      The term "district office" means an office of NASD Regulation located in a district.
      (g) "Governor"
      The term "Governor" means a member of the NASD Board.
      (h) "Interested Association Staff"
      The term "Interested Association Staff" means an employee who directly participates in a decision under Rule 1014[,] or 1017, [or 1018,] an employee who directly supervises an employee with respect to such decision, an employee who conducted an investigation or examination of a member that files an application under Rule 1017 [or a notice and application under Rule 1018], the District Director for the relevant district, and the head of the Department.
      (i) "material change in business operations"
      The term "material change in business operations" includes, but is not limited to:
      (1) removing or modifying a membership agreement restriction;
      (2) market making, underwriting, or acting as a dealer for the first time; and
      (3) adding business activities that require a higher minimum net capital under SEC Rule 15c3-1.
      [(i)](j) "NASD Board"
      The term "NASD Board" means the Board of Governors of the NASD.
      [(j)](k) "NASD Regulation Board"
      The term "NASD Regulation Board" means the Board of Directors of NASD Regulation.
      (l) "principal place of business"
      The term "principal place of business" means the executive office from which the sole proprietor or the officers, partners, or managers of the Applicant direct, control, and coordinate the activities of the Applicant, unless the Department determines that the principal place of business is where: (1) the largest number of Associated Persons of the Applicant are located; or (2) the books and records necessary to provide information and data to operate the business and comply with applicable rules are located.
      [(k)](m) "sales practice [violations] event"
      The term "sales practice [violations] event" means any [conduct directed at or involving a customer that would constitute a violation of any Rule in the Rule 2000 or 3000; any provision of the Act, Securities Exchange Act of 1934; or any state statute prohibiting fraudulent conduct in connection with the offer, sale, or purchase of a security or in connection with the rendering of investment advice] customer complaint, arbitration, or civil litigation that has been reported to the Central Registration Depository, currently is required to be reported to the Central Registration Depository, or otherwise has been reported to the Association.
      [(l)](n) "Subcommittee"
      The term "Subcommittee" means a subcommittee of the National Adjudicatory Council that is constituted pursuant to Rule 1015 to conduct a review of a Department decision issued under the Rule 1010 Series.


      IM-1011-1. Safe Harbors for Business Expansions

      This interpretive material concerns the types of business expansions that will not require a member to submit a Rule 1017 application to obtain NASD Regulation's approval of the expansion. This safe harbor applies to: (1) firms that do not have a membership agreement, and (2) firms that have a membership agreement that does not contain a restriction on the factors listed below.

      The safe harbor is not available to a member that has a membership agreement that contains a specific restriction as to one or more of the factors listed below. In that case, the agreement takes precedence because NASD Regulation has determined that a particular restriction should apply as to one or more of the factors, and NASD Regulation has issued a decision with a rationale for that restriction. Similarly, the safe harbor also does notapply if the member has a membership agreement that permits expansion beyond the limits set forthbelow (e.g., an Applicant requests and obtains approval for ten registered representatives in the first six months with an additional ten registered representatives in the nextyear); in such case, the Department has specifically considered the firm's expansion plans and approved them.

      The safe harbor is not available to any member that has disciplinary history. For purposes of this Interpretation, "disciplinary history" means a finding of a violation by the member or a principal of the member in the past five years by the Securities and Exchange Commission, a self-regulatory organization, or a foreign financial regulatory authority of one or more of the following provisions (or a comparable foreign provision) or rules or regulations thereunder: Sections 15(b)(4)(E) and 15(c) of the Securities Exchange Act of 1934; Section 17(a) of the Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD Rules 2110, 2120, 2310, 2330, 2440, 3010 (failure to supervise only), 3310, and 3330; and MSRB Rules G-19, G- 30, and G-37(b) & (c).

      For those firms to which the safe harbor is available, the following types of expansions are presumed not to be a material change in business operations and therefore do not require a Rule 1017 application. For any expansion beyond these limits, a member should contact its district office prior to implementing the change to determine whether the proposed expansion requires an application under Rule 1017. Expansions in each area are measured on a rolling 12-month basis; members are required to keep records of increases in personnel, offices, and markets to determine whether they are within the safe harbor.

      "Associated Persons involved in sales" includes all Associated Persons, whether or not registered, who are involved in sales activities with public customers, including sales assistants and cold callers, but excludes clerical, back office, and trading personnel who are not involved in sales activities.

        Safe Harbor - Increase Permitted Within One Year Period Without Rule 1017 Application
      Number of Associated Persons Involved in Sales
      1-10 . . . . . . . . . . . . . . . . . . . . . . .
      11 or more . . . . . . . . . . . . . . . . . .

      Number of Offices (registered or unregistered)
      1-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
      6 or more . . . . . . . . . . . . . . . . . . . . . . . .

      Number of Markets Made
      1-10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . .
      10 persons
      10 persons or a 30 percent increase,
      whichever is greater


      3 offices
      3 offices or a 30 percent increase,
      whichever is greater


      10 markets
      10 markets or a 30 percent increase,
      whichever is greater


      1012. General Provisions

      (a) [Service of Notices and Decisions;] Filing by Applicant or Service by the Association
      [A notice or a decision issued by the Association under the Rule 1010 Series with respect to an application shall be served promptly by first-class mail on the Applicant or its counsel, unless a Rule speci- fies a different method of service.Service by the Association or filing by an Applicant by mail shall be deemed complete upon mailing. Service by the Association or filing by an Applicant by commercial courier or facsimile shall be deemed complete on the date specified in the written confirmation of receipt.]
      (1) An Applicant may file an application or any document or information requested under the Rule 1010 Series by first-class mail, overnight courier, or hand delivery. If the Department and the Applicant agree, the Applicant also may file a requested document or information by facsimile.
      (2) The Association shall serve a notice or decision issued under the Rule 1010 Series by firstclass mail on the Applicant or its counsel, unless a Rule specifies a different method of service.
      (3) Service by the Association or filing by an Applicant shall be deemed complete as follows:
      (A) Service or filing by firstclass mail shall be deemed complete on the date of postmark;
      (B) Service or filing by overnight courier shall be deemed complete on the date of delivery to the overnight courier as specified in the airbill;
      (C) Service or filing by hand delivery shall be deemed complete on the date of receipt as evidenced by a date stamp; and
      (D) Service or filing by facsimile shall be deemed complete on the date specified in the document and on the written confirmation of transmission.
      (b) Lapse of Application

      (1) Absent a showing of good cause, an application filed under Rule 1013 or 1017 shall lapse if an Applicant fails to:
      (A) respond fully within 60 days after service of an initial written request for information or documents under Rule 1013, within 30 days after service of an initial written request for information or documents under Rule 1017, within 30 days after service of a subsequent written request for information or documents under Rule 1013 or 1017, or within such other time period agreed to by the Department and the Applicant;
      (B) appear at or otherwise participate in a scheduled membership interview pursuant to Rule 1013(b) or 1017(f); or
      (C) file an executed membership agreement under Rule 1014(d) or Rule 1017(g)(4) within 25 days after service of the agreement, or within such other period agreed to by the Department and the Applicant.
      (2) If an Applicant wishes to continue to seek membership or approval of a change in ownership, control, or business operations, then the Applicant shall be required to submit a new application and fee under Rule 1013 or 1017, respectively. The Association shall not refund any fee for a lapsed application.
      [(b)] (c) Ex Parte Communications

      (1) The prohibitions against ex parte communications shall become effective when Association staff has knowledge that an Applicant intends to file a written request for review by the National Adjudicatory Council under Rule 1015.
      [(1)] (2) Unless on notice and opportunity for an Applicant and Interested Association Staff to participate, or to the extent required for the disposition of ex parte matters as authorized by the Rules of the Association:
      (A) an Applicant, a counsel or representative of an Applicant, or an Interested Association Staff shall not make or knowingly cause to be made an ex parte communication relevant to the merits of a membership proceeding under the Rule 1010 Series to a Governor, a member of the National Adjudicatory Council or a Subcommittee thereof, or an Association employee who is participating or advising in a decision of such a person with respect to that proceeding; and
      (B) a Governor, a member of the National Adjudicatory Council or a Subcommittee thereof, or an Association employee who is participating or advising in the decision of such a person with respect to a membership proceeding shall not make or knowingly cause to be made to an Applicant, a counsel or rep- resentative of the Applicant, or an Interested Association Staff an ex parte communication relevant to the merits of that proceeding.
      [(2)] (3) A Governor, a member of the National Adjudicatory Council or a Subcommittee thereof, or an Association employee participating or advis- in the decision of such a per- who receives, makes, or knowingly causes to be made a communication prohibited by this paragraph shall place in the record of the membership proceeding:

      (A) all such written communications;
      (B) memoranda stating the substance of all such oral communications; and
      (C) all written responses and memoranda stating the substance of all oral responses to all such communications.
      [(3) The prohibitions against ex parte communications shall become effective when Association staff has knowledge that an Applicant intends to file a written request for review by the National Adjudicatory Council under Rule 1015.]
      [(c)](d) Recusal or Disqualification
      A Governor or a member of the National Adjudicatory Council or a Subcommittee thereof shall not participate in a matter governed by the Rule 1010 Series as to which that person has a conflict of interest or bias, or if circumstances otherwise exist where his or her fairness might reasonably be questioned. In such a case, the person shall recuse himself or shall be disquali- fied as follows:
      (1) The Chair of the NASD Board shall have authority to direct the disqualification of a Governor, and a majority of the Governors of the NASD Board excluding the Chair shall have authority todirect the disqualification of the Chair of the NASD Board.
      (2) The Chair of the National Adjudicatory Council shall have authority to direct the disqualifi- cation of a member of the National Adjudicatory Council or a member of a Subcommittee appointed pursuant to Rule 1015, and the Vice Chair of the National Adjudicatory Council shall have authority to direct the disqualification of the Chair of the National Adjudicatory Council.
      [(d)](e) Computation of Time
      (1) Calendar Day
      In the Rule 1010 Series, "day" means calendar day.
      (2) Formula
      In computing a period of time under the Rule 1010 Series, the day of the act, event, default, or lapse from which the period of time designated begins to run shall not be included. The last day of the period so computed shall be included unless it is a Saturday, Sunday, or Federal holiday, in which event the period runs until the end of the next day that is not a Saturday, Sunday, or Federal holiday. Intermediate Saturdays, Sundays, and Federal holidays shall be excluded from the computation when the period prescribed is ten days or less.


      1013.New Member Application [and Membership] and Interview

      (a) Filing of Application
      (1) Where To File
      [Each Applicant for Association membership shall file its application in two parts. The first part of the application shall be filed withthe Membership Department and shall include the following documents:]
      An Applicant for Association membership shall file its application with the Department of Member Regulation at the districtoffice in the district in which the Applicant intends to have its principal place of business as defined in Rule 1011(l).
      (2) Contents
      The application shall include:
      (A) an original signed and notarized paper Form BD, with applicable schedules;
      (B) an original signed paper Form U-4 for each Associated Person who is required to be registered under the Rules of the Association;
      (C) an original NASD-approved fingerprint card for each Associated Person who will be subject to SEC Rule 17f-2;
      (D) a new member assessment report;
      [(E) a new member firm contact questionnaire; and]
      [(F)] (E) a check for the appropriate fee[.];
      [(2) The second part of the application shall be filed with the Department of Member Regulation at the district office in the district in which the Applicant intends to have its principal place of business and shall include the following information and documents:]
      [(A)] (F) a detailed business plan[, in a form prescribed by the Association,] that adequately and comprehensively describes all material aspects of the business that will be, or are reasonably anticipated to be, performed at and after the initiation of business operations, including future business expansion plans, if any, and includes:
      (i) a trial balance, balance sheet, supporting schedules, and computation of net capital, each of which has been prepared as of a date that is within 30 days before the filing date of the application;
      (ii) a monthly projection of income and expenses, with a supporting rationale, for the first twelve months of operations;
      (iii) an organizational chart;
      (iv) [a list of] the intended [locations] location of [all offices, ] the Applicant's principal place of business and all other offices, if any, whether or not such offices would be required to be registered under the Rules of the Association, and the names of the persons who will be in charge of each office;
      (v) a list of the types of securities to be offered and sold and the types of retail or institutional customers to be solicited;
      (vi) a description of the methods and media to be employed to develop a customer base and to offer and sell products and services to customers, including the use of the Internet, telephone solicitations, seminars, or mailings;
      (vii) a description of the business facilities and a copy of any proposed or final lease;
      (viii) the number of markets to be made, if any, the type and volatility of the products, and the anticipated maximum inventory positions;
      (ix) any plan to enter into contractual commitments, such as underwritings or other securities-related activities;
      (x) any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and speculative nature of the products; [and]
      (xi) any other activity that the Applicant may engage in that reasonably could have a material impact on net capital within the first twelve months of business operations; and
      (xii) a description of the communications and operational systems the Applicant will employ to conduct business with customers or other members and the plans and procedures the Applicant will employ to ensure business continuity, including: system capacity to handle the anticipated level of usage; contingency plans in the event of systems or other technological or communications problems or failures that may impede customer usage or firm order entry or execution; system redundancies; disaster recovery plans; system security; disclosures to be made to potential and existing customers who may use such systems; and supervisory or customer protection measures that may apply to customer use of, or access to, such systems;
      [(B) a copy of the Applicant's most recent Form BD;]
      [(C)](G) a copy of any decision or order by a federal or state authority or self-regulatory organization taking permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person;
      [(D)](H) a list of all Associated Persons[, the most recent Form U-4 and Form U-5 for each Associated Person, any other document that discloses the disciplinary history of each Associated Person, and a list ofany other persons or entities that will exercise control with respect to the Applicant's business];
      [(E)](I) documentation of any of the following events, unless the event has been reported to the Central Registration Depository:
      (i) a regulatory action against or investigation of the Applicant or an Associated Person by the Commission, the Commodity Futures Trading Commission, a federal, state, or foreign regulatory agency, or a self-regulatory organization that is pending, adjudicated, or settled;
      (ii) an investment-related civil action for damages or an injunction against the Applicant or an Associated Person that is pending, adjudicated, or settled;
      (iii) an investment-related customer complaint or arbitration [involving sales practice violations, theft, misappropriation, conversion, or breach of fiduciary duty, against the Applicant or an Associated Person that is pending, settled, or has resulted in an award or judgement] that is required to be reported on Form U-4; [and]
      (iv) a criminal action (other than a minor traffic violation) against the Applicant or an Associated Person that is pending, adjudicated, or that has resulted in a guilty or no contest plea; and
      [(F)](v) a copy of any document evidencing a termination for cause or a permitted resignation after investigation of an alleged violation of a federal or state securities law, a rule or regulation thereunder, a self-regulatory organizatio rule, or an industry standard of conduct;
      [(G)](J) a description of any remedial action, such as special training [or], continuing education requirements, or heightened supervision, imposed on an Associated Person by a state or federal authority or self-regulatory organization;
      [(H)](K) a written acknowledgment that heightened supervisory procedures and special educational programs may be required pursuant to Notice to Members 97-19 for an Associated Person whose record[s] reflects[:
      (i)] disciplinary actions [involving] or sales practice [violations] events;
      [(ii) customer complaints; or
      (iii) arbitrations that were resolved adversely to the Associated Person;]
      [(I)](L) a copy of final or proposed contracts with banks, clearing entities, or service bureaus, and a general description of any other final or proposed contracts;
      [(J)](M) a description of the nature and source of Applicant's capital with supporting documentation, including a list of all persons or entities that have contributed or plan to contribute financing to the Applicant's business, the terms and conditions of such financing arrangements, the risk to net capital presented by the Applicant's proposed business activities, and any arrangement for additional capital should a business need arise;
      [(K)](N) a description of the financial controls to be employed by the Applicant;
      [(L)](O) a description of the Applicant's supervisory system and a copy of its written supervisory procedures, internal operating procedures (including operational and internal controls), internal inspections plan, written approval process, and qualifications investigations required by Rule 3010;
      [(M)](P) a description of the number, experience, and qualifications of supervisors and principals and the number, experience, and qualifications of persons to be supervised by such personnel, the other responsibilities of the supervisors and principals with the Applicant, their full-time or parttime status, any business activities that the supervisors or principals may engage in outside of their association with the Applicant, the hours per week devoted to such activities, and an explanation of how a part-time supervisor or principal will be able to discharge his or her designated functions on a part-time basis;
      [(N)](Q) a description of Applicant's proposed recordkeeping system;
      [(O)](R) a copy of the Applicant's written training plan to comply with Firm Element continuing education requirements described in Rule 1120(b), including the name of the Associated Person responsible for implementation; and
      [(P)](S) [a copy of the documents described in paragraph (a)(1)] a Web CRD entitlement request form and a Member Contact Questionnaire user access request form.
      (3) Electronic Filings [The Applicant shall file both parts of the application simultaneously by commercial courier. The application shall be deemed received on the date specified in the written confirmation of receipt generated by the commercial courier for the delivery of the second part of the application to the district office.] Upon approval of the Applicant's Web CRD entitlement request form, the Applicant shall submit any amendments to its Forms BD or U-4, any additional Forms U-4, and any Form U-5 electronically via Web CRD. Upon approval of the Applicant's membership, the Applicant shall submit any amendments to its Member Contact Questionnaire electronically.
      (4) Rejection Of Application That Is Not Substantially Complete
      If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department may reject the application and deem it not to have been filed. In such case, within the 30 day period, the Department shall serve a written notice on the Applicant of the Department's determination and the reasons therefor. The Association shall refund the application fee, less $350, which shall be retained by the Association as a processing fee. If the Applicant determines to continue to seek membership, the Applicant shall submit a new application and fee under this Rule.
      (5) Request For Additional Documents Or Information
      Within 30 days after the [receipt] filing of an application, the Department shall [determine whether the application is complete and, if not, shall request] serve an initial request for any additional information or documents necessary to render a decision on the application. The Department may [request] serve subsequent requests for additional information or documents at any time during the membership application process.
      [(5)] Unless otherwise agreed by the Department and the Applicant, the Applicant shall file any additional information and documents with the Department within 60 days after service of the Department's initial request and 30 days after service of any subsequent request.
      [(b) Lapse of Application]
      [(1) Absent a showing of good cause, an application for membership shall lapse if an Applicant fails to:
      (A) respond fully within 60 days after an initial request for information or documents, within 30 after any subsequent request, or within such other time period agreed to by the Department and the Applicant;
      (B) appear at or otherwise participate in a scheduled membership interview pursuant to paragraph (c); or
      (C) return an executed membership agreement under Rule 1014(c) within 25 days after service of the agreement.]
      [(2) The lapse of an application shall require an Applicant continuing to seek membership to submit a new application under paragraph (a).]
      [(c)](b) Membership Interview
      (1) Requirement for Interview
      Before the Department [issues a] serves its decision on an application for new membership in the Association, the Department shall conduct a membership interview with a representative or representatives of the Applicant.
      (2) Service of Notice
      At least seven days before the membership interview, the Department shall serve on the Applicant a written notice that specifies the date and time of the interview and the representative or representatives of the Applicant who are required to participate in the interview. The Department shall serve the notice by facsimile or [commercial] overnight courier. The Applicant and the Department may agree to a shorter or longer period for notice or a different method of service under this subparagraph.
      (3) Time
      Unless the Department directs otherwise for good cause shown, a membership interview shall be scheduled to occur within 90 days after the [receipt] filing of an application or within 60 days after the [receipt] filing of all additional information or documents requested, whichever is later.
      (4) Place
      Unless the Department and the Applicant otherwise agree, the membership interview shall be conducted in the district office for the district in which the Applicant has or intends to have its principal place of business.
      (5) Updated Financial Documents
      On or before the date of the membership interview, the Applicant shall file an updated trial balance, balance sheet, supporting schedules, and computation of net capital. The Applicant shall prepare such documents as of a date that is within 45 days before the date of the membership interview, unless the Applicant and the Department agree on a longer period. The Applicant shall promptly notify the Department in writing of any material adverse change in its financial condition that occurs before a decision constituting final action of the Association is served on the Applicant.
      [(5)](6) Review of Standards for Admission
      During the membership interview, the Department shall review the application and the standards for admission to membership with the Applicant's representative or representatives.
      [(6)](7) Information From Other Sources
      During the membership interview, the Department shall provide to the Applicant's representative or representatives any information or document that the Department has obtained from the Central Registration Depository or a source other than the Applicant and upon which the Department intends to base its decision under Rule 1014. If the Department receives such information or document after the membership interview or decides to base its decision on such information after the membership interview, the Department shall promptly serve the information or document and an explanation thereof on the Applicant.


      1014. Department Decision

      (a) Standards for Admission
      After considering the application, the membership interview, other information and documents provided by the Applicant, other information and documents obtained by the Department, and the public interest and the protection of investors, the Department shall determine whether the Applicant meets each of the following standards:
      (1) The application and all supporting documents are complete and accurate.
      (2) The Applicant and its Associated Persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations.
      (3) The Applicant and its Associated Persons are capable of complying with the federal securities laws, the rules and regulations thereunder, and the Rules of the Association, including observing high standards of commercial honor and just and equitable principles of trade. In determining whether this standard is met, the Department may take into consideration whether:
      (A) a state or federal authority or self-regulatory organization has taken permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person;
      (B) an Applicant's or Associated Person's record[s] reflects[: (i) disciplinary actions involving sales practice violations; (ii) customer complaints; or (iii) arbitrations that were resolved adversely to the Applicant or Associated Person] a sales practice event;
      (C) an Applicant or Associated Person is the subject of a pending, adjudicated, or settled regulatory action or investigation by the Commission, the Commodity Futures Trading Commission, a federal, state, or foreign regulatory agency, or a self-regulatory organization; a pending, adjudicated, or settled investment-related civil action for damages or an injunction; [an investment-related customer complaint or arbitration alleging sales practice violations, theft, misappropriation, conversion, or breach of fiduciary duty that is pending, settled, or has resulted in an award or judgment;] or a criminal action (other than a minor traffic violation) that is pending, adjudicated, or that has resulted in a guilty or no contest plea;
      (D) an Associated Person was terminated for cause or permitted to resign after an investigation of an alleged violation of a federal or state securities law, a rule or regulation thereunder, a self-regulatory organization rule, or industry standard of conduct;
      (E) a state or federal authority or self-regulatory organization has imposed a remedial action, such as special training [or], continuing education requirements, or heightened supervision, on an Associated Person; and
      (F) a state or federal authority or self-regulatory organization has provided information indicating that the Applicant or an Associated Person otherwise poses a threat to public investors.
      (4) The Applicant has established all contractual or other arrangements and business relationships with banks, clearing corporations, service bureaus, or others necessary to: (A) initiate the operations described in the Applicant's business plan, considering the nature and scope of operations and the number of personnel; and (B) comply with the federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
      (5) The Applicant has or has adequate plans to obtain facilities that are sufficient to: (A) initiate the operations described in the Applicant's business plan, considering the nature and scope of operations and the number of personnel; and (B) comply with the federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
      (6) The communications and operational systems that the Applicant intends to employ for the purpose of conducting business with customers and other members are adequate and provide reasonably for business continuity in each area set forth in Rule 1013(a)(2)(F)(xii);
      [(6)](7) The Applicant is capable of maintaining a level of net capital in excess of the minimum net capital requirements set forth in SEC Rule 15c3-1 adequate to support the Applicant's intended business operations on a continuing basis, based on information [that is current within 30 days before the membership interview] filed under Rule 1013(b)(5). The Department may impose a reasonably determined higher net capital requirement for the initiation of operations after considering:
      (A) the amount of net capital sufficient to avoid early warning level reporting requirements, such as SEC Rule 17a-11;
      (B) the amount of capital necessary to meet expenses net of revenues for at least twelve months, based on reliable projections agreed to by the Applicant and the Department;
      (C) any planned market making activities, the number of markets to be made, the type and volatility of products, and the anticipated maximum inventory positions;
      (D) any plan to enter into other contractual commitments, such as underwritings or other securities-related activities;
      (E) any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and speculative nature of the products; and
      (F) any other activity that the Applicant will engage in that reasonably could have a material impact on net capital within the first twelve months of business operations.
      [(7)](8) The Applicant has financial controls to ensure compliance with the federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
      [(8)](9) The Applicant has compliance, supervisory, operational, and internal control practices and standards that are consistent with practices and standards regularly employed in the investment banking or securities business, taking into account the nature and scope of Applicant's proposed business.
      [(9)](10) The Applicant has a supervisory system, including written supervisory procedures, internal operating procedures (including operational and internal controls), and compliance procedures designed to prevent and detect, to the extent practicable, violations of the federal securities laws, the rules and regulations thereunder, and the Rules of the Association. In evaluating the adequacy of a supervisory system, the Department shall consider the overall nature and scope of the Applicant's intended business operations and shall consider whether:
      (A) the number, location, experience, and qualifications of supervisory personnel are adequate in light of the number, location, experience, and qualifications of persons to be supervised; the [disciplinary history of such] Central Registration Depository record or other disciplinary history of supervisory personnel and persons to be supervised; [any criminal, civil, administrative, or arbitration actions or written customer complaints against such persons;] and the number and locations of the offices that the Applicant intends to open and the nature and scope of business to be conducted at each office;
      (B) the Applicant has identified specific Associated Persons to supervise and discharge each of the functions in Applicant's business plan, and to supervise each of the Applicant's intended offices, whether or not such offices are required to be registered under the Rules of the Association;
      (C) the Applicant has identified the functions to be performed by each Associated Person and has adopted procedures to assure the registration with the Association and applicable states of all persons whose functions are subject to such registration requirements.
      [(C)] (D) each Associated Person identified in the business plan to discharge a supervisory function [in the business plan] has at least one year of direct experience or two years of related experience in the subject area to be supervised;
      [(D)] (E) the Applicant will solicit retail or institutional business;
      [(E)] (F) the Applicant will recommend securities to customers;
      [(F)] (G) the location or parttime status of a supervisor or principal will affect such person's ability to be an effective supervisor;
      [(G)] (H) [the records of an Associated Person reflect: (i) disciplinary actions involving sales practice violations; (ii) customer complaints; or (iii) arbitrations that were resolved adversely to the Associated Person] the Applicant should be required to place one or more Associated Persons under heightened supervision pursuant to Notice to Members 97-19;
      [(H)] (I) any remedial action, such as special training or continuing education requirements or heightened supervision, has been imposed on an Associated Person by a state or federal authority or self-regulatory organization; and
      [(I)] (J) any other condition that will have a material impact on the Applicant's ability to detect and prevent violations of the federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
      [(10)](11) The Applicant has a recordkeeping system that enables Applicant to comply with federal, state, and self-regulatory organization recordkeeping requirements and a staff that is sufficient in qualifications and number to prepare and preserve required records.
      [(11)](12) The Applicant has completed a training needs assessment and has a written training plan that complies with the continuing education requirements imposed by the federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
      [(12)](13) The Association does not possess any information indicating that the Applicant may circumvent, evade, or otherwise avoid compliance with the federal securities laws, the rules and regulations thereunder, or the Rules of the Association.
      [(13)](14) The application and all supporting documents otherwise are consistent with the federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
      (b) Granting or Denying Application
      (1) If the Department determines that the Applicant meets each of the standards in paragraph (a), the Department shall grant the application for membership.
      (2) If the Department determines that the Applicant does not meet one or more of the standards in paragraph (a) in whole or in part, the Department [may] shall:
      (A) grant the application subject to one or more restrictions reasonably designed to address a specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern based on the standards for admission in Rule 1014(a); or
      (B) deny the application.
      [(c) Submission of Membership Agreement
      If the Department grants an application, with or without restriction, the Applicant's approval for membership shall be contingent upon the Applicant's submission of a written membership agreement, satisfactory to the Department, undertaking to:
      (1) engage only in the business set forth in the business plan and the membership agreement;
      (2) abide by any restriction specified in the Department's decision;
      (3) obtain the Department's prior approval of the removal or modification of such a restriction pursuant to Rule 1017; and
      (4) notify and obtain the Department's approval of a change in ownership or control or a material change in business operations pursuant to Rule 1018.
      The Applicant shall not waive the right to file a written request for review under Rule 1015 by executing a membership agreement under this paragraph.]
      [(d)](c) Decision
      (1) Time
      The Department shall [issue] serve a written decision on the membership application within 30 days after the conclusion of the membership interview or after the [submission] filing of additional information or documents, whichever is later.
      (2) Content
      If the Department denies the application, the decision shall explain in detail the reason for denial, referencing the applicable standard or standards in paragraph (a). If the Department grants the application subject to restrictions, the decision shall explain in detail the reason for each restriction, referencing the applicable standard or standards in paragraph (a) upon which the restriction is based and identify the specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern that the restriction is designed to address and the manner in which the restriction is reasonably designed to address the concern.
      (3) Failure to [Issue] Serve Decision
      If the Department fails to [issue] serve a decision within 180 days after [receipt] the filing of an application or such later date as the Department and the Applicant have agreed in writing, the Applicant may file a written request with the NASD Board requesting that the NASD Board direct the Department to [issue] serve a decision. Within seven days after [receipt] the filing of such a request, the NASD Board shall direct the Department to serve its written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the NASD Board may extend the 180 day time limit by not more than 90 days.
      (d) Submission of Membership Agreement
      If the Department grants an application, with or without restriction, the Applicant's approval for membership shall be contingent upon the Applicant's filing of an executed written membership agreement, satisfactory to the Department, undertaking to:
      (1) abide by any restriction specified in the Department's decision; and
      (2) obtain the Department's approval of a change in ownership, control, or business operations pursuant to Rule 1017, including the modification or removal of a membership agreement restriction.
      The Applicant shall not waive the right to file a written request for review under Rule 1015 by executing a membership agreement under this paragraph.
      (e) Service and Effectiveness of Decision
      The Department shall serve its decision and the membership agreement on the Applicant in accordance with Rule 1012. The decision shall become effective upon service and shall remain in effect during the pendency of any review until a decision constituting final action of the Association is issued under Rule 1015 or 1016, unless otherwise directed by the National Adjudicatory Council, the NASD Board, or the Commission.
      (f) Effectiveness of Restriction
      A restriction imposed under this Rule shall remain in effect and bind the Applicant and all successors to the ownership or control of the Applicant unless:
      (1) removed or modified by [the Department under Rule 1017] a decision constituting final action of the Association issued under Rule 1015, 1016, or 1017;
      [(2) removed or modified by a decision constituting final action of the Association issued under Rule 1015 or 1016;] or
      [(3)](2) stayed by the National Adjudicatory Council, the NASD Board, or the Commission.
      (g) Final Action
      Unless the Applicant files a written request for a review under Rule 1015, the Department's decision shall constitute final action by the Association.


      1015. Review by National Adjudicatory Council

      (a) Initiation of Review by Applicant
      [(1) Request by Applicant]
      Within 25 days after service of a decision under Rule 1014[,] or 1017 [or 1018], an Applicant may file a written request for review with the National Adjudicatory Council. A request for review shall state with specificity why the Applicant believes that the Department's decision is inconsistent with the membership standards set forth in Rule 1014, or otherwise should be set aside, and state whether a hearing is requested. The Applicant simultaneously shall [send] file by first-class mail a copy of the request to the district office where the Applicant filed its [membership] application.
      [(2) Notice by National Adjudicatory Council
      A decision issued under Rule 1014, 1017, or 1018 shall be subject to a call for review by any member of the National Adjudicatory Council or the Review Subcommittee defined in Rule 9120 within 30 days after service of the decision. If the National Adjudicatory Council calls a decision for review, a written notice of review shall be served promptly on the Applicant by first-class mail. The written notice of review shall state the specific grounds for the review and whether a hearing is directed. If a decision is called for review by any member of the National Adjudicatory Council or the Review Subcommittee, the decision shall be reviewed by the National Adjudicatory Council. The National Adjudicatory Council simultaneously shall send by first-class mail a copy of the notice to the district office where the Applicant filed its membership application.]
      (b) Transmission of Documents
      Within ten days after [receipt] the filing of a request for [or notice of] review, the Department shall:
      (1) transmit to the National Adjudicatory Council copies of all documents that were considered in connection with the Department's decision and an index to the documents; and
      (2) serve on the Applicant a copy of such documents (other than those documents originally submitted by Applicant) and a copy of the index.
      (c) Membership Application Docket
      The Department shall promptly record in the Association's membership application docket each request for [or notice of] review filed with the National Adjudicatory Council under this Rule and each material subsequent event, filing, and change in the status of a membership proceeding.
      (d) Appointment of Subcommittee
      The National Adjudicatory Council or the Review Subcommittee defined in Rule 9120 shall appoint a Subcommittee to participate in the review. The Subcommittee shall be composed of at least two members. One member shall be a current member of the National Adjudicatory Council. The remaining member or members shall be current or past Directors or past Governors.
      (e) Powers of Subcommittee
      If a hearing is requested [or directed], the Subcommittee shall conduct the hearing. If a hearing is not requested, the Subcommittee may serve a notice directing that a hearing be held. If a hearing is not requested or directed, the Subcommittee shall conduct its review on the basis of the record developed before the Department and any written submissions made by the Applicant or the Department in connection with the request for review.
      (f) Hearing
      (1) Notice
      If a hearing is requested or directed, the hearing shall be held within 45 days after the [receipt] filing of the request [or service of the notice by] with the National Adjudicatory Council or service of the notice by the Subcommittee. The National Adjudicatory Council shall [send] serve written notice of the date and time of the hearing to the Applicant by facsimile or [commercial] overnight courier not later than 14 days before the hearing.
      (2) Counsel
      The Applicant and the Department may be represented by counsel at a hearing conducted pursuant to this Rule.
      (3) Evidence
      Formal rules of evidence shall not apply to a hearing under this Rule. Not later than five days before the hearing, the Applicant and the Department shall exchange copies of their proposed hearing exhibits and witness lists and provide copies of the same to the National Adjudicatory Council. If the Applicant or the Department fails to provide copies of its proposed hearing exhibits or witness list within such time, the Subcommittee shall exclude the evidence or witnesses from the proceeding, unless the Subcommittee determines that good cause is shown for failure to comply with the production date set forth in this subparagraph.
      (4) Transcript
      The hearing shall be recorded and a transcript prepared by a court reporter. A transcript of the hearing shall be available for purchase from the court reporter at prescribed rates. The Applicant, the Department, or a witness may seek to correct the transcript. A proposed correction of the transcript shall be submitted to the Subcommittee within a reasonable period of time prescribed by the Subcommittee. Upon notice to the Applicant and the Department, the Subcommittee may direct the correction to the transcript as requested or sua sponte.
      [(5) Failure to Appear at Hearing]
      [If an Applicant fails to appear at a hearing for which it has notice, the National Adjudicatory Council may dismiss the request for review as abandoned, and the decision of the Department shall become the final action of the Association. Upon a showing of good cause, the National Adjudicatory Council may withdraw a dismissal entered pursuant to this subparagraph.]
      (g) Additional Information, Briefs
      At any time during its consideration, the Subcommittee or the National Adjudicatory Council may direct the Applicant or the Department to [submit] file additional information [and to file] or briefs. Any additional information or brief [submitted] filed shall be provided to all parties before the National Adjudicatory Council renders its decision.
      (h) Abandonment of Request for Review
      If an Applicant fails to specify the grounds for its request for review under Rule 1015(a)(1), appear at a hearing for which it has notice, or file information or briefs as directed, the National Adjudicatory Council or the Review Subcommittee may dismiss the request for review as abandoned, and the decision of the Department shall become the final action of the Association. Upon a showing of good cause, the National Adjudicatory Council or the Review Subcommittee may withdraw a dismissal entered pursuant to this paragraph.
      [(h)](i) Subcommittee Recommendation
      The Subcommittee shall present a recommended decision in writing to the National Adjudicatory Council within 60 days after the date of the hearing held pursuant to paragraph (f), and not later than seven days before the meeting of the National Adjudicatory Council at which the membership proceeding shall be considered.
      [(i)](j) Decision
      (1) Proposed Written Decision
      After considering all matters presented in the review and the Subcommittee's recommended written decision, the National Adjudicatory Council may affirm, modify, or reverse the Department's decision or remand the membership proceeding with instructions. The National Adjudicatory Council shall prepare a proposed written decision pursuant to subparagraph (2).
      (2) Contents
      The decision shall include:
      (A) a description of the Department's decision, including its rationale;
      (B) a description of the principal issues raised in the review;
      (C) a summary of the evidence on each issue; and
      (D) a statement whether the Department's decision is affirmed, modified, or reversed, and a rationale therefor that references the applicable standards in Rule 1014.
      (3) Issuance of Decision After Expiration of Call for Review Periods
      The National Adjudicatory Council shall provide its proposed written decision to the NASD Board. The NASD Board may call the membership proceeding for review pursuant to Rule 1016. If the NASD Board does not call the membership proceeding for review, the proposed written decision of the National Adjudicatory Council shall become final. The National Adjudicatory Council shall serve the Applicant with a written notice specifying the date on which the call for review period expired and stating that the final written decision will be served within 15 days after such date. The National Adjudicatory Council shall serve its final written decision within 15 days after the date on which the call for review period expired. The decision shall constitute the final action of the Association for purposes of SEC Rule 19d-3, unless the National Adjudicatory Council remands the membership proceeding.
      (4) Failure to Issue Decision If the National Adjudicatory Council fails to serve its final written decision within the time prescribed in subparagraph (3), the Applicant may file a written request with the NASD Board requesting that the NASD Board direct the National Adjudicatory Council to serve its decision immediately or to show good cause for an extension of time. Within seven days after [receipt] the filing of such a request, the NASD Board shall direct the National Adjudicatory Council to serve its written decision immediately or to show good cause for an extension of time. If the National Adjudicatory Council shows good cause for an extension of time, the NASD Board may extend the 15 day time limit by not more than 15 days.


      1016. Discretionary Review byNASD Board

      (a) Call for Review by Governor
      A Governor may call a membership proceeding for review by the NASD Board if the call for review is made within the period prescribed in [sub]paragraph [(2)] (b).
      (b) 15 Day Period; Waiver
      A Governor shall make his or her call for review at the next meeting of the NASD Board that is at least 15 days after the date on which the NASD Board receives the proposed written decision of the National Adjudicatory Council. By unanimous vote of the NASD Board, the NASD Board may shorten the period to less than 15 days. By an affirmative vote of the majority of the NASD Board then in office, the NASD Board may, during the 15 day period, vote to extend the period to more than 15 days.
      (c) Review At Next Meeting
      If a Governor calls a membership proceeding for review within the time prescribed in paragraph (b), the NASD Board shall review the membership proceeding not later than the next meeting of the NASD Board. The NASD Board may order the Applicant and the Department to file briefs in connection with review proceedings pursuant to this paragraph.
      (d) Decision of NASD Board,
      Including Remand After review, the NASD Board may affirm, modify, or reverse the proposed written decision of the National Adjudicatory Council. Alternatively, the NASD Board may remand the membership proceeding with instructions. The NASD Board shall prepare a written decision that includes all of the elements described in Rule 1015[(i)(2)] (j)(2).
      (e) Issuance of Decision
      The NASD Board shall serve its written decision on the Applicant within 15 days after the meeting at which it conducted its review. The decision shall constitute the final action of the Association for purposes of SEC Rule 19d-3, unless the NASD Board remands the membership proceeding.


      1017. [Removal or Modification of Business Restriction] Application for Approval of Change in Ownership, Control, or Business Operations

      (a) Events Requiring Application
      [A member of the Association may seek modification or removal of a restriction on its business activities imposed pursuant to the Rule 1010 Series by filing a written application with the Department at the district office for the district in which the member's principal place of business is located. The application shall present facts showing that the circumstances that gave rise to the restriction have changed and state with specificity why the restriction should be modified or removed in light of the standards set forth in Rule 1014 and the articulated rationale for the imposition of the restriction. A copy of the decision and membership agreement pertaining to such restriction shall be appended to the application.]
      A member shall file an application for approval of any of the following changes to its ownership, control, or business operations:
      (1) a merger of the member with another member, unless both are members of the New York Stock Exchange, Inc. or the surviving entity will continue to be a member of the New York Stock Exchange, Inc.;
      (2) a direct or indirect acquisition by the member of another member, unless the acquiring member is a member of the New York Stock Exchange, Inc.;
      (3) a direct or indirect acquisition of substantially all of the member's assets, unless the acquirer is a member of the New York Stock Exchange, Inc.;
      (4) a change in the equity ownership or partnership capital of the member that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital; or
      (5) a material change in business operations as defined in Rule 1011(i).
      (b) Filing and Content of Application
      (1) The member shall file the application with the Department at the district office in the district in which the member's principal place of business is located. If the application involves a merger between members with principal places of business in two or more districts, the application shall be filed and processed by the district office wherein the surviving firm's principal place of business will be located.
      (2) The application shall describe in detail the change in ownership, control, or business operations and include a business plan, pro forma financials, an organizational chart, and written supervisory procedures reflecting the change.
      (A) If the application requests approval of a change in ownership or control, the application also shall include the names of the new owners, their percentage of ownership, and the sources of their funding for the purchase and recapitalization of the member.
      (B) If the application requests the removal or modification of a membership agreement restriction, the application also shall:
      (i) present facts showing that the circumstances that gave rise to the restriction have changed; and
      (ii) state with specificity why the restriction should be modified or removed in light of the standards set forth in Rule 1014 and the articulated rationale for the imposition of the restriction.
      (C) If the application requests approval of an increase in Associated Persons involved in sales, offices, or markets made, the application shall set forth the increases in such areas during the preceding 12 months.
      (c) Effecting Change and Imposition of Interim Restrictions
      (1) A member shall file an application for approval of a change in ownership or control at least 30 days prior to such change. A member may effect a change in ownership or control prior to the conclusion of the proceeding, but the Department may place new interim restrictions on the member based on the standards in Rule 1014, pending final Department action.
      (2) A member may file an application to remove or modify a membership agreement restriction at any time. An existing restriction shall remain in effect during the pendency of the proceeding.
      (3) A member may file an application for approval of a material change in business operations, other than the modification or removal of a restriction, at any time, but the member may not effect such change until the conclusion of the proceeding, unless the Department and the member otherwise agree.
      (d) Rejection Of Application That Is Not Substantially Complete
      If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department may reject the application and deem it not to have been filed. In such case, within the 30 day period, the Department shall serve a written notice on the Applicant of the Department's determination and the reasons therefor. If the Applicant determines to continue to apply for approval of a change in ownership, control, or business operations, the Applicant shall submit a new application under this Rule.
      [(b)](e) Request for Additional Documents and Information
      Within 30 days after the [receipt] filing of an application [to remove or modify a restriction], the Department shall [determine whether the application is complete, and if not, shall] serve a request for any additional information or documents necessary to render a decision [under paragraph (e)] on the application. The Department may serve subsequent requests for additional information or documents at any time during the application process. Unless otherwise agreed by the Department and the Applicant, the Applicant shall file any additional information and documents with the Department within 30 days after service of a request.
      [(c) Lapse]
      [(1) Absent a showing of good cause, an application to modify or remove a restriction shall lapse if an Applicant fails to:
      (A) respond fully within 30 days after a request for information or documents;
      (B) appear at or otherwise participate in a scheduled membership interview pursuant to paragraph (d); or
      (C) return an executed membership agreement under paragraph (e)(4) within 25 days after service of the agreement.
      (2) The lapse of an application shall require the Applicant to submit a new application to modify or remove a restriction under paragraph (a).]
      [(d)](f) Membership Interview
      (1) The Department may require the Applicant to participate in a membership interview within 30 days after the [receipt] filing of the application, or if the Department requests additional information or documents, within 30 days after the filing of the additional information or documents by the Applicant.
      (2) At least seven days before the membership interview, the Department shall serve on the Applicant a written notice that specifies the date and time of the interview and [the representative or representatives of the Applicant] persons who are required to participate in the interview. The Department shall serve the notice by facsimile or [commercial] overnight courier. The Applicant and the Department may agree to a shorter or longer period for notice or a different method of service.
      (3) Unless the Department and the Applicant otherwise agree, the membership interview shall be conducted in the district office for the district in which the Applicant has its principal place of business.
      (4) During the membership interview, the Department shall review the application and the considerations for the Department's decision set forth in paragraph [(e)(1)] (g)(1). The Department shall provide to the Applicant's representative or representatives any information or document that the Department has obtained from the Central Registration Depository or a source other than the Applicant and upon which the Department intends to base its decision under paragraph [(e)](g). If the Department receives such information or document after the membership interview or decides to base its decision on such information after the membership interview, the Department shall promptly serve the information or document and an explanation thereof on the Applicant.
      [(e)](g) Department Decision
      (1) [In evaluating an application submitted under paragraph (a)] The Department shall consider the application, the membership interview, other information and documents provided by the Applicant or obtained by the Department, the public interest, and the protection of investors.
      (A) In rendering a decision on an application for approval of a change in ownership or control, or an application for approval of a material change in business operations that does not involve modification or removal of a membership agreement restriction, the Department shall determine if the Applicant would continue to meet the standards in Rule 1014(a) upon approval of the application.
      (B) In rendering a decision on an application requesting the modification or removal of a membership agreement restriction, the Department shall consider whether maintenance of the restriction is appropriate in light of:
      [(A)](i) the standards set forth in Rule 1014;
      [(B)](ii) the circumstances that gave rise to the imposition of the restriction;
      [(C)](iii) the Applicant's operations since the restriction was imposed;
      [(D)] (iv) [a] any change in ownership or control or supervisors and principals; and
      [(E)](v) any new evidence submitted in connection with the application.
      (2) The Department shall [issue] serve a written decision on the application within 30 days after the conclusion of the membership interview or the [submission] filing of additional information or documents, whichever is later. If the Department does not require the Applicant to participate in a membership interview or request additional information or documents, the Department shall [issue] serve a written decision within 45 days after the [receipt] filing of the application under paragraph (a). The decision shall state whether the application [to modify or remove the restriction] is granted or denied in whole or in part, and shall provide a rationale for the Department's decision, referencing the applicable standard in Rule 1014.
      (3) If the Department fails to [issue] serve a decision within 180 days after [receipt] filing of an application or such later date as the Department and the Applicant have agreed in writing, the Applicant may file a written request with the NASD Board requesting that the NASD Board direct the Department to issue a decision. Within seven days after [receipt] the filing of such a request, the NASD Board shall direct the Department to issue a written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the NASD Board may extend the time limit for issuing a decision by not more than 30 days.
      (4) If the Department [modifies or removes a restriction on the Applicant's business activities, the] approves an application under this Rule in whole or part, the Department shall require an Applicant to file an executed membership agreement [submitted under Rule 1014 shall be modified accordingly].
      [(f)](h) Service and Effectiveness of Decision
      The Department shall serve its decision on the Applicant in accordance with Rule 1012. The decision shall become effective upon service and shall remain in effect during the pendency of any review until a decision constituting final action of the Association is [issued] served under Rule 1015 or 1016, unless otherwise directed by the National Adjudicatory Council, the NASD Board, or the Commission.
      [(g)](i) Request for Review; Final Action
      An Applicant may file a written request for review of the Department's decision with the National Adjudicatory Council pursuant to Rule 1015. The procedures set forth in Rule 1015 shall apply to such review, and the National Adjudicatory Council's decision shall be subject to discretionary review by the NASD Board pursuant to Rule 1016. If the Applicant does not file a request for a review, the Department's decision shall constitute final action by the Association.
      [(h)](j) Removal or Modification of Restriction on Department's Initiative
      The Department shall modify or remove a restriction on its own initiative if the Department determines such action is appropriate in light of the considerations set forth in paragraph [(e)(1)](g)(1). The Department shall notify the member in writing of the Department's determination and inform the member that it may apply for further modification or removal of a restriction by filing an application under paragraph (a).
      (k) Lapse or Denial of Application for Approval of Change in Ownership
      If an application for approval of a change in ownership lapses, or is denied and all appeals are exhausted or waived, the member shall, no more than 60 days after the lapse or exhaustion or waiver of appeal:
      (1) submit a new application;
      (2) unwind the transaction; or
      (3) file a Form BDW.
      For the protection of investors, the Department may shorten the 60- day period. For good cause shown by the member, the Department may lengthen the 60-day period. The Department shall serve written notice on the Applicant of any change in the 60-day period and the reasons therefor. During the 60-day or other imposed period, the Department may continue to place interim restrictions on the member for the protection of investors.


      [1018. Change in Ownership, Control, or Operations]

      [(a) Notice
      At least 30 days prior to the occurrence of any of the following changes in ownership, control, or operations, a member shall file a written notice and application for continuance in membership with the Department at the district office in the district in which the member's principal place of business is located:
      (1) a merger of the member with another member;
      (2) an acquisition by the member of another member;
      (3) an acquisition of substantially all of the member's assets;
      (4) a change in the equity ownership or partnership capital of the member that results in one person or entity owning or controlling 25 percent or more of the equity or partnership capital; or
      (5) a material change in the member's business operations.]
      [(b) Review and Imposition of Interim Restrictions
      The Department shall review a change in ownership, control, or operations described in paragraph (a) prior to the change taking effect. The Department may maintain existing restrictions on the member's business activities and place new interim restrictions on the member based on the standards in Rule 1014, pending final Department action.]
      [(c) Request for Information
      Within 30 days after receipt of the notice and application under paragraph (a), the Department shall request any additional information or documents necessary to render a decision under paragraph (f). Unless otherwise agreed by the Department and the Applicant, the Applicant shall file such additional information or documents with the Department within 30 days after the Department's request. The Department may request additional information and documents at any time during the application process; unless the Applicant and the Department agree otherwise, the Applicant shall file such information or documents within 30 days after the Department's request.]
      [(d) Lapse
      (1) Absent a showing of good cause, an application for continuance in membership shall lapse if an Applicant fails to:
      (A) respond fully within 30 days after a request for information or documents;
      (B) appear at or otherwise participate in a scheduled membership interview pursuant to paragraph (e); or
      (C) return an executed membership agreement under paragraph (g) within 25 days after service of the agreement.
      (2) The lapse of an application shall require the Applicant to submit a new application under paragraph (a).]
      [(e) Membership Interview
      (1) The Department may require the Applicant to participate in a membership interview. The membership interview shall be held within 30 days after the receipt of the application, or if the Department requests additional information or documents, within 30 days after the filing of such additional information or documents by the Applicant.
      (2) At least seven days before the membership interview, the Department shall serve on the Applicant a written notice that specifies the date and time of the interview and the representative or representatives of the Applicant who are required to participate in the interview. The Department shall serve the notice by facsimile or commercial courier. The Applicant and the Department may agree to a shorter or longer period for notice or a different method of service.
      (3) Unless the Department and the Applicant otherwise agree, the membership interview shall be conducted in the district office for the district in which the Applicant has or intends to have its principal place of business.
      (4) During the membership interview, the Department shall review the application and the considerations for the Department's decision set forth in paragraph (f). The Department shall provide to the Applicant's representative or representatives any information or document that the Department has obtained from the Central Registration Depository or a source other than the Applicant and upon which the Department intends to base its decision under paragraph (f). If the Department receives such information or document after the membership interview or decides to base its decision on such information after the membership interview, the Department shall promptly serve the information or document and an explanation thereof on the Applicant.]
      [(f) Department Decision
      (1) In evaluating an application submitted under paragraph (a), the Department shall consider whether the Applicant continues to meet the standards set forth in Rule 1014 in light of the change in ownership, control, or operations, and whether current restrictions, if any, or new restrictions are necessary for the Applicant to continue to meet such standards.
      (2) The Department shall issue a written decision within 30 days after the membership interview or the submission of additional information or documents, whichever is later. If the Department does not require the Applicant to participate in a membership interview or submit additional information or documents, the Department shall issue a written decision within 45 days after receipt of an application under paragraph (a). The decision shall state the terms for continuance in NASD membership, whether current restrictions, if any, are maintained or new restrictions are imposed, and shall provide a rationale for the Department's decision, referencing the applicable standard in Rule 1014.
      (3) If the Department fails to issue a decision within 180 days after receipt of an application or such later date as the Department and the Applicant have agreed in writing, the Applicant may file a written request with the NASD Board requesting that the NASD Board direct the Department to issue a decision. Within seven days after receipt of such a request, the NASD Board shall direct the Department to issue a written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the NASD Board may extend the time limit for issuing a decision by not more than 30 days.]
      [(g) Submission of Membership Agreement
      The Department may condition approval of an application for continuance in membership on the Applicant's submission of a new written membership agreement pursuant to Rule 1014(c).]
      [(h) Service and Effectiveness of Decision
      The Department shall serve its decision on the Applicant in accordance with Rule 1012. The decision shall become effective upon service and shall remain in effect during the pendency of any review until a decision constituting final action of the Association is issued under Rule 1015 or 1016, unless otherwise directed by the National Adjudicatory Council, the NASD Board, or the Commission.]
      [(i) Request for Review; Final Action
      An Applicant may file a written request for review of the Department's decision with the National Adjudicatory Council pursuant to Rule 1015. The procedures set forth in Rule 1015 shall apply to such a review, and the National Adjudicatory Council's decision shall be subject to discretionary review by the NASD Board pursuant to Rule 1016. If the Applicant does not file a request for review, the Department's action shall constitute the final action of the Association.]


      1018. Reserved



      1019. Application to Commission for Review

      No change.



      Rule 1140. Electronic Filing Rules

      (a) Filing Requirement
      Except as provided in Rule 1013(a)(2), all [All] forms required to be filed by the By-Laws shall be filed through an electronic process or such other process the Association may prescribe to the Central Registration Depository.

    • 00-72 Broker/Dealer And Agent Renewals For 2001

      View PDF File

      ACTION REQUIRED

      Broker/Dealer And Agent Renewals

      Payment Deadline: December 8, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registered Representatives
      Registration
      Senior Management

      Maintenance Fees
      Registration
      Renewals
      Web CRD



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) 2001 Broker/Dealer and Agent Registration Renewal Program begins November 6, 2000. This annual program simplifies the registration renewal process through the payment of one amount on the member firm's Preliminary Renewal Statement that includes fees for NASD personnel assessments, NASD system processing fees, NASD branch offices, New York Stock Exchange (NYSE), American Stock Exchange (Amex®), Chicago Board Options Exchange (CBOE), Pacific Exchange (PCX), and Philadelphia Stock Exchange (PHLX) maintenance fees. The statement also includes state agent renewal fees and state broker/dealer renewal fees.

      Members should read this Notice, any instructions posted to the NASD Regulation, Inc. (NASD RegulationSM) Web Site (www.nasdr.com), and any mailed information to ensure continued eligibility to do business in the states effective January 1, 2001. Any renewal processing changes subsequent to the publishing of this Notice to Members will be published in a Special Notice to Members.

      Questions/Further Information

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

      Preliminary Renewal Statements

      Between November 6 and November 17, 2000, Preliminary Renewal Statements will be available on the Web CRDSM system for all member firms. The statements will include fees for NASD personnel assessments; NASD system processing fees; NASD branch-office fees; NYSE, Amex, CBOE, PCX, and PHLX maintenance fees; state agent renewal fees; and state broker/dealer renewal fees. The NASD must receive full payment of the November Preliminary Renewal Statement amount no later than December 8, 2000.

      The Preliminary Renewal Statements and rosters are available electronically for viewing and printing through the Web CRD system. There will be three rosters available with the Preliminary Renewal Statement:

      • The Firm Renewal Roster (Agent) will list all agents registered with your firm and the information contained in it is sorted by regulator
      • .

      • The Branches Renewal Roster lists each branch registered with the NASD and lists branch offices for which the firm is being assessed a fee. Firms should use this roster to reconcile their records for renewal purposes
      • .

      • The Non-NASD Registered Individuals Roster will contain all individuals who are not registered with the NASD but are registered with one or more jurisdictions. This roster will only be available if a firm has agents whose status falls within this category. This roster should be used to determine if any NASD registrations need to be requested or jurisdictions terminated
      • .

      Fees

      NASD personnel assessments for 2001 will be based on the number of registered personnel with an approved NASD license (that includes Approved Pending Prints, Inactive-Prints, Temporary Registration, and Inactive- Continuing Education registration statuses) on or before December 31, 2000. The personnel assessment is currently $10 per person. A system processing fee will be assessed for each person who renews registration with an regulator through the NASD Broker/Dealer Renewal Program. The system processing fee is $30. The NASD branch office assessment fee is $75 per branch, based on the number of active branches as of December 31, 2000.

      Agent renewal fees for NYSE, Amex, CBOE, PCX, PHLX, and state affiliations are listed in the Preliminary Renewal Statement on the Web CRD system. A matrix, which includes a list of broker/dealer renewal fees for states that participate in the NASD Broker/Dealer Renewal Program, is posted on the CRD Web Page of the NASDRSM Web Site (www.nasdr.com/3400.htm) under the "License Renewal Information" menu selection. NYSE, Amex, CBOE, PCX, and PHLX maintenance fees—collected by the NASD for firms that are registered with those exchanges, as well as the NASD—are based on the number of NYSE, Amex, CBOE, PCX, and PHLX registerer 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 jurisdictions directly for further information on jurisdiction renewal requirements.

      Payment of the Preliminary Renewal Statement should be either in the form of a 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 CRD number included on the check. Submit the check, along with the first page of the online statement, and mail to:

      NASD Regulation, Inc. - Renewals
      Department Number 0653
      C/O Riggs National Bank
      5700 River Tech Court
      Riverdale, MD 20737-1250

      To ensure prompt processing, the Preliminary Renewal Statement payment must include the first page of your statement with no other forms or fee submissions. Members are advised that failure to return full payment to the NASD by the December 8, 2000, deadline could cause a member to immediately become ineligible to do business in its registered jurisdictions effective January 1, 2001.

      Filing Forms U-5

      Members may avoid paying unnecessary renewal fees by electronically filing Forms U-5 via the Web CRD system for agents terminating in one or more jurisdiction affiliations. The NASD will again accept post-dated agent termination notices on the Forms U-5. Between November 1 and December 22, 2000, firms may process Forms U-5 (both partial and full terminations) with a postdated termination date of December 31, 2000 (this is the only date that can be used for a post-dated Form U-5). If the Form U-5 indicates a termination date of December 31, 2000, 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 8:00 p.m., Eastern Time (ET), on December 22, 2000.

      Members should exercise care when submitting post-dated Forms U-5. The NASD will systematically process these forms as they are received but cannot withdraw a post-dated termination once processed. To withdraw a postdated termination, a member would have to file, electronically, a new Form U-4 after December 31, 2000.

      Filing Forms BDW

      The CRD Phase II Program allows firms requesting BD termination (either full or partial) to electronically file their Forms BDW with the Web CRD system and avoid the assessment of renewal fees with regulators, provided that the regulator is a CRD Phase II participant. Currently, there are three regulators that are not participating in Phase II. They are:

      • American Stock Exchange


      • New York Stock Exchange


      • Pacific Exchange

      Firms requesting termination with any of the above-listed regulators must submit a paper Form BDW directly to the regulator, as well as electronically through the Web CRD system.

      The deadline for electronic filing of Forms BDW for firms that want to terminate an affiliation before yearend 2000 is 8:00 p.m., ET, on December 22, 2000. This same NASD Notice to Members 00-72 October 2000 565 NASD Notice to Members 00-72 date applies to the filing of Forms BDW with the regulators that are not participating in Phase II. Postdated Forms BDW filed on the Web CRD system will be accepted and processed in the same manner as post-dated Forms U-5.

      Removing Open Registrations

      In addition to providing members with the Firm Renewal Roster and the Branches Renewal Roster, the NASD will also be making available to its members the Non-NASD Registered Individuals Roster. This roster identifies agents whose NASD registration is either terminated or purged due to the existence of a deficient condition (i.e., exams or fingerprints) but maintain an approved registration with a state. Firms should use this roster to terminate obsolete state registrations through the submission of Forms U-5 or reinstate the NASD licenses through the filing of an amendment to Form U-4 indicating such in the appropriate section. This roster should aid in the reconciliation of personnel registrations prior to year's end. The Non-NASD Registered Individuals Roster will only be available on the Web CRD system if a firm has agents within this category.

      Final Renewal Statements

      Between January 2 and January 22, 2001, the NASD will make available Final Renewal Statements to its members. These statements will reflect the final status of firm and agent registrations as of December 31, 2000. Any adjustments in fees owed as a result of registration terminations or approvals subsequent to the Preliminary Renewal Statement will be made in this final reconciled statement on the Web CRD system. If a member has more agents and/or branch offices registered at year's end than it did on the Preliminary Renewal Statement, additional fees will be assessed. If a member has fewer agents and/or branch offices registered at year's end than it did in November, a credit/refund will be issued.

      Members should access the Reports Tab for the Firm Renewal Roster, which will list all renewed personnel with the NASD, NYSE, Amex, CBOE, PCX, PHLX, and each jurisdiction. Persons whose registrations are approved in any of these jurisdictions during November and December will be included in this roster, while registrations that are pending approval or are deficient at year's end will not be included in the renewal process. Firms will also see an NASD Renewal Branch Office Roster that lists all branches for which they have been assessed.

      Two reports will also be available with the Final Renewal Statement, a Billing Code Summary Report, and a Billing Code Detail Report. These reports will aid firms in their internal research and allocation of fees.

      Firms then will have until March 19, 2001, to report any discrepancies on the Renewal Rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the Final Renewal Statements and Renewal Rosters will appear in the January 2001 issue of Notices to Members. Firms may also refer to the Renewal edition of the CRD/PD Bulletin, which will be published in November, for details concerning the renewal process.

    • 00-71 NASD Announces Nominees For Regional Industry Member Vacancies On The National Adjudicatory Council

      View PDF File

      INFORMATIONAL

      NAC Nominees

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      National Adjudicatory Council



      Executive Summary

      The purpose of this Special Notice to Members is to announce the nominees for the National Adjudicatory Council (NAC) for the North Region, South Region, and Central Region. The nominees, nominated for two-year terms beginning in January 2001, are listed in Exhibit I. These nominees will be proposed to the National Association of Securities Dealers, Inc. (NASD®) National Nominating Committee in 14 calendar days, unless an election is contested.

      We appreciate the interest shown by many members in expressing their desire to serve on the NAC and thank everyone for their continuing support of the self-regulatory process. The Regional Nominating Committees thoroughly reviewed the background of every candidate before selecting their nominee in an effort to secure appropriate and fair representation of the regions.

      Contested Election Procedures

      If an officer, director, or employee of an NASD member in the North Region, South Region, or Central Region has not been proposed for nomination by the Regional Nominating Committee and wants to seek the nomination, he or she should send a written notice to Joan Conley, Corporate Secretary, at the address below within 14 calendar days after the publishing date of this Special Notice.

      Joan C. Conley, Senior Vice President and Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street NW
      Washington, D.C. 20006
      (202) 728-8381

      The Contested Nomination Procedures can be found in Article VI of the NASDRSM By-Laws. If no additional candidate comes forward within 14 calendar days, the Regional Nominating Committees shall certify their candidates to the National Nominating Committee.

      Questions/Further Information

      Questions concerning this Special Notice to Members may be directed to Joan C. Conley, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8381 or via e-mail at: joan.conley@nasd.com.

      National Adjudicatory Council Membership And Function

      Membership

      The NAC consists of 14 members—seven Industry members and seven Non-Industry members. Two Industry members are nominated by the NASD National Nominating Committee and are appointed by the Board of Directors of NASD Regulation, Inc. (NASD RegulationSM) as at-large members. Five Industry members each represent one of the following geographic regions:

      West Region Hawaii, California, Nevada, Arizona, Colorado, New Mexico, Utah, Wyoming, Alaska, Idaho, Montana, Oregon, and Washington (Districts 1, 2, and 3)

      South Region: Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, Tennessee, Texas, Florida, Georgia, North Carolina, South Carolina, Puerto Rico, Virginia, Canal Zone, and the Virgin Islands (Districts 5, 6, and 7)

      Central Region: Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Illinois, Indiana, Michigan, part of Western New York state, and Wisconsin (Districts 4 and 8)

      North Region: Delaware, Maryland, Pennsylvania, West Virginia, District of Columbia, New Jersey, Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, and New York (except for New York City, Long Island, and Western New York state) (Districts 9 and 11)

      New York: New York City and Long Island (District 10)

      Only three regions (North, South, and Central) have vacancies for this election. NAC members for the other two regions (West and New York) are completing the second year of their two-year term.

      Function

      According to the NASD By-Laws, the NAC is authorized to act for the NASD Board of Governors in matters concerning:

      • appeals or reviews of disciplinary proceedings, statutory disqualification proceedings, or membership proceedings;


      • the review of offers of settlement; letters of acceptance, waiver, and consent; and minor rule violation plan letters;


      • the exercise of exemptive authority; and


      • other proceedings or actions authorized by the Rules of the Association.

      The NAC also considers and makes recommendations to the Board on enforcement policy and rule changes relating to the business and sales practices of NASD members and associated persons.


      EXHIBIT I

      Nominees For NAC Industry Member Vacancies

      South Region (Districts 5, 6, and 7)

      Barbara L. Weaver, Vice President and Southeast Compliance Officer
      Legg Mason Wood Walker, Inc.
      New Orleans, LA

      Central Region (Districts 4 and 8)

      Douglas L. Kelly, Corporate Vice President and Director of Law and Compliance
      A.G. Edwards & Sons, Inc.
      St. Louis, MO

      North Region (Districts 9 and 11)

      Theodore W. Urban, Executive Vice President and General Counsel
      Ferris, Baker Watts, Incorporated
      Washington, D.C.

    • 00-70 Nasdaq Requests Comment On Extending Manning Limit Order Protection Interpretation To Premarket Hours (Correction: On p. 556, it was originally stated incorrectly that Nasdaq's regular trading hours are 9:30 a.m. to 6:30 p.m. ET.)

      View PDF File

      Correction: On page 556, this Notice originally stated incorrectly that Nasdaq's regular trading hours are 9:30 a.m. to 6:30 p.m. ET. In fact, Nasdaq's regular trading hours are 9:30 a.m. to 4:00 p.m. ET and the Nasdaq extended hours session is 4:00 p.m. to 6:30 p.m. ET. The online and print versions of this Notice have been corrected.

      ACTION REQUESTED

      Limit Orders — Manning Interpretation

      Comment Period Expires: October 31, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Technology
      Trading & Market Making

      IM-2110-2
      Limit Orders
      Manning Interpretation



      Executive Summary

      The Nasdaq Stock Market, Inc.(The Nasdaq Stock Market®) is seeking member comment on a proposal to extend the National Association of Securities Dealers, Inc. (NASD®) Manning Limit Order Protection Interpretation (IM-2110-2 or Manning) at the customer's discretion to premarket hours (8:40 a.m.1 to 9:30 a.m. Eastern Time). Manning prohibits an NASD member firm from trading ahead of a customer limit order. Manning currently applies only during regular Nasdaq®; trading hours.

      The proposal is designed to respond to increasing member activity in premarket hours and to provide customers with the opportunity to have their priced orders protected and potentially executed in this premarket period. Limit orders from customers who do not elect to have their orders protected in the 8:40 a.m. to 9:30 a.m. time period will continue to be protected and executed in the normal fashion at the market open when Manning already applies.

      Request For Comment

      Nasdaq encourages all members and interested parties to comment on the proposal. For your convenience, we have provided a checklist (see Attachment A) so that in a minimum amount of time you can provide Nasdaq with your general comments. Comments must be received by October 31,2000.

      Members and interested parties can submit their comments using the following methods:

      1) mailing in the checklist (Attachment A)
      2) mailing in written comments
      3) e-mailing written comments to: pubcom@nasd.com
      4) submitting comments online at the NASD Regulation, Inc.(NASD RegulationSM)Web Site (www.nasdr.com)

      If you decide to send comments using both the checklist and one of the other methods listed above, please let us know. The checklist and/or written comments should be mailed to:

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

      The only comments that will be considered are those submitted in writing, either via e-mail, regular mail, or the NASDR Web Site.

      Before becoming effective, the Nasdaq Board of Directors must adopt, and the Securities and Exchange Commission (SEC) must approve, any rule change. The NASD Board of Governors also may review the rule change.

      Questions/Further Information

      As noted, written comments should be submitted to Joan C. Conley. Questions concerning this Notice to Members—Request for Comment may be directed to Thomas P. Moran, Assistant General Counsel, Office of General Counsel, The Nasdaq Stock Market, at (202) 728-8294.

      Background

      Increasingly, public customers are entering orders with their brokers prior to the market open. In an attempt to service those orders, member firms are increasing their trading in the premarket to manage order imbalances. However, customer limit orders do not, other than the general duty of best execution, currently have the protection mandated by Manning when member firms trade during this period.

      To respond to this change in market activity, the NASD Board of Governors recently approved a proposal to extend, at the customer's discretion, Manning to 8:40 a.m. to 9:30 a.m. ET. Manning prohibits an NASD member firm that is holding a customer limit order from trading for its own account at a price that would satisfy the customer's limit order without executing that customer limit order. Manning currently applies only during regular Nasdaq trading hours (9:30 a.m. to 4:00 p.m. ET) and Nasdaq's extended hours session (4:00 p.m. to 6:30 p.m. ET) (see Notice to Members 95-67 and SEC Release No. 34-42003).

      Under the Board's proposal,customers who do not choose to have their orders protected in the premarket will have their orders executed in the normal manner at market open. Given the risk that market makers and customers assume when trading in the premarket, only those customers who affirmatively agree to have their limit orders protected will be eligible for Manning protection.Such agreements between customers and their firms will highlight the potential that premarket executions may occur at prices that could be inferior to the price a customer might have obtained by waiting to trade until the market has formally opened.

      Questions For Comment

      Given the potential for significant member system reprogramming associated with the expansion of Manning to the premarket, Nasdaq is seeking member comment on this proposal prior to submitting this rule change to the SEC for approval. Specifically, Nasdaq seeks comment on the following:

      • What are the specific technology challenges and issues facing your firm in connection with the expansion of Manning to the 8:40 a.m. to 9:30 a.m. time period?


      • What changes to your firm's current process for organizing and executing customer limit orders would have to be made to comply with a rule mandating Manning limit order protection to the premarket time period?


      • What is the best estimate of time it would take for your firm to become prepared to comply both technologically and operationally with an expansion of Manning to the premarket time period?


      Endnote

      1The 8:40 a.m. Manning start time was selected in order to avoid conflicting with the traditional 8:30 a.m. public release of economic and material company information and to allow all market participants sufficient time to adjust and enter orders in response to that information.


      ATTACHMENT A

      Request For Comment Checklist — Questions For Members And Other Interested Parties

      The following list of questions provides a quick and easy means to comment on some of the provisions contained in the proposal. This list of questions does not cover all of the changes contained in the proposal; therefore, we encourage members and other interested parties to review the entire proposal and to comment separately on all aspects of the proposal.

      Instructions

      Comments must be received by October 31, 2000. Members and interested parties can submit their comments using the following methods:

      • mailing in this checklist


      • e-mailing written comments to pubcom@nasd.com


      • mailing in written comments


      • submitting comments online at the NASDR Web Site (www.nasdr.com)

      The checklist and/or written comments and should be mailed to:

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

      Proposed Extension Of Manning Limit Order Protection Interpretation

      1. What are the specific technology challenges and issues facing your firm in connection with the expansion of Manning to the 8:40 a.m. to 9:30 a.m. time period?
      2. What changes to your firm's current process for organizing and executing customer limit orders would have to be made to comply with a rule mandating Manning limit order protection to the premarket time period?
      3. What is the best estimate of time it would take for your firm to become prepared to comply both technologically and operationally with an expansion of Manning to the premarket time period?

      Contact Information

      Name: Firm:
      Address: City/State/Zip:
      Phone: E-Mail:

      Are you:

        An NASD Member
        An Investor
        A Registered Representative
        Other:

    • 00-69 Columbus Day: Trade Date — Settlement Date Schedule

      View PDF File

      INFORMATIONAL

      Trade Date — Settlement Date

      SUGGESTED ROUTING

      KEY TOPIC

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making

      Holiday Trade Date — Settlement Date Schedule



      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 9, 2000. 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. 3 Oct. 6 Oct. 10
      4 10 11
      5 11 12
      6 12 13
      9 12 16
      10 13 17

      Note: October 9, 2000, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 9, will be combined with transactions made on the previous business day, October 6, for settlement on October 12. 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 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."

    • 00-68 Fixed Income Pricing System Additions, Changes, And Deletions As Of August 21, 2000

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      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Senior Management
      Trading & Market Making

      FIPS



      As of August 21, 2000, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      BIOB.GA Bio-Rad Laboratories Inc. 11.625 02/15/07
      CPN.GH Calpine Corp. 8.625 08/15/10
      CPN.GI Calpine Corp. 8.250 08/15/05
      EQXC.GA Equinix Inc. 13.000 12/01/07
      LAB.GB Labranche & Co. 12.000 03/02/07
      LVLT.GE Level 3 Communication Inc. 11.250 03/15/10
      MTDC.GA Mattress Discounters Corp. 12.625 07/15/07
      OWC.GA Owens Corning 7.500 05/01/05
      SKS.GE Saks Inc. 7.250 12/01/04
      SVGC.GB Sovereign Specialty Chem 11.875 03/15/10
      VRIO.GD Verio Inc. 10.625 11/15/09

      As of August 21, 2000, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      AEC.GB Associated Estates Realty Corp. 7.100 11/15/02
      BLFN.GA Beal Financial Corp. 12.750 08/15/00
      CALA.GA Contl Airlines Inc. 9.500 12/15/01
      CCIL.GA Cellular Communication Intl I 0.000 08/15/00
      CTYA.GC Century Communications Corp. 9.500 08/15/00
      JDN.GB JDN Realty Corp. 6.950 08/01/00
      PNDC.GA Penda Corp. 10.750 03/01/04
      WCII.GB Winstar Communications Inc. 14.500 10/15/05

      As of August 21, 2000, changes were made to the symbols of the following FIPS bonds.

      New Symbol Old Symbol Name Coupon Maturity
      ATU.GA APW.GA Applied Power Inc. 8.750 04/01/09
      CONV.GA CVGC.GA Convergent Communs Inc. 12.000 04/01/08
      DBGC.GB DBG.GB Dyersburg Corp. 9.750 09/01/07
      FRAE.GA FRA.GA Flooring America Inc. 9.250 10/15/07
      PBSC.GA PCKB.GA Packard Bioscience Inc. 9.375 03/01/07
      PLHC.GB PLS.GB Paracelsus Healcare Corp. 10.000 08/15/06
      TOKM.GB TOK.GB Tokheim Corp. 11.500 08/01/06
      TOKM.GC TOK.GC Tokheim Corp. 11.275 08/01/08
      UCO.GA UVCG.GA Universal Compression Hldgs Inc. 11.375 02/15/09
      ULTE.GA ULME.GA Ultimate Electronics Inc. 10.250 01/31/05

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, Market Regulation, NASD RegulationSM, at (301) 590-6447.

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

    • 00-67 Decimalization Implementation Plan

      View PDF File

      INFORMATIONAL

      Decimalization

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Options
      Registered Representatives
      Senior Management
      Technology
      Trading & Market Making

      Decimalization



      Executive Summary

      In response to the request1 from the Securities and Exchange Commission (SEC) for a plan on the implementation of decimals trading, the National Association of Securities Dealers, Inc. (NASD®) and the exchanges submitted a plan on July 24, 2000. A summary of the critical dates is provided in this Notice to Members.

      Questions/Further Information

      Questions regarding this Notice to Members may be directed to the ASD Decimalization Program Management Office (DPMO) toll free at: (888) 227-1330, or via e-mail at decimals@nasd.com.

      For the most recent decimalization news and developments, visit the NASD Web Site (www.nasd.com) and click on the decimalization link. Additional decimalization information is available on the Securities Industry Association's (SIA) Web Site (www.sia.com).

      First Phase Of Decimalization

      Please note, on August 28, 2000, the securities industry successfully implemented the first phase in the move to decimalization by trading 13 issues and their related options in decimals. Initial reports have stated that the trading in these issues ran smoothly and volume and spreads on the issues were all within a normal range.

      NASD & Exchanges' Decimalization Implementation Plan

      On July 24, 2000, the NASD and the exchanges submitted a comprehensive phase-in plan for decimal pricing in equity securities and options. Details of the plan are shown in the table below:

      Checkpoint/Phase Action Date
      Checkpoint I Pre-Implementation Evaluation August 15, 2000
      Phase I Limited Exchange-Listed Issues and Options August 28, 2000
      Checkpoint II Determine Readiness for Additional Exchange-Listed Issues and Options September 19, 2000
      Phase IIA Additional Exchange-Listed Issues and Options September 25, 2000
      Checkpoint III Determine Readiness for Full Implementation of Exchange-Listed Issues and/or All Options November 1, 2000
      Phase IIB Full Conversion Exchange-Listed Issues and/or All Options November 2000 - April 2001
      Checkpoint IV Limited Nasdaq Issues March 5, 2001
      Phase III Limited Nasdaq Issues On or before March 12, 2001
      Checkpoint V Determine Readiness for All Markets, Full Implementation April 2, 2001
      Phase IV All Markets, Full Implementation On or before April 9, 2001

      To view the complete plan, visit the SEC Web Site (www.sec.gov/rules/othern/decimalp.htm). The SEC has not given final approval to the plan.


      Endnote

      1Release No. 34-42914 (June 8, 2000), 65 Fed. Reg. 38010 (June 19, 2000).

    • 00-66 NASD Regulation Withdraws Proposed Rule Regarding Confidential Customer Financial Information; SEC Issues Regulation S-P, "Privacy of Consumer Financial Information"

      View PDF File

      INFORMATIONAL

      Confidential Customer Information

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Consumer Information
      SEC Regulation S-P



      Executive Summary

      In light of recently enacted federal law, NASD Regulation, Inc. (NASD RegulationSM) has withdrawn its rule proposal announced in Notice to Members 97-12 (March 1997) regarding the use and release of confidential customer financial information. The new law mandates rulemaking governing the privacy of consumer financial information by federal agencies, including the Securities and Exchange Commission (SEC), thereby eliminating the need for NASD Regulation to pursue its own rules.

      On June 22, 2000, the SEC issued Regulation S-P, "Privacy of Consumer Financial Information." Regulation S-P goes into effect on a voluntary basis starting November 13, 2000; it becomes mandatory on July 1, 2001. A copy of Regulation S-P is included with this Notice.

      Questions/Further Information

      Legal questions or comments concerning this Notice may be directed to Gregory Dean, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8159. Other questions or comments concerning this Notice may be directed to Paul Voketaitis, Member Regulation, NASD Regulation, at (202) 728-8843.

      Background

      In Notice to Members 97-12, NASD Regulation proposed requirements regarding the use of confidential financial information obtained from a customer by a member firm, either directly or through a business affiliate, and the release of such information to any third party, whether affiliated or nonaffiliated. In general, the proposal prohibited the release by a member (or its affiliate) of confidential customer financial information unless prior written consent was obtained from the customer or proper notification was given to the customer about the intended release of the information.

      NASD Regulation received approximately 50 comments in response to the proposal in Notice to Members 97-12. Many of the comments raised significant concerns about the proposed rule. Because of the substantial opposition to the proposed rule and due to potential congressional action in this area, NASD Regulation did not take any action on the proposal.

      Gramm-Leach-Bliley Act

      On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act (GLB).1 Title V of the GLB sets forth privacy requirements for use of nonpublic personal financial information by banks, securities industry members, insurance companies, and other financial institutions. The GLB required the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision (collectively known as the "federal banking regulators"), the SEC, the National Credit Union Administration (NCUA), and the Federal Trade Commission (FTC) to coordinate the issuance of regulations governing the collection, use, and safeguarding of nonpublic personal financial information. In addition, the law recommended that the federal regulators work with state insurance commissioners on the regulations. The federal banking regulators, NCUA, and FTC issued proposed regulations in February 2000 and issued final regulations in May 2000. The SEC's final regulation, Regulation S-P, "Privacy of Consumer Financial Information," was issued in June 2000.

      Due to the privacy provisions of GLB and the SEC's issuance of Regulation S-P, NASD Regulation believes that its proposed rule regarding confidential customer financial information is no longer necessary. On July 26, 2000, the NASD Regulation Board approved a measure to withdraw Notice to Members 97-12.

      SEC Regulation S-P

      On March 2, 2000, the SEC issued a proposed regulation, Regulation S-P,2 and on June 29, the SEC's final regulation was published in the Federal Register.3 Regulation S-P will go into effect on November 13, 2000, on a voluntary basis, and will become mandatory on July 1, 2001.

      Regulation S-P is built around an "opt-out" policy. This means that as long as certain notices are given to consumers and customers, then financial institutions4 (broker/dealers) are permitted to share their clients' financial information with the broker/dealers' affiliated and non-affiliated third parties unless the consumers and customers opt out of the information sharing arrangement. The SEC defines a "consumer" as an individual who obtains or has obtained a financial product or service from a financial institution. Typically, a consumer has no further contact with the financial institution other than the one-time delivery of products or services. In addition, the SEC defines a "customer" as a consumer who has developed a continuing relationship with a financial institution to provide products or services.5

      According to the SEC, in the first year a broker/dealer becomes subject to the rule, a broker/dealer must comply with the following requirements:

      (1) prepare notices describing the firm's privacy policies;
      (2) provide an initial privacy notice and opt-out notice to each consumer;
      (3) provide an initial privacy notice to each new customer (who did not receive a notice when he or she was a consumer);
      (4) provide an annual privacy notice to each existing customer; and
      (5) adopt policies and procedures that address the protection of customer information and records.

      The SEC also recommends that broker/dealers review their contracts with third parties for administrative services and joint marketing agreements to ensure that the contracts reflect the firms' privacy policies. After the first year, broker/dealers would be required to revise notices only to reflect changes in their privacy policies. Similarly, these firms would have to revise their policies and procedures on safeguarding customer information as appropriate to ensure the protection of the information.

      Privacy Notices

      For the privacy notices, the rule requires broker/dealers to disclose details on the broker/dealers' information sharing arrangements. Specifically, the rule requires broker/dealers to disclose:

      • the categories of nonpublic personal information that a broker/dealer may collect;


      • the categories of nonpublic personal information that a broker/dealer may disclose;


      • the categories of affiliates and nonaffiliated third parties to whom a broker/dealer discloses nonpublic personal information other than service providers and third parties that aid in fulfilling the service requested by a consumer;


      • the broker/dealer's policies with respect to sharing information about former customers;


      • the categories of information that are disclosed under agreements with third party service providers and joint marketers and the categories of third parties providing the services;


      • a consumer's right to opt out of the disclosure of nonpublic personal information to nonaffiliated third parties;


      • any disclosures regarding affiliate information sharing opt outs a financial institution is providing under the Fair Credit Reporting Act; and


      • the institution's policies and practices with respect to protecting the confidentiality, security, and integrity of nonpublic personal information.

      Essentially, consumers and customers must be given notice when information is going to be shared and then be given the opportunity to opt out of that sharing arrangement.

      In certain circumstances, Regulation S-P permits broker/dealers to use "short-form" initial notices for consumers with whom the broker/dealer does not have a customer relationship. The short-form notice must be accompanied by an opt-out notice and information on where the consumer may obtain additional information on the firm's privacy policies.

      Under Regulation S-P, any information given by consumers or customers to broker/dealers to obtain a product or service will generally be considered to be nonpublic financial information. In addition, any list, description, or other grouping of consumers and customers that is derived from this information also may be considered nonpublic information. A broker/dealer may consider the information received to be publicly available (and therefore not subject to the restrictions of Regulation SP) if the broker/dealer reasonably believes that the information is lawfully available from three sources:

      (1) federal, state, or local government records;
      (2) widely distributed media; or
      (3) disclosures to the general public that are required to be made by federal, state, or local law.

      Information Sharing Arrangements

      Another important aspect of Regulation S-P concerns the information sharing arrangements broker/dealers may have with their affiliates and with nonaffiliated third parties.

      Affliates

      Generally, broker/dealers may share consumers' and customers' information with the broker/dealers' affiliates as long as that fact is disclosed in the privacy notices. Consumers and customers may not opt out of that information sharing arrangement.

      Nonaffliated Third Parties

      If, however, a broker/dealer has an information sharing agreement with nonaffiliated third parties, then that fact must be disclosed, and consumers and customers may generally opt out of having their information shared under that agreement.

      The GLB does provide a series of exceptions that permit broker/dealers to share information with nonaffliated third parties and in which consumers and customers may not opt out of those sharing arrangements. These exceptions include, but are not limited to, arrangements with joint marketers and service providers. While consumers and customers may not opt out of these information sharing arrangements, these arrangements must be disclosed in the privacy statements.

      Introducing And Clearing Brokers

      With regard to the information sharing arrangements between introducing brokers and clearing brokers, the regulation considers introducing brokers and clearing brokers as each having an individual relationship with consumers and customers. In other words, Regulation S-P recognizes that either the introducing broker or the clearing broker could share nonpublic consumer or customer financial information with third parties outside of the introducing/clearing relationship. The regulation will, however, permit the introducing brokers and clearing brokers to send one joint privacy notice to consumers and customers as long as the introducing and clearing brokers' privacy policies and notices are accurate for each institution.

      Delivery Of Initial Privacy Notices

      The delivery of the initial privacy notices to consumers and customers is another important aspect to Regulation S-P. For a consumer, the privacy notice must be delivered by broker/dealers before any nonpublic information is to be disclosed to third parties. For a customer, the privacy notice must be delivered by broker/dealers prior to the establishment of the customer relationship. Recognizing that many customer relationships with broker/dealers may be established through telephone calls, Regulation S-P will permit the initial privacy notices to be given as part of a Customer Agreement Form even if the form is sent out after the request for service by a consumer or customer. This may only be permitted when the sending of the notice prior to the establishment of a customer relationship "would substantially delay the consumer's transaction" and the customer agrees to receive the notice at a later time.

      As Regulation S-P highlights the use of electronic communications and Web sites, the privacy policies, initial and annual notices, and optout notices may, under certain conditions, be delivered through e-mail and the Internet.

      Small Firm Compliance

      With regard to small firms, the SEC believes that compliance will be relatively simple. As stated in the SEC's release, since most small firms do not share nonpublic consumer financial information other than with service providers, the SEC believes that a simple set of model notices will assist small firms in their compliance. The SEC includes examples and model disclosure forms as part of the Federal Register release; however, unlike the federal banking regulators', NCUA's, and FTC's rules, the SEC will not permit the use of the examples and model forms as a safe harbor by firms.

      Regulation S-P And Other Federal Agencies' Regulations

      While Regulation S-P is substantially similar to the final regulations issued by the federal banking regulators, NCUA, and FTC, there are differences (e.g., the SEC's lack of a safe harbor for the use of the SEC's model forms). Firms that are affiliated with banks and/or other financial entities should pay particular attention to the differences between these regulations and adopt procedures concerning the release of consumer and customer financial information that ensure compliance with all applicable requirements.

      GLB And State Law

      GLB was not intended to alter or supersede any state law, and expressly permits states to adopt any statute, regulation, order, or interpretation that affords persons greater protection than is provided under GLB's privacy provisions.


      Endnotes

      1 Public Law 106-102.

      2 Privacy of Consumer Financial Information (Regulation S-P), Exchange Act Release No. 42484 (March 2, 2000), 65 Fed. Reg. 12354 (March 8, 2000).

      3 Exchange Act Release No. 42974 (June 22, 2000), 65 Fed. Reg. 40333 (June 29, 2000).

      4 For the term "financial institution," the SEC uses the definition contained in the GLB law which is any institution that engages in financial activities as described in section 4(K) of the Bank Holding Company Act of 1956. For Regulation S-P, the term includes broker/dealers, investment advisers, investment companies, and other entities engaging in activities that are financial in nature or incidental to such financial activities.

      5 Generally, references in Regulation S-P to "consumers" also apply to "customers."


      SECURITIES AND EXCHANGE COMMISSION

      00-66 Attachment

      17 CFR Part 248

      [Release Nos. 34-42974, IC-24543, IA-1883; File No. S7-6-00]

      RIN 3235-AH90

      Privacy of Consumer Financial Information (Regulation S-P)

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule.

      SUMMARY: The Securities and Exchange Commission is adopting Regulation S-P, privacy rules promulgated under section 504 of the Gramm-Leach-Bliley Act. Section 504 requires the Commission and other federal agencies to adopt rules implementing notice requirements and restrictions on a financial institution's ability to disclose nonpublic personal information about consumers. Under the Gramm-Leach-Bliley Act, a financial institution must provide its customers with a notice of its privacy policies and practices, and must not disclose nonpublic personal information about a consumer to nonaffiliated third parties unless the institution provides certain information to the consumer and the consumer has not elected to opt out of the disclosure. The Act also requires the Commission to establish for financial institutions appropriate standards to protect customer information. The final rules implement these requirements of the Gramm-Leach-Bliley Act with respect to investment advisers registered with the Commission, brokers, dealers, and investment companies, which are the financial institutions subject to the Commission's jurisdiction under that Act.

      DATES: Effective Date: This regulation is effective November 13, 2000.

      Compliance Dates: Compliance will be mandatory as of July 1, 2001. Joint marketing and service agreements in effect as of July 1, 2000 must be brought into compliance with § section 248.13 of Regulation S-P by July 1, 2002.

      FOR FURTHER INFORMATION CONTACT: For information regarding the rules as they relate to brokers or dealers, contact George Lavdas or Jerome Roche, Office of Chief Counsel, Division of Market Regulation, (202) 942-0073, or regarding the rules as they relate to investment companies or registered investment advisers, Penelope W. Saltzman or Hugh P. Lutz, Office of Regulatory Policy, (202) 942-0690, Division of Investment Management, Securities and Exchange Commission, 450 5th Street, NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the "Commission") today is adopting new Regulation S-P, 17 CFR 248.1-248.30, under Title V of the Gramm-Leach-Bliley Act [Pub. L. No. 106-102, 113 Stat. 1338 (1999), to be codified at 15 U.S.C. 6801-6831], the Securities Exchange Act of 1934 [15 U.S.C. 78] ("Exchange Act"), the Investment Company Act of 1940 [15 U.S.C. 80a] ("Investment Company Act"), and the Investment Advisers Act of 1940 [15 U.S.C. 80b] ("Investment Advisers Act").

      I. Background

      Subtitle A of Title V of the Gramm-Leach-Bliley Act ("G-L-B Act" or the "Act"), captioned Disclosure of Nonpublic Personal Information ("Title V"), limits the instances in which a financial institution may disclose nonpublic personal information about a consumer to nonaffiliated third parties, and requires a financial institution to disclose to all of its customers the institution's privacy policies and practices with respect to information sharing with both affiliates and nonaffiliated third parties. Title V also requires the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision (collectively, the "Banking Agencies"), Secretary of the Treasury, National Credit Union Administration, Federal Trade Commission (collectively with the Banking Agencies, the "Agencies"), and the Commission, after consulting with representatives of State insurance authorities designated by the National Association of Insurance Commissioners, to prescribe regulations necessary to carry out the purposes of Title V.1

      Commission representatives participated with representatives from the Agencies in drafting rules to implement Title V. As required by the G-L-B Act, the rules we are adopting today are, to the extent possible, consistent with and comparable to the rules adopted by the Agencies.2 Regulation S-P contains rules of general applicability that are substantially similar to the rules adopted by the Agencies. The rules also contain examples that illustrate the application of the general rules. These examples differ from those used by the Agencies in order to provide more meaningful guidance to the financial institutions subject to the Commission's jurisdiction.

      Title V also requires the Commission (and each of the Agencies) to establish appropriate standards for financial institutions subject to their jurisdiction to safeguard customer information and records. Regulation S-P includes requirements for investment advisers registered with the Commission ("registered advisers"), brokers, dealers (collectively, "broker-dealers"), and investment companies ("funds") to adopt appropriate policies and procedures that address safeguards to protect this information.3

      1 G-L-B Act § 504(a)(1).

      2 See G-L-B Act § 504(a). The Banking Agencies published a joint release adopting rules to implement Title V earlier this month. Privacy of Consumer Financial Information, 65 FR 35162 (June 1, 2000) ("Banking Agencies' Release"). The National Credit Union Administration approved its final rules on May 8, 2000 [Privacy of Consumer Financial Information; Requirements for Insurance, 65 FR 31722 (May 18, 2000)]. The Federal Trade Commission adopted its privacy rules on May 12, 2000 [Privacy of Consumer Financial Information, 65 FR 33646 (May 24, 2000)].

      3 Under the G-L-B Act, investment advisers registered with the States are regulated by the Federal Trade Commission. See G-L-B Act § 505(a)(7).

      II. Overview of Comments Received

      On March 2, 2000, the Commission issued a notice of proposed rulemaking (the "proposal" or "proposed rules").4 The Commission received a total of 115 comments in response to the proposal.5 Of these, approximately 14 were from individuals, virtually all of whom encouraged the Commission to provide greater protection of individuals' financial privacy. Many individuals noted their concerns generally about the loss of privacy and the receipt of unwanted solicitations by marketers.6 Other commenters advocated that we extend privacy protections in a number of ways. These suggestions included requiring (i) financial institutions to provide consumers with access to information about them maintained by the institutions and the opportunity to correct errors, (ii) more detailed disclosures of the information collected and disclosed, and (iii) disclosures of a financial institution's privacy policies and practices earlier in the process of establishing a customer relationship.

      The National Association of Insurance Commissioners ("NAIC") submitted a comment on behalf of the State insurance authorities that generally supported the Commission's proposed rules. The NAIC also proposed various measures to provide certain protections for consumers, such as specifying means to exercise the right to opt out of the disclosure of information. The NAIC further advised the Commission to clarify the boundary of federal and State jurisdiction over privacy regulations and ensure that the financial privacy rules under the Act are compatible with the privacy rules relating to medical information that are to be issued by the Secretary of the Department of Health and Human Services ("HHS") under the Health Insurance Portability and Accountability Act ("HIPAA") of 1996.7

      We received approximately 20 letters from broker-dealers, funds, registered advisers, insured depository institutions, bank holding companies, and their representatives.8 These commenters suggested many changes to the proposed rules. The most common suggestions included: (i) Extending the effective date of the rules; (ii) amending the definition of "nonpublic personal information" to focus more clearly on what they believe is "financial" information; (iii) streamlining information required in the initial and annual disclosures; (iv) clarifying how one or more of the statutory exceptions operate; (v) revising or clarifying the definitions of "consumer" and "customer"; and (vi) adding flexibility to provide initial notices at some point other than "prior to" the time a customer relationship is established. We have modified the proposed rules in light of the comments received.9 These comments, and our responses to them, are discussed in the following section-by-section analysis.

      4 Privacy of Consumer Financial Information (Regulation S-P), Exchange Act Release No. 42484 (Mar. 2, 2000) [65 FR 12354 (Mar. 8, 2000)] ("Proposing Release").

      5 The Banking Agencies, FTC, and NCUA received a total of 8,126, 640, and 99 comments, respectively, in response to their proposed rules.

      6 Commenters also requested that the Commission support legislation that the commenters believe would provide additional protections. In addition, the Commission received a comment letter from the Congressional Privacy Caucus, which encouraged the Commission to exercise its rulemaking authority to provide more protections than were proposed. The Chairman of the Commission also received two letters signed by several members of Congress, and a third letter from other commenters, which urged the Commission not to delay the compliance date of the final rules until July 1, 2001.

      7 See Standards for Individually Identifiable Health Information, 64 FR 59918 (Nov. 3, 1999) (as amended by 65 FR 427 (Jan. 5, 2000)).

      8 Representatives of a wide variety of other interests, including the health care industry, retail merchants, insurance companies, credit bureaus, and higher education, also submitted comment letters.

      9 We also have included a guide to assist brokerdealers, funds, and registered advisers in their efforts to comply with the privacy rules. See infra section VI.

      III. Section-by-Section Analysis

      The final Regulation presents the various sections in five subparts that consist of related sections. Related concepts are grouped together to make the rules easier to follow. A comparison table is included in section V to assist readers in locating provisions that appeared in the proposal. We also have added an Appendix to the final rules, setting out sample disclosures for broker-dealers, funds, and registered advisers to consider.

      Section 248.1 Purpose and Scope

      We are revising section 248.1, which identifies the purposes and scope of the rules. As stated in the proposal, the rule is intended to require a broker-dealer, fund, or registered adviser to provide notice to customers about its privacy policies and practices; to describe the conditions under which the institution may disclose nonpublic personal information about consumers to nonaffiliated third parties; and to provide a method for consumers to prevent the financial institution from disclosing that information to certain nonaffiliated third parties by "opting out" of that disclosure, subject to various exceptions as stated in the rules. Most of the comments received on this section focused on the scope of the rules. Several commenters suggested that the Commission clarify how the rules apply to insurance companies. Section 505 of the G-L-B Act sets out the Commission's enforcement authority with respect to broker-dealers, funds, and registered advisers. The section explicitly excludes "persons providing insurance" from the Commission's (and the Agencies') enforcement authority (and, by operation of section 504(a)(1) of the G-L-B Act, from the Commission's and the Agencies' rulemaking authority). We believe that the G-L-B Act relies on the States to enforce Title V with respect to any insurance activities conducted by broker-dealers, funds, or registered advisers. Consistent with this reading of the statute, the final rule excludes the provision of insurance by a broker-dealer, fund, or registered adviser from the scope of Regulation S-P. If the insurance product also is a security, however, any broker-dealer or fund that provides that security, or registered adviser that provides advice with respect to that security is subject to Regulation S-P.10 In addition, insurance company separate accounts that are "investment companies" under the Investment Company Act are subject to this part.11

      Several commenters stated that Regulation S-P should apply to foreign financial institutions that solicit business from individuals in the United States. As adopted, the requirements of Regulation S-P apply to any brokerdealer, fund, or investment adviser that is registered with the Commission, regardless of whether its consumers are U.S. persons or non-U.S. persons, and regardless of whether it conducts its activities through U.S. or non-U.S. offices or branches.12 We also have decided not to apply Regulation S-P to any foreign (or "non-resident") brokerdealer or fund that is not registered with the Commission. Despite the broad reach of the U.S. federal securities laws,13 we believe it would be impractical to apply Regulation S-P to those foreign unregistered entities. If a foreign broker-dealer or fund conducts activities through U.S. interstate commerce in a manner that subjects it to the registration requirements of the U.S. securities laws, it is subject to those requirements and any other applicable protections to investors, such as antifraud protections. We do not believe that subjecting these unregistered entities to the obligation to provide the privacy and opt out notices under Regulation S-P would add to the protections provided to investors under the G-L-B Act. As noted above, however, if a foreign broker-dealer, fund, or investment adviser decides to register with the Commission, it would be required to comply fully with Regulation S-P.14

      Several commenters suggested that the rule should not apply to entities that must comply with regulations proposed by HHS to implement the HIPAA.15 We do not believe that broker-dealers, funds, or registered advisers would be subject to any rules HHS has proposed under HIPAA regarding protected health information. We recognize, however, that there could be areas of overlap between the rules adopted by HHS under HIPAA and the privacy rules. After HHS publishes its final rules, we will consult with HHS to avoid the imposition of duplicative or inconsistent requirements.

      Section 248.2 Rule of Construction

      We are revising section 248.2, which sets out a rule of construction intended to clarify the effect of the examples used in the rules, to include the sample clauses in the Appendix to the rules. As noted in the Proposing Release, the examples (and the sample clauses) are not intended to be exhaustive; rather, they are intended to provide guidance about how the rules would apply in specific situations.16

      Commenters generally agreed that examples are helpful in clarifying how the rules will work in specific circumstances. Some commenters also suggested that we include more examples, and provide examples of model disclosures. A few commenters suggested that the regulation state that a financial institution is not obligated to comply with an example but has the latitude to comply with the general rules in other ways. Other commenters also requested that we treat the examples as safe harbors or establish a presumption that compliance with the examples constitutes compliance with the rules. Others stated that the examples ought to be identical in each privacy regulation adopted by the Commission and the Agencies.

      We agree that more examples would be helpful, and have included additional examples in appropriate places throughout the rules. We also have provided sample clauses in the Appendix to assist broker-dealers, funds, and registered advisers in drafting privacy notices. The sample clauses are provided to illustrate the level of detail we believe is appropriate. We caution financial institutions against relying on the sample disclosures without determining the relevance or appropriateness of the disclosure for their operations. We have used statutory terms, such as "nonpublic personal information" and "nonaffiliated third parties," in the sample clauses to convey generally the subject of the clauses. However, a financial institution that uses these terms must provide sufficient information to enable consumers to understand what these terms mean in the context of the institution's notices.17

      We have not added a statement in the final rule regarding a financial institution's ability to comply with the rules in ways other than as suggested in the examples. The rule states that the facts and circumstances of each individual situation will determine whether compliance with an example constitutes compliance with the applicable rule.18 The examples and the sample clauses do not provide a safe harbor.19 Nevertheless, we believe that, when read together, the rule of construction, examples, and sample clauses provide broker-dealers, funds, and registered advisers sufficient guidance on ways to comply with the rules as well as sufficient flexibility to comply with the regulation in ways appropriate for the institution.

      Section 248.3 Definitions

      (a) Affiliate. We are adopting the definition of "affiliate" as proposed. The rule incorporates the definition of "affiliate" in the G-L-B Act.20 An affiliation exists when one company "controls" (as defined in section 248.3(g) below), is controlled by, or is under common control with another company. The definition includes both financial institutions and entities that are not financial institutions. The proposed rule also provided that a broker-dealer, fund, or registered adviser would be considered an affiliate of another company if the other company is regulated under Title V by one of the Agencies, and under that Agency's rules, the other entity would be affiliated with the broker-dealer, fund, or registered adviser. Few commenters addressed this definition, and none disagreed with it.

      (b) Broker. We are adopting the definition of "broker" as proposed. The definition incorporates the meaning of "broker" in the Exchange Act. One commenter suggested that the definition exclude foreign banks and savings institutions because they will be subject to the privacy rules of the Banking Agencies.21 We disagree, and the rule does not include this exception.22

      Brokers registered with the Commission include foreign entities that may not be subject to the Banking Agencies' privacy rules, which do not extend to foreign entities that do not have offices within the United States.23

      (c) Clear and conspicuous. We are revising the definition of "clear and conspicuous" in response to issues raised by commenters. The proposed rules required various notices to be "clear and conspicuous," and defined the term to mean that the notice must be reasonably understandable and designed to call attention to the nature and significance of the information contained in the notice. The proposal did not mandate the use of any particular technique for making the notices clear and conspicuous, but provided examples of how a notice may be made clear and conspicuous. As noted in the Proposing Release, each financial institution would retain the flexibility to decide for itself how best to comply with this requirement.24

      We received a large number of comments on the proposed definition. Several commenters favored adopting the definition as proposed, with some advocating that the final rule include a requirement that disclosures be on a separate piece of paper in order to ensure that they will be conspicuous. Others stated that the definition was unnecessary, given the experience financial institutions have in complying with requirements that disclosures mandated by other laws be clear and conspicuous. Several commenters stated that the definition is inconsistent with requirements in other consumer protection regulations such as Regulation Z 25 and the Truth in Savings regulation,26 which require only that a disclosure be reasonably understandable.27 A few commenters questioned how the requirement would work in a document that contains several disclosures that are required to be clear and conspicuous, while others raised questions about how a disclosure may be clear and conspicuous on an Internet web site.

      New standard for "clear and conspicuous." The proposed definition developed the concept of "clear and conspicuous." The phrase "designed to call attention to the nature and significance of the information contained" was intended to provide meaning to the term "conspicuous." We believe that this standard will result in notices to consumers that communicate effectively the information consumers need in order to make an informed choice about the privacy of their information, including whether to open a brokerage account, purchase fund shares, or enter into an advisory contract with an adviser.

      Examples of "clear and conspicuous." We recognize that many of the examples are imprecise. We believe, however, that more prescriptive examples, while perhaps easier to conform to, likely would result in requirements that would be inappropriate in a given circumstance. To avoid this result, the examples provide generally applicable guidance about ways in which a brokerdealer, fund, or registered adviser may make a disclosure clear and conspicuous. We note that the examples do not mandate how to make a disclosure clear and conspicuous. A financial institution must decide for itself how best to comply with the general rule, and may use techniques not listed in the examples. To address concerns about the imprecision of the examples, we have incorporated several of the commenters' suggestions in the final rule for ways to make the guidance more helpful.28

      Combination of several notices. Commenters stated that a document may combine different types of disclosures that are subject to specific disclosure requirements under different regulations. For example, a fund that includes a privacy notice in its prospectus would have to make the privacy notice clear and conspicuous, and would have to prepare the prospectus according to certain standards under the Securities Act of 1933.29 The final rule provides an example of how a financial institution may make privacy disclosures conspicuous, including privacy disclosures that are combined in a document with other information.30 In order to avoid the potential conflicts between two different rules requiring different sets of disclosures that are subject to different standards, the final rule does not mandate precise specifications for presenting various disclosures.

      Disclosures on Internet web pages. Several commenters requested guidance on how they may clearly and conspicuously disclose privacy-related information on their Internet sites. Disclosures over the Internet may present some issues that will not arise in paper-based disclosures. Consumers may view various web pages within a financial institution's web site in a different order each time they access the site, aided by hypertext links. Depending on the hardware and software used to access the Internet, some web pages may require consumers to scroll down to view the entire page. To address these issues, the example concerning Internet disclosures states that broker-dealers, funds, and registered advisers may comply with the rule if they use text or visual cues to encourage scrolling down the page if necessary to view the entire notice and ensure that other elements on the web site (such as text, graphics, hypertext links, or sound) do not distract attention from the notice.31 The examples also note that the institution should place a notice or a conspicuous link on a screen that consumers frequently access, such as a page on which consumers conduct transactions.

      There is a range of approaches a broker-dealer, fund, or registered adviser could use based on current technology. For example, a broker-dealer could use a dialog box that pops up to provide the disclosure before a consumer provides information to a financial institution. Another approach would be a simple, clearly labeled graphic located near the top of the page or in close proximity to the financial institution's logo, directing the customer, through a hypertext link or hotlink, to the privacy disclosures on a separate web page.

      (d) Collect. We are revising the definition of "collect" to clarify the scope of the term.32 The G-L-B Act requires a financial institution to disclose in its initial and annual notices the categories of nonpublic personal information that the institution collects. The proposal defined "collect" to mean obtaining any information that is organized or retrievable on a personally identifiable basis, irrespective of the source of the underlying information. This definition was included to provide guidance about the information that a broker-dealer, fund, or registered adviser must include in its notices and to clarify that the obligations arise regardless of whether the institution obtains the information from a consumer or from some other source.

      Commenters suggested that the final rule treat information that is not organized and retrievable in an automated fashion as not "collected." We disagree that information should not be deemed to be collected simply because it is not retrievable in an automated fashion. We believe that the method of retrieval is irrelevant to whether information should be protected under the rule. We agree, however, that the scope of the regulation should be refined, and have changed the definition of "collect" by using language from the Privacy Act of 1974.33

      Other commenters requested that the rule clarify that information that a broker-dealer, fund, or registered adviser receives but then immediately passes along without retaining a copy, is not "collected." We believe that merely receiving information without retaining it would not be "collecting" the information. The final rule reflects this by stating that the information must be organized or retrievable by the financial institution.

      (f) Company. We received no substantive comments on the proposed definition of "company" and are adopting it as proposed.34

      (g) Consumer. We are adopting as proposed the definition of "consumer," and are revising the examples under the definition in response to issues raised by commenters. The G-L-B Act distinguishes "consumers" from "customers" for purposes of the statute's notice requirements. A brokerdealer, fund, or registered adviser is required to give a "consumer" the notices required under Title V only if the institution intends to disclose nonpublic personal information about the consumer to a nonaffiliated third party for purposes other than as permitted by section 502(e) of the statute.35 We received a large number of comments on this proposed definition that raised questions about how the definition would apply in a variety of situations.

      Evaluation of a request for a financial product or service. The proposal defined "consumer" to mean an individual (and his or her legal representative) who obtains, from a financial institution, financial products or services that are to be used primarily for personal, family, or household purposes.36 Because "financial product or service" includes a financial institution's evaluation of an application or request to obtain a financial product or service, a person becomes a consumer even if the application or request is denied or withdrawn.37 The examples for the definition of "consumer" clarify that a consumer includes an individual who provides nonpublic personal information when seeking to obtain brokerage or investment advisory services. For example, an investor who provides nonpublic personal information to several registered advisers (whether orally or in writing) in seeking financial advisory services would be a consumer of each registered adviser, even if the investor does not enter into an advisory contract with any of the advisers.

      Many commenters disagreed that someone should be deemed a consumer of a financial institution by virtue of the institution evaluating nonpublic personal information provided by the individual in an application or otherwise. These commenters maintained that the individual has not obtained a financial product or service, as is required by the G-L-B Act. We believe, however, that a "financial product or service" includes the evaluation of information an individual provides to the financial institution in order to obtain some other financial product or service. Broker-dealers, funds, and registered advisers frequently provide a range of services in connection with the delivery of a financial product, including the evaluation of information provided by an individual. The evaluation may be the sole financial product or service delivered, or one of several services provided in connection with establishing a customer relationship. For example, an investor who seeks to invest in certain investment products, such as stock options, must provide a broker-dealer or registered adviser with nonpublic personal information in connection with the request. Based on this nonpublic personal information, the broker-dealer or registered adviser may open an account for the investor, but deny his or her request to invest in options. Whether the evaluation is the sole product or service or one of several, the institution's evaluation of the individual's information is a separate financial product or service.

      The proposed definition of "consumer" also is consistent with one of the primary purposes of Title V: To enable an individual to restrict a financial institution from sharing nonpublic personal information about the individual with a nonaffiliated third party. The information an individual provides to a financial institution before a customer relationship is established is likely to contain precisely the types of information that the statute is designed to protect. This information is no less deserving of protection simply because an application is denied or withdrawn. For these reasons, we have retained in the examples in the definition of "consumer" an individual who provides nonpublic personal information to a broker-dealer or investment adviser in connection with obtaining brokerage or investment advisory services.38

      Loan sales. Several commenters requested clarification of circumstances in which a borrower becomes a consumer. The final rule provides that a person will be a consumer of any entity that holds ownership or servicing rights to an individual's loan.39 We believe that financial institutions that own or service a loan provide a financial product or service to the individual borrower in question. In some cases, the product or service is the funding of the loan, directly or indirectly. In other cases, the product or service is the processing of payments, sending account-related notices, responding to consumer questions, and complaints about the handling of the account. The final rule defines "consumer" in a way that covers individuals receiving financial products or services in each of these situations.

      Agents of financial institutions. Several commenters maintained that an individual should not be considered to be a consumer of an entity that is acting as agent for a financial institution.40 These commenters noted that the financial institution that hires the agent is responsible for that agent's conduct in carrying out the agency responsibilities. We agree and continue to believe that the broker-dealer, fund, or registered adviser has a consumer relationship, even if the institution uses agents to help it deliver its products or services. For example, fund consumers would not become consumers of the fund's transfer agent that services the fund's customer accounts. The final rule retains the examples addressing clearing agents and provides a more general example to illustrate this principle.41

      Legal representative. We also agree with the suggestion by several commenters that the definition of "consumer" should clarify that a financial institution may satisfy the obligations stemming from a consumer relationship by dealing either with the individual who obtains a financial product or service from a financial institution or that individual's legal representative. We do not intend that the rule require a financial institution to send opt out and initial notices to both the individual and his or her legal representatives, and have amended the final rule accordingly.42

      Trusts. We received several comments concerning whether an individual who obtains financial services in connection with trusts is a consumer or customer of a financial institution. Several commenters urged the Commission generally to exempt a financial institution from the requirements of the rules when it acts as a fiduciary or, in the alternative, to clarify the categories of individuals who are considered to be customers. Commenters proposed, for example, that individuals who are beneficiaries with current interests should be identified as customers, whereas individuals who are only contingent beneficiaries should not be customers. Other commenters stated that when the financial institution serves as trustee of a trust, neither the grantor nor beneficiary is a consumer or customer under the rules. In these commenters' view, the trust itself is the institution's "customer," and therefore the rules should not apply to a financial institution when it acts as trustee. These commenters also stated that when a financial institution is a trustee, it serves as a fiduciary and is subject to other obligations to protect the confidentiality of the beneficiaries' information that are more stringent than those under the provisions in the G-L-B Act. Similarly, these and other commenters claimed that an individual who is a participant in an employee benefit plan administered or advised by a financial institution does not qualify as a consumer or customer. They contended that plan participants have no direct relationship with the financial institution and, in any event, the financial institution is authorized to use information that would be covered under the G-L-B Act only in accordance with the directions of the plan sponsor. The commenters concluded, therefore, that the regulations should specifically exclude individuals who are participants in an employee benefit plan from the definition of customer.

      We believe that the definition of "consumer" in the G-L-B Act does not squarely resolve whether the beneficiary of a trust is a consumer of the financial institution that is the trustee. We agree with the commenters who concluded that, when the financial institution serves as trustee of a trust, neither the grantor nor beneficiary is a consumer or customer under the rules. Instead, the trust itself is the entity that obtains the financial services, and the rules do not apply because the trust is not an individual.43 We note that a financial institution that is a trustee assumes obligations as a fiduciary, including the duty to protect the confidentiality of the beneficiaries' information, that are consistent with the purposes of the G-L-B Act and enforceable under State law. Accordingly, we have excluded an individual who is a beneficiary of a trust or a plan participant in an employee benefit plan, from the definitions of "consumer" and "customer." Nevertheless, we believe that an individual who selects a financial institution to be a custodian of securities or assets in an individual retirement account or individual retirement arrangement ("IRA") is a "consumer" under the G-L-B Act. We have included examples in the rule that appropriately illustrate this interpretation of the G-L-B Act.43

      Requirements arising from consumer relationship. While the proposed and final rules define "consumer" broadly, we note that this definition will not result in any additional burden to a broker-dealer, fund, or registered adviser if (i) no customer relationship is established and (ii) the institution does not intend to disclose nonpublic personal information about the consumer to nonaffiliated third parties. Under the approach taken in the final rule, a broker-dealer, fund, or registered adviser is under no obligation to provide a consumer who is not a customer with any privacy disclosures unless it intends to disclose the consumer's nonpublic personal information to nonaffiliated third parties outside the exceptions in sections 248.14 and 248.15. The institution may disclose a consumer's nonpublic personal information to nonaffiliated third parties under the final rule, if it delivers the requisite notices and the consumer does not opt out. Thus, the rule allows a financial institution to avoid all of the rule's requirements for consumers who are not customers if the institution chooses not to share information about the consumers with nonaffiliated third parties. Conversely, if a broker-dealer, fund, or registered adviser chooses to share consumers' nonpublic personal information with nonaffiliated third parties, the financial institution is free to do so, provided it notifies consumers about the sharing and affords them a reasonable opportunity to opt out. In this way, the rule attempts to strike a balance between protecting an individual's nonpublic personal information and minimizing the burden on a financial institution.

      (h) Consumer reporting agency. We received no comments on the proposed definition of "consumer reporting agency," and we are adopting it as proposed.45 The definition incorporates the definition of "consumer reporting agency" in the Fair Credit Reporting Act.46

      (i) Control. We are adopting the definition of "control" as proposed. "Control" means the power to exercise a controlling influence over the management or policies of a company whether through ownership of securities, by contract, or otherwise. In addition, ownership of more than 25 percent of a company's voting securities creates a presumption of control of the company. This definition is used to determine when companies are affiliated.47 Under the definition, companies are considered to be affiliates regardless of whether the control is by a company or individual.

      Some commenters suggested that the rule adopt the definition of control used in Form BD to determine when an entity is a "control affiliate." 48 Another commenter suggested a test that focuses solely on percent of stock owned in a company in order to avoid the uncertainties from a "control-in-fact" test. One commenter suggested alternative definitions based on (i) the ability to control the use of information in a company in which an ownership interest exists or (ii) a bright line 10 percent ownership test that also provided for aggregating the interests of credit unions and their wholly owned subsidiaries.

      We believe that a test based only on stock ownership is unlikely to be flexible enough to address all situations in which companies should be considered to be affiliated. In addition, the proposed definition of control is consistent with the definition in Form BD, except that the definition in Form BD creates a presumption of control in broader circumstances.49 The rule limits the presumption of control to ownership of more than 25 percent of the voting securities, consistent with the definition of control in the Investment Company Act.50 This definition does not prevent a finding of control-in-fact in the circumstances that create a presumption of control under the definition in Form BD.

      (j), (k) Customer, Customer relationship. We received a large number of comments on the definition of "customer" and "customer relationship." A "customer" is a consumer who has a "customer relationship" with a financial institution, and a "customer relationship" is a continuing relationship between a consumer and a broker-dealer, fund, or registered adviser under which the institution provides a financial product or service that is to be used by the consumer primarily for personal, family, or household purposes. As noted in the proposal, a one-time transaction may be sufficient to establish a customer relationship, depending on the nature of the transaction. A consumer would not become a customer simply by engaging in an isolated transaction that by itself would be insufficient to establish a customer relationship, such as when an individual opens a brokerage account solely for the purpose of liquidating or purchasing securities as an accommodation, i.e., on a one-time basis, without the expectation of engaging in other transactions.

      Point at which a consumer becomes a customer. Commenters criticized the vagueness of the standard for differentiating consumers from customers. Several suggested that the distinction should be based on when a consumer and financial institution enter into a written contract for a financial product or service.

      We recognize that the distinction between consumers and customers will, in some instances, require a financial institution to make a judgment about whether a customer relationship is established. When an individual engages in a transaction and is not likely to expect further communication about that transaction from the financial institution (such as brokerage services as an accommodation to buy or liquidate securities), the individual will not have established a customer relationship as a result of that transaction. In other situations when a consumer typically would receive some measure of continued service following, or in connection with, a transaction (such as when a consumer opens a brokerage account, is the record owner of fund shares, or obtains investment advice), a customer relationship is established. We believe that the distinction set out in the proposed rule, as further clarified by the examples in the final rule of when a customer relationship is and is not established, provides a sufficiently clear line while retaining flexibility to address less clearcut situations on a case-by-case basis.

      Use of "isolated transaction" test. The final rule does not define the distinction between consumer and customer based solely on whether the transaction is an isolated event. We used this concept in an example in the proposed rule to illustrate one of the factors that may determine whether a relationship is of a continuing nature. Several commenters suggested that this approach was insufficiently precise to serve as a workable distinction between consumers and customers. We agree that the test may not be useful in all situations, but believe that it will help clarify the status of relationships in certain circumstances. Accordingly, the final rule retains the following example of an "isolated transaction": providing brokerage services as an accommodation to buy or liquidate securities without the expectation of engaging in further transactions does not establish a customer relationship.51

      Purchase of insurance. Some commenters suggested that, in the context of financial institutions that engage in the sale of insurance and that are regulated by the Commission, the customer should be the policyholder and not the beneficiary. As discussed above, Regulation S-P does not apply to the provision of insurance by brokerdealers, funds, or registered advisers. A variable annuity or variable life insurance contract, however, is both an insurance product and a security.52 We agree with the commenters, and the final rule includes an example of purchasing a variable annuity as one situation in which a customer relationship is formed.53 In this case, the person obtaining a financial product or service from the financial institution is the person purchasing the annuity.54

      Sales of loans. As noted above, several commenters raised questions about loan sales. They stated that when a financial institution sells the servicing rights for a loan to another financial institution, the borrower should not be considered a customer of both institutions.

      Commenters suggested that the entity with which the borrower communicates about the loan (i.e., the servicer) could have the customer relationship with the borrower, and that the other institutions could have a consumer relationship with the borrower.

      We believe that it is appropriate to consider that a loan transaction gives rise to only one customer relationship and that this customer relationship may be transferred in connection with a sale of part or all of the loan. In this way, the borrower will not be inundated by privacy notices, many of which might be from secondary market purchasers that the borrower did not know had any connection to his or her loan. We note, however, that a borrower will remain a consumer of the institution that transfers the servicing rights, as well as a consumer of any other institution that holds an interest in the loan.

      Under the final rules, therefore, a financial institution will be considered to have established a customer relationship with any individual to whom it makes a loan.55 If the institution transfers the servicing rights of that loan to another institution, the second institution will establish a customer relationship with the individual, and the first institution's customer relationship will end (if the relationship is based solely on the loan).56 If the originating lender sells the loan but continues to service the loan, it will continue to have a customer relationship with the borrower, and the purchaser will have a consumer relationship with the borrower.57 For example, a broker-dealer who purchases a loan, but not the servicing rights to the loan, will have a consumer relationship, but not a customer relationship, with the borrower.58

      Fund shares purchased through an intermediary. Several commenters suggested that an individual who is the record owner of fund shares should not be a fund's "customer" if the fund is limited, under its contract with the intermediary who sold the shares, to servicing the investor's account. The commenters argue that these investors would be confused by receiving privacy notices from the fund. We proposed a "bright line" example of record ownership to establish the customer relationship because the fund clearly has nonpublic personal information about its record owners that is personally identifiable. We do not believe that an investor who receives account statements and other information from a fund that services the investor's account will be confused by receiving notices regarding the fund's privacy policies and practices. Moreover, an investor is unlikely to know whether a fund is contractually limited in its use of the investor's nonpublic personal information or whether those contract terms may change. For these reasons, we are adopting the proposed example that record owners of fund shares are the fund's customers.59

      Fund complex. One commenter suggested that a customer of a fund should be considered a customer of the fund complex, which may include the fund's primary investment adviser, or that a fund customer, at least in some cases, should also be considered a customer of the fund's primary investment adviser. We noted in the Proposing Release that the record owner of fund shares has a customer relationship with both the fund and the principal underwriter (which is a broker-dealer) that sells the shares.60 The customer relationship with the broker-dealer arises because the investor has an account with the broker-dealer, who provides financial services directly to the investor. By contrast, an investment adviser to a fund does not generally have an ongoing account relationship with each fund shareholder. Instead, it serves the fund shareholders indirectly through the portfolio management services it provides to the fund.

      We recognize that the definition of "customer" may have disparate effects on the ability of some investment advisers to receive nonpublic personal information about fund investors. For example, if the underwriter of a fund is affiliated with the fund's investment adviser, the underwriter can share nonpublic personal information about its customers with the adviser. By contrast, if the underwriter is not affiliated with the fund's investment adviser, the underwriter can share this type of information only under an exception in section 248.13, 248.14, or 248.15, and the adviser's ability to reuse the information would be limited to the purpose for which it received the information. These limitations result from the language of the G-L-B Act, which defines affiliation in terms of "control," and we are unwilling to modify the definition of "customer relationship" to alter the effect of that definition.61 For these reasons, we believe that, in the absence of an advisory contract with the investor, a fund's primary investment adviser does not have a customer relationship with the fund's customers.62

      Transferred accounts. One commenter requested clarification about whether an investor becomes a consumer of a broker-dealer when the consumer's account is transferred to the brokerdealer. An individual who has an account with a broker-dealer or a contract with a registered adviser has established a customer relationship with that broker-dealer or adviser. Thus, the investor is a customer of that brokerdealer or registered adviser, regardless of whether the account was transferred at the customer's request or as the result of a merger, acquisition, or assignment. Accordingly, the final rule includes an example that an individual is a customer of a broker-dealer or registered adviser if the individual's account is transferred to the broker-dealer or adviser.63

      Trusts. The final rule adds an example to clarify that an individual will be deemed to establish a customer relationship when a broker-dealer, fund, or registered adviser acts as a custodian for securities or assets in an IRA.64 This example is consistent with the explanation set out above in the discussion of "consumer" concerning trusts.65

      (l) Dealer. We received no comments on the proposed definition of "dealer" and are adopting it as proposed. The definition incorporates the definition of dealer in the Exchange Act.66

      (m) Federal functional regulator. We are defining the term "federal functional regulator" in place of "government regulator." The proposal sought comment on a definition of "government regulator" which included each of the Agencies, the Commission, and State insurance authorities under the circumstances identified in the definition. This term was used in the exception in proposed section 248.15(a)(4) for disclosures to law enforcement agencies, "including government regulators."

      For purposes of the privacy rules, this term is relevant in determining when an entity is an affiliate and when a brokerdealer, fund, or registered adviser may disclose information to a law enforcement agency.67 The exception for disclosure as stated in the G-L-B Act uses the term "Federal functional regulator," 68 which is defined in the statute at section 509(2) and includes the Secretary of the Treasury for purposes of the exception permitting disclosures to law enforcement agencies. We have decided that it is appropriate to use the term "federal functional regulator" instead of "government regulator."

      (n) Financial institution. We are adopting the definition of "financial institution" as proposed. The proposal defined "financial institution" as any institution the business of which is engaging in activities that are financial in nature, or incidental to such financial activities, as described in section 4(k) of the Bank Holding Company Act of 1956.69 The G-L-B Act also defines "financial institution," and the proposal excepted from the definition those entities the G-L-B Act also excepts.70

      Commenters suggested that the final rule include additional exceptions from the definition, such as for securitization trusts, debt buyers, and credit bureaus. We have not included these exceptions in the final rule. We believe it is inappropriate to exclude many of the activities suggested by commenters because the objective of the suggested exclusions can be achieved in other ways. Even if an entity is a financial institution as that term is used in the G- L-B Act, it will not have any disclosure responsibilities under the Act or this rule if it does not provide a financial product or service to a consumer. In most of the situations posited by the commenters, the entity in question will not meet that test and therefore will fall outside the scope of the rules with respect to privacy disclosures.71

      (o) Financial product or service. We are adopting the definition of "financial product or service" as proposed. The proposal defined the term as a product or service that a broker-dealer, fund, or registered adviser could offer by engaging in an activity that is financial in nature, or incidental to such a financial activity, under section 4(k) of the Bank Holding Company Act. An activity that is complementary to a financial activity, as described in section 4(k), was not included in the proposed definition of "financial product or service." The proposal's definition included the broker-dealer, fund, or registered adviser's evaluation of nonpublic personal information collected in connection with a request by a consumer for a financial product or service even if the request ultimately is rejected or withdrawn.72 It also included the distribution of information about a consumer for the purpose of assisting the consumer in obtaining a financial product or service.

      Several commenters criticized the proposed definition and suggested that the evaluation of application information should not be considered a financial product or service. For the reasons discussed above regarding the definition of "consumer," we continue to believe that it is appropriate to retain evaluation or brokerage of information as within the scope of financial products or services covered by the rules.

      (q) Investment adviser. We received no comments on the proposed definition of "investment adviser" and are adopting it as proposed. The definition incorporates the definition of "investment adviser" under the Investment Advisers Act.73

      (r) Investment company. We received no substantive comments on the proposed definition of "investment company" and are adopting it as proposed. The definition incorporates the definition of "investment company" under the Investment Company Act, whether or not the company is registered with the Commission.74

      (s) Nonaffiliated third party. We are adopting the definition of nonaffiliated third party as proposed. The proposal defined the term as any "person" (including natural persons as well as corporate entities) except (i) an affiliate of a financial institution and (ii) a joint employee of a financial institution and a third party. The proposal clarified the circumstances under which a company that is controlled by a broker-dealer, fund, or registered adviser through that institution's merchant banking activities or insurance company activities would be a "nonaffiliated third party" of the broker-dealer, fund, or registered adviser.

      We received very few comments in response to the proposed definition. One commenter requested that the final rule state that a disclosure of information to someone who is serving as a joint employee of two financial institutions should be deemed to have been disclosed to both financial institutions. We disagree with this result. Instead, we believe it is appropriate to deem the information to have been given to the financial institution that is providing the financial product or service in question. Thus, for example, if an employee of a bank is also an employee of a brokerage firm, information that employee receives in connection with a securities transaction conducted with the brokerage firm would be considered as received by the brokerage firm.

      (t) Nonpublic personal information. We are revising the definition of "nonpublic personal information." Section 509(4) of the G-L-B Act defines the term to mean "personally identifiable financial information" that is provided by a consumer to a financial institution, results from any transaction with the consumer or any service performed for the consumer, or is otherwise obtained by the financial institution. The term also includes any "list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived using any nonpublic personal information that is not publicly available information." The G-L-B Act excludes publicly available information (unless provided as part of the list, description, or other grouping described above), as well as any list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived without using nonpublic personal information. The statute does not define either "personally identifiable financial information" or "publicly available information."

      The proposed rules implemented the definition of "nonpublic personal information" under the G-L-B Act by restating the categories of information described above. The proposed rules treated information as publicly available if a broker-dealer, fund, or registered adviser could obtain it from a public source. We also asked for comment on an approach that would have deemed information as "publicly available" only if a financial institution actually obtained it from a public source ("alternative approach").75 Most commenters supported the proposed approach to publicly available information. They noted that the proposed rule was consistent with the Act and would be far less burdensome on financial institutions. They also stated that any requirement that the information actually be obtained from a public source would impose a needless burden on financial institutions (by requiring, for instance, that a financial institution "tag" information it obtained from public records) and is not required by the Act. Other commenters advocated the alternative approach. They argued that the alternative approach would provide the greatest protection for consumers by treating any information the consumer gives to a financial institution to obtain a financial product or service as nonpublic personal information. This protection would be lost only if a financial institution actually obtained the information from a public source. These commenters also preferred the brightline distinction drawn by the alternative approach.

      The final rule adopts an approach that we believe incorporates the benefits of both alternatives. As under the proposed rule, in the final rule information will be deemed to be "publicly available" and therefore excluded from the definition of "nonpublic personal information" if a broker-dealer, fund, or registered adviser reasonably believes that the information is lawfully made available to the general public from one of the three categories of sources listed in the rule.76 The examples provided in the rule clarify when a broker-dealer, fund, or registered adviser has a reasonable belief that information is lawfully made available to the general public. For example, an institution would have a reasonable belief if (i) the institution has confirmed, or the consumer has represented, that the information is publicly available from a public source, or (ii) the institution has taken steps to submit the information, in accordance with its internal procedures and policies and with applicable law, to a keeper of federal, State, or local government records who is required by law to make the information publicly available.77 The examples also state that a brokerdealer, fund, or registered adviser would have a reasonable belief that a telephone number is publicly available if the institution located the number in a telephone book or if the consumer told the institution that the number is not unlisted.78 Moreover, the examples make clear that an institution may not assume information about a particular consumer is publicly available simply because that type of information is normally provided to a government record keeper and made available to the public by the record keeper, because the consumer may have the ability to keep that information non public or to screen his or her identity.

      The approach of the final rule is based on the underlying principle that a consumer in many circumstances can control the public availability or identification of his or her information and that a financial institution therefore should not assume that the information about that customer is in fact publicly available. Thus, even though a lender typically enters a mortgage in public records in order to protect its security interest, when a borrower can maintain the privacy of his or her personal information by owning the property and obtaining the loan through a separate legal entity, the customer's name would not appear in the public record. In the case of a telephone number, a person may request that his or her number be unlisted. Thus, in evaluating whether it is reasonable to believe that information is publicly available, a financial institution must determine whether the consumer has kept the information or his or her identity from being a matter of public record.79

      To implement the complex definition of "nonpublic personal information" that is provided in the statute, the final rule adopts a definition that consists, generally speaking, of (i) personally identifiable financial information, plus (ii) a consumer list or description or grouping of consumers (and publicly available information pertaining to the consumers) that is derived using any personally identifiable financial information that is not publicly available information. From that body of information, the final rule excludes publicly available information (except as noted above or if the information is disclosed in a manner that indicates that the individual is the institution's consumer) and any consumer list that is derived without using personally identifiable financial information that is not publicly available information.80 Examples illustrate how this definition applies in the context of consumer lists.81

      (u) Personally identifiable financial information. We are adopting the definition of "personally identifiable financial information" substantially as proposed. The proposed rule defined the term to include (i) information that a consumer provides a broker-dealer, fund, or registered adviser in order to obtain a financial product or service, (ii) information resulting from any transaction between the consumer and a broker-dealer, fund, or registered adviser involving a financial product or service, and (iii) information about a consumer that a broker-dealer, fund, or registered adviser otherwise obtains in connection with providing a financial product or service to the consumer. The proposed rule also treated the fact that someone is a consumer of a brokerdealer, fund, or registered adviser as personally identifiable financial information. In essence, the proposed rules treated any personally identifiable information as "financial" if a brokerdealer, fund, or registered adviser obtained the information in connection with providing a financial product or service to a consumer. We noted in the Proposing Release that this interpretation may result in certain information being covered by the rules that may not commonly be considered intrinsically financial, such as health status.82

      We received a large number of comments in response to the definition of "personally identifiable financial information." Many commenters objected to including in the term certain identifying information that they did not view as "financial," such as name, address, and telephone number. Many commenters argued that "personally identifiable financial information" should not include the fact that someone is a customer of a financial institution. These commenters noted that many customer relationships are matters of public record (such as would be the case, for instance, any time a transaction results in the recording of a security interest) while other customer relationships are matters of public knowledge (because consumers frequently disclose the relationships by writing checks, using credit cards, and so on). Many commenters stated that aggregate data about a financial institution's customers that lack personal identifiers should not be considered personally identifiable financial information.

      Treatment of identifying information as financial. We continue to believe that it is appropriate to treat any information as "financial" information if a financial institution obtains it in order to provide a financial product or service. We also believe this approach is consistent with the G-L-B Act. Although the statute does not define the term "financial," it does include a broad definition of "financial institution" used in the G-L- B Act, which encompasses a large number of entities (such as travel agencies, insurance companies, and data processors) that engage in activities not traditionally considered financial. As a consequence of that definition, the range of information that has a bearing on the terms and availability of a financial product or service or that a financial institution uses in connection with providing a financial product or service is extremely broad and may include, for instance, medical information and other types of information that might not commonly be thought of as financial. It includes information a broker-dealer, fund, or registered adviser requests from the consumer, obtains from a transaction involving a financial product or service with the consumer, or otherwise obtains in connection with providing a financial product or service to a consumer. Thus, the information included in the definition of "financial" is information the broker-dealer, fund, or registered adviser has determined is relevant to providing a financial product or service.

      We are sensitive to the concern expressed by several commenters about the need for ready access to identifying information to locate individuals who are attempting to evade their financial obligations. These commenters suggested that names, addresses, and telephone numbers should not be treated as financial information. We believe, however, that this information is financial, and is covered by the G-L- B Act. Broker-dealers, funds, and registered advisers rely on a broad range of information, including information such as addresses and telephone numbers, when providing financial products or services. Broker-dealers, funds, and registered advisers use location information to provide a wide variety of financial services, such as sending account statements and disbursing funds to a consumer. We concluded that it would be inappropriate to exclude certain items of information from the definition of personally identifiable financial information simply because a particular broker-dealer, fund, or registered adviser might not rely on those items when providing a particular financial product or service.83

      Customer relationship as "personally identifiable financial information." We disagree with those commenters who maintain that customer relationships should not be considered to be personally identifiable financial information. This information is "personally identifiable" because it identifies the individual as a customer of the institution. The information is financial because it reveals a financial relationship with the institution and the receipt of financial products or services from the institution.

      Changes made to the definition. We have revised the definition of "personally identifiable financial information" to make it easier to read and understand. In addition, the final rule adds to the examples of information covered by the rule any information that the institution collects through an information-collecting device from a web server, often referred to as a "cookie." 84 This example illustrates one of the many ways that a financial institution may obtain information about a consumer in connection with providing a financial product or service to that consumer.

      In addition, in response to many comments from the securities industry, the final rule also includes an example that clarifies that aggregate information (or "blind data") lacking personal identifiers is not covered by the definition of "personally identifiable financial information." 85 We agree with the commenters who argued that this type of data does not "identify" any individual.

      (v) Publicly available information. We are adopting the definition of "publicly available information" substantially as proposed. The proposal defined the term to include information that is lawfully available to the general public from official public records (such as real estate recordations or security interest filings), information from widely distributed media (such as a telephone book, television or radio program, or newspaper), and information that is required to be disclosed to the general public by federal, State, or local law (such as prospectuses and periodic shareholder reports). The proposed rule stated that publicly available information from widely distributed media would include information from an Internet site that is available to the general public without requiring a password or similar restriction. As previously explained in the discussion of "nonpublic personal information," we have adopted the proposed approach in the final rule, but with additional clarifying provisions.

      Many commenters questioned the appropriateness of excluding from the definition of "publicly available information" information that a person obtains over the Internet by using a password or complying with a similar restriction. These commenters noted that many Internet sites are available to a large number of people, each of whom needs a user name and identification number to access the sites. Several of these commenters suggested that it would be more appropriate to focus on whether the information was lawfully placed on the Internet.

      We agree with these comments, and have revised the final rule to remove the reference to passwords or similar restrictions from the example of the Internet as a "widely distributed" medium of communication. In its place, we have substituted a standard that requires the information, whether from the Internet or otherwise, to be available on an unrestricted basis. Information that an individual specifically requests be compiled, such as information that a locator or "look up" service provides with respect to a particular individual that may combine confidential information in addition to publicly available information, will not be considered available to the general public on an unrestricted basis, regardless of whether the information is provided over the Internet or otherwise. The rule also states that an Internet site is not restricted merely because an Internet service provider or a site operator requires a fee or password, as long as access is otherwise available to the general public. One common use of passwords is to confine the access of web site users to specific, individual information. However, web site operators also may require user identifications and passwords as a method of tracking access rather than restricting access to the information available through the website. Internet service providers may charge fees to users to access the site rather than to restrict access to particular information. Other sites available to the general public, such as daily newspapers, also may charge a fee to access archived information. Therefore, we believe that the definition of "widely distributed media" should properly focus on whether the information is lawfully available to the general public, rather than on the type of medium from which information is obtained.

      We note that the concept of information being lawfully obtained was included in the proposal, and is retained in the final rule.86 Thus, information unlawfully obtained will not be deemed to be publicly available notwithstanding that it may be available to the general public through widely distributed media.

      (w) You. We are adopting the definition of "you" largely as proposed. The proposed definition of "you" referred to broker-dealers, funds, and registered advisers, which are the entities within the Commission's jurisdiction under Title V. We are, however, revising the definition to clarify that the provision of insurance by financial institutions under the Commission's primary jurisdiction is not covered under these rules.87

      A. Subpart A-Privacy and Opt Out Notices

      Sections 248.4 through 248.9 of Regulation S-P include requirements concerning the delivery of initial and annual notices about the privacy policies and practices of a financial institution, and about the opportunity and methods for consumers to opt out of their institution's sharing of their nonpublic personal information with nonaffiliated third parties.

      Section 248.4 Initial Privacy Notice to Consumers Required

      We are revising the requirements relating to initial privacy notices to consumers, in response to issues raised by commenters. The G-L-B Act requires a financial institution to provide an initial notice of its privacy policies and practices in two circumstances. For customers, the notice must be provided at the time of establishing a customer relationship.88 For consumers who are not customers, the notice must be provided before disclosing nonpublic personal information about the consumer to a nonaffiliated third party.89

      The proposed rules implemented these requirements by mandating that a financial institution provide the initial notice to an individual prior to the time a customer relationship is established and the opt out notice prior to disclosing nonpublic personal information to nonaffiliated third parties. The rule required these disclosures to be clear and conspicuous and to accurately reflect the institution's privacy policies and practices. The proposal also set out rules governing when a customer relationship is established and how a financial institution is to provide notice.90

      We received many comments raising concerns about proposed section 248.4. Most commenters from the securities industry raised questions about the time when initial notices must be provided, the point at which a customer relationship is established, and how initial notices may be provided.

      Providing initial notices "prior to" time customer relationship is established. Almost all the commenters from the securities industry stated that, because the statute requires only that the initial notice be provided "at the time of establishing a customer relationship," the regulation should not require that the notice be provided "prior to" the point when a customer relationship is established. Some of these commenters were concerned that the rule could be interpreted as requiring a financial institution to provide disclosures at a point different from when they must provide other federally mandated consumer disclosures during the process of establishing a customer relationship.

      Although we believe many commenters misinterpreted the proposed language concerning the timing for providing initial notices, we have revised the rule to clarify the requirement. The final rule states that, as a general rule, the initial notice must be given not later than the time when a financial institution establishes a customer relationship.91 As stated in the Proposing Release, the initial notices may be provided at the same time a broker-dealer, fund, or registered adviser is required to give other notices, such as the requirement that credit terms in margin transactions be disclosed,92 or that a registered adviser provide each client with a written disclosure statement ("brochure") not later than the time of entering an investment advisory contract with the client.93 This approach, like the approach taken in the proposed rule, strikes a balance between (i) ensuring that consumers will receive privacy notices at a meaningful point during the process of "establishing a customer relationship" and (ii) minimizing unnecessary burden on broker-dealers, funds, and registered advisers that may otherwise result if the final rule were to require financial institutions to provide consumers with a series of notices at various times in a transaction.

      Providing notices after customer relationship is established. Several commenters stated that the rule should provide financial institutions with the flexibility to deliver the initial notice after the customer relationship is established under certain circumstances. These commenters offered several situations in which a customer relationship is established without direct contact between the consumer and the financial institution. The commenters stated that delivery of the initial notice before the customer relationship is established in these situations would be impractical. Commenters also indicated that in many circumstances requiring delivery at this time would have a significant adverse effect on the ability to provide a financial product or service to a consumer as quickly as the consumer desires.

      To accommodate the wide range of situations presented by the commenters, we have modified the examples of when subsequent delivery of the initial notice is appropriate, so that they now are more broadly applicable. As stated in the final rule in section 248.4(e), a broker-dealer, fund, or registered adviser may satisfy the delivery requirement by providing the initial notice within a reasonable time after establishing a customer relationship, in three instances. First, the institution may provide notice after the fact if the customer has not elected to establish the customer relationship.94 This might occur, for example, when a brokerage account is transferred to another broker by a trustee selected by the Securities Investor Protection Corporation ("SIPC") and appointed by a United States Court.95 Second, a broker-dealer, fund, or registered adviser may send a notice after establishing a customer relationship when to do otherwise would substantially delay the consumer's transaction and the consumer agrees to receive the notice at a later time.96 An example of this is when an investor requests over the telephone that a broker-dealer execute a securities trade. The final example states that delayed delivery is permissible when a nonaffiliated brokerdealer or registered adviser purchases fund shares or establishes a brokerage account on behalf of a customer.97

      We note that in most situations, a broker-dealer, fund, or registered adviser should give the initial notice at a point when the consumer still has a meaningful choice about whether to enter into the customer relationship.98 The exceptions listed in the examples, while not exhaustive, are intended to illustrate the less frequent situations when delivery either would pose a significant impediment to the conduct of a routine business practice or the consumer agrees to receive the notice later in order to obtain a financial product or service immediately.

      In circumstances when it is appropriate to deliver an initial notice after the customer relationship is established, a broker-dealer, fund, or registered adviser should deliver the notice within a reasonable time thereafter. Several commenters requested that the final rule specify how many days a financial institution has in which to deliver the notice under these circumstances. However, we believe that a rule prescribing the maximum number of days would be inappropriate because (i) the circumstances of when an after-the-fact notice is appropriate are likely to vary significantly, and (ii) a rule that attempts to accommodate every circumstance is likely to provide more time than is appropriate in many instances. Therefore, we have retained the more general rule as set out in the proposal.99

      As we noted in the Proposing Release, nothing in the rule is intended to discourage a financial institution from providing an individual with a privacy notice at an earlier point in the relationship in order to make it easier for the individual to compare its privacy policies and practices with those of other institutions in advance of conducting transactions.100

      New notices not required for each new financial product or service. Several commenters asked whether a new initial notice is required every time a consumer obtains a financial product or service from that broker-dealer, fund, or registered adviser. These commenters suggested that a consumer would not materially benefit from repeated disclosures of the same information, and that requiring additional initial notices to be provided to the same consumer would be burdensome on financial institutions.

      We agree that it would be burdensome, with little corresponding benefit to the consumer, to require a financial institution to provide the same consumer with additional copies of its initial notice every time the consumer obtains a financial product or service. Accordingly, the final rule states that a broker-dealer, fund, or registered adviser will satisfy the notice requirements when an existing customer obtains a new financial product or service if the institution's initial, revised, or annual notice (as appropriate) is accurate with respect to the new financial product or service.101

      Joint accountholders. We agreed with several commenters who recommended that the final rule state that a financial institution is not obligated to provide more than one notice to joint accountholders.102 Accordingly, the final rule clarifies that one notice may be sent in connection with a joint account.103 A broker-dealer, fund, or registered adviser may, in its discretion, provide notices to each party to the account. This situation might arise, for example, when a financial institution does not want one opt out election to apply automatically to all joint accountholders.104

      Mergers. A few commenters requested guidance on what notices are required in the event of a merger of two financial institutions or an acquisition of one financial institution by another. In such a situation, the need to provide new initial (and opt out) notices to the customers of the entity that ceases to exist will depend on whether the notices previously given to those customers accurately reflect the policies and practices of the surviving entity. If they do, the surviving entity will not be required under the rule to provide new notices.105

      As was stated in the Proposing Release, a financial institution may not fail to maintain the protections that it represents in the notice that it will provide.106 We expect that brokerdealers, funds, and registered advisers will take appropriate measures to adhere to their stated policies and practices.

      Section 248.5 Annual Privacy Notice to Customers Required

      We are adopting largely as proposed the requirements relating to annual privacy notices to consumers. Section 503 of the G-L-B Act requires a financial institution to provide notices of its privacy policies and practices at least annually to its customers "during the continuation" of a customer relationship. The proposed rules implemented this requirement by requiring a clear and conspicuous notice that accurately reflects the privacy policies and practices then in effect to be provided at least once during any period of twelve consecutive months.107 The proposed rule noted that the rule governing how to provide an initial notice also would apply to annual notices, and stated that a financial institution would not be required to provide annual notices to a customer with whom it no longer has a continuing relationship.108

      Many commenters from the securities industry requested that the final rule permit annual notices to be given each calendar year, instead of every 12 months. A few commenters recommended that the rule require notices each calendar year, with no more than 15 months elapsing between mailings. To clarify the extent of financial institutions' flexibility, the final rule retains the general rule requiring annual notices but then provides an example, stating that a broker-dealer, fund, or registered adviser may select a calendar year as the 12-month period within which notices will be provided, and deliver the first annual notice at any point in the calendar year following the year in which the customer relationship was established.109 The final rule also requires that a broker-dealer, fund, or registered adviser apply the 12- consecutive-month period to its customers consistently.

      Several commenters suggested that a financial institution be permitted to make the annual notice available upon request only, particularly if there have been no material changes to the notice since it was last delivered. These commenters argued that little value is added by providing customers with additional copies each year of the same information. Some suggested that financial institutions be permitted to provide a "short-form" annual notice, in which the institution informs its customers that there has been no change to its privacy policies and practices and that the customers may obtain a copy upon request.

      We have not amended the final rule to permit this approach, for two reasons. First, we believe that the G-L-B Act requires a full set of disclosures to each customer once a year.110 Second, the revisions to the disclosure provisions reflected in the final rule clarify that a broker-dealer, fund, or registered adviser is not required to provide a lengthy and detailed privacy notice. Small institutions that do not share information with third parties beyond the statutory exceptions should be able to provide a short, streamlined notice. The rule also permits a broker-dealer, fund, or registered adviser to provide annual notices to customers over the institution's web site if the customer conducts transactions electronically and agrees to the electronic disclosures.111 As a result, the final rule achieves much of the burden reduction sought by those requesting a short-form annual notice option.112

      Section 248.6 Information To Be Included in Initial and Annual Privacy Notices

      We are revising the requirements for information to be included in initial and annual privacy notices. The revisions clarify the level of detail required in these notices, and permit a "short-form" initial notice in certain circumstances.

      Section 503 of the G-L-B Act identifies the items of information that a broker-dealer, fund, or registered adviser must include in its initial and annual notices. Section 503(a) of the GL- B Act sets out the general requirement that a financial institution must provide customers with a notice describing the institution's policies and practices with respect to, among other things, disclosing nonpublic personal information to affiliates and nonaffiliated third parties. Section 503(b) of the Act identifies certain elements that must be addressed in that notice.

      The proposed rule implemented section 503 by requiring a financial institution to provide information concerning:

      • The categories of nonpublic personal information that a brokerdealer, fund, or registered adviser may collect;


      • The categories of nonpublic personal information that a brokerdealer, fund, or registered adviser may disclose;


      • The categories of affiliates and nonaffiliated third parties to whom a broker-dealer, fund, or registered adviser discloses nonpublic personal information, other than those to whom information is disclosed under an exception in section 502(e) of the G-L-B Act;


      • The broker-dealer, fund, or registered adviser's policies with respect to sharing information about former customers;


      • The categories of information that are disclosed under agreements with third party service providers and joint marketers and the categories of third parties providing the services;


      • A consumer's right to opt out of the disclosure of nonpublic personal information to nonaffiliated third parties;


      • Any disclosures regarding affiliate information sharing opt outs a financial institution is providing under the Fair Credit Reporting Act; and


      • The institution's policies and practices with respect to protecting the confidentiality, security, and integrity of nonpublic personal information.

      We received a large number of comments concerning these requirements, and most made the points summarized below.

      Level of detail required. Many commenters observed that the level of detail required by the proposed rule would result in lengthy, complicated, and confusing disclosures. These comments have led us to revise the rule to clarify the level of detail required in a financial institution's initial and annual disclosures.

      We do not intend to require a brokerdealer, fund, or registered adviser to publish lengthy disclosures that precisely identify every type of information collected or shared, the name of every entity with which the institution shares information, and a complete description of the technical specifications of how the institution protects its customers' records or the identity of each employee who has access to those records. Instead, the rule is intended to require notices that provide consumers with the types of third parties with which a financial institution shares nonpublic personal information, the types of information it shares, and the other information about the institution's privacy policies and practices listed above. The final rule, like the proposal, permits a brokerdealer, fund, or registered adviser to comply with these notice requirements by describing its privacy policies and practices.113 We believe that in most cases the initial and annual disclosure requirements can be satisfied by disclosures contained in a tri-fold brochure.

      In response to commenters' concerns that consumers will not read long, detailed disclosures, we have revised the examples of the disclosures to clarify the level of detail that we think is appropriate. We have provided sample clauses in the Appendix to the rules, and have set out a compliance guide below in this release. Because the examples are not exclusive, the final rule permits a financial institution to use different categories than those provided in the examples, thereby providing additional flexibility for financial institutions in complying with the disclosure requirements. In addition, we have revised the language that precedes the items of information to be addressed in the initial notice, to clarify that a broker-dealer, fund, or registered adviser is required only to address those items that apply to the institution. Thus, for instance, if an investment adviser does not disclose nonpublic personal information to third parties, it may simply omit any reference to the categories of affiliates and nonaffiliated third parties to whom the institution discloses nonpublic personal information.

      As noted in the Proposing Release, the required content is the same for both the initial and annual notices of privacy policies and practices.114 While the information contained in the notices must be accurate as of the time the notices are provided, a financial institution may prepare its notices based on current and anticipated policies and practices.

      Short-form initial notice. We have reconsidered the need to give consumers a copy of a financial institution's complete initial notice when there is no customer relationship. In these circumstances, we believe that the objectives of the statute can be accomplished in a less burdensome way than was proposed. Accordingly, we have exercised our exemptive authority under section 504(b) to create an exception to the general rule that a financial institution must provide both the initial and opt out notices to a consumer before disclosing nonpublic personal information about that consumer to nonaffiliated third parties.

      Section 248.6(d) provides that a financial institution may provide a "short-form" initial privacy policy notice along with the opt out notice to a consumer with whom the institution does not have a customer relationship. The short-form notice must clearly and conspicuously state that the disclosure containing information about the institution's privacy policies and practices is available on request, and must provide one or more reasonable means by which the consumer may obtain a copy of the notice. We believe that the short-form is appropriate because a consumer who does not become a customer of a broker-dealer, fund, or registered adviser may have less interest in certain elements of the institution's privacy policies. Thus, the consumer may receive greater benefit from obtaining a short-form notice with the opt out notice, which informs the consumer about the categories of his or her information the institution may share and the categories of nonaffiliated third parties that may receive the information. The rule also requires a broker-dealer, fund, or registered adviser to provide a consumer who is interested in the more complete privacy disclosures with a reasonable means to obtain them.

      Information about affiliate sharing. Several commenters suggested that the rule should not require that initial and annual notices include categories of affiliates with whom a financial institution shares information. These commenters noted that the Act specifically requires disclosures of categories of nonaffiliated third parties only, and that the only statutorily mandated disclosures concerning affiliate sharing are disclosures required, if any, concerning affiliate sharing under the Fair Credit Reporting Act ("FCRA").115 These commenters concluded that the Commission and the Agencies, by expanding the disclosure requirements in the manner prescribed in the proposed rule, would be exceeding their rulemaking authority and imposing an unnecessary burden on financial institutions.

      We believe that the language and legislative history of section 503 support requiring disclosures of affiliate sharing beyond what may be required by the FCRA. First, section 503(b) does not state that the items listed in the section are to be the only items set out in a financial institution's initial and annual disclosures. Instead, it uses the nonrestrictive phrase "shall include" when discussing the contents of the disclosures, thereby preserving flexibility for the Commission (which was expressly granted authority under section 503(a) to prescribe rules governing these notices) to require that additional items be addressed in the disclosures consistent with those specifically enumerated.

      Second, section 503(a) states that the financial institution shall provide in its initial and annual notices "a clear and conspicuous disclosure * * * of such financial institution's policies and practices with respect to—(1) disclosing nonpublic personal information to affiliates and nonaffiliated third parties, consistent with section 502, including the categories of information that may be disclosed; * * *" While the FCRA disclosures would be a subset of the disclosures required by section 503(a)(1), they may not be sufficient to fully satisfy that requirement.

      Third, the legislative history of the G- L-B Act suggests that Congress intended the disclosures to provide more information about affiliate sharing than what may be required under the FCRA.116 That history underscores the Congressional intent of ensuring that individuals are given the opportunity to make informed decisions about the privacy policies and practices of financial institutions. We believe that limiting the disclosures about affiliate sharing just to those disclosures that may be required under the FCRA would frustrate that purpose.117

      Disclosures of the right to opt out. Other commenters suggested that the final rule eliminate the requirement that the initial and annual notices contain disclosures about a consumer's right to opt out. These commenters pointed out that the statute does not specifically require these disclosures.

      As previously discussed, section 503(a) of the statute requires a financial institution to disclose its policies and practices with respect to sharing information, both with affiliated and nonaffiliated third parties. Given that a financial institution's practices with respect to sharing nonpublic personal information with nonaffiliated third parties will be affected by the opt out rights created by the statute, an institution will need to describe these opt out rights in order to provide a complete disclosure that satisfies the statute.

      Other comments. We received many comments expressing support for a number of the provisions in proposed section 248.6. For example, several commenters agreed with the approach of permitting a financial institution to state generally that it makes disclosures to nonaffiliated third parties "as permitted by law" to describe disclosures made under one of the exceptions. Others agreed with the proposed flexibility to allow a disclosure to be based on current and contemplated information sharing. In light of these comments, we have adopted proposed section 248.6 with changes as discussed above. The final rule makes several other stylistic changes to the material in section 248.6 that are intended to make the rule easier to read.

      Section 248.7 Form of Opt Out Notice to Consumers; Opt Out Methods

      We are adopting as proposed the requirement that any opt out notice provided by a broker-dealer, fund, or registered adviser be clear and conspicuous and accurately explain the right to opt out.118 The final rule also requires, as proposed, that a financial institution provide the consumer with a reasonable means by which to opt out, and honor an opt out election as soon as reasonably practicable. The rule also states that an opt out election survives until revoked by the consumer. In addition, we have adopted provisions to address the application of these rules to joint accounts, the means by which an opt out right may be exercised, duration of an opt out, the level of detail required in the opt out notice, and the time by which an opt out election must be honored. The final rule also includes stylistic changes to make it easier to read.

      Joint accounts. We agree with the commenters who stated that a financial institution should have the option of providing one notice per account, regardless of the number of persons on the account, and the final rule includes a new section to address this issue.119 Under the final rule, a financial institution may provide one initial, annual, and opt out notice per account. However, each of the accountholders must have the right to opt out. The final rule also requires a broker-dealer, fund, and registered adviser to state in the opt out notice provided to a joint accountholder whether the institution will consider an opt out by a joint accountholder as an opt out by all of the accountholders or whether each accountholder is permitted to opt out separately.

      Means of opting out. At the suggestion of many commenters, the final rule includes a provision that permits a broker-dealer, fund, or registered adviser to require that a consumer opt out through a specific means, if the means is reasonable for the consumer.120 We recognize that a financial institution may not have systems in place or trained personnel to handle opt out elections at each point of contact between a consumer and financial institution and therefore may choose not to honor opt out elections communicated to the institution through means other than those specified for the consumer.

      As was proposed, the examples provide that a broker-dealer, fund, or registered adviser may not require a consumer to write his or her own letter in order to opt out.121 The final rule adds an example of a toll-free telephone number as another way by which financial institutions may allow consumers to opt out.122

      Duration of opt out. Several commenters requested changes to the proposed provision concerning duration of an opt out.123 They noted that a financial institution would be required to keep track of opt out elections if, for example, a person opts out during the course of establishing a customer relationship with a financial institution, terminates that relationship, and then establishes another customer relationship several years later, perhaps under a different name or with someone on a joint account. The commenters suggested that it would be more appropriate in these circumstances to treat the opt out election made in connection with the first relationship as applying solely to that relationship.

      We agree with the commenters' suggestions. Under the final rule, a broker-dealer, fund, or registered adviser is to treat an opt out election made by a customer in connection with a prior customer relationship as applying solely to the nonpublic personal information that the institution collected during, or related to, that relationship. That opt out will continue until the customer revokes it.124 However, if the customer relationship terminates and a new one is established at a later point, the institution must then provide a new opt out notice to the customer in connection with the new relationship, and any prior opt out election does not apply to the new relationship.125

      Level of detail required in opt out notice. We are adopting as proposed the rule requirements for the form of the opt out notice.126 A few commenters interpreted the proposal as requiring a more detailed disclosure of categories of nonpublic personal information and nonaffiliated third parties in the opt out notice than is required in the initial and annual notices.127 We did not intend this result, and specifically referred to section 248.6 in the proposed opt out provision to address precisely this concern. The disclosures in the initial and annual notices of the categories of nonpublic personal information being disclosed and the categories of nonaffiliated third parties to whom the information is disclosed will suffice for the opt out notices as well. If the opt out notice is a part of the same document that contains the disclosures that must be included in the initial notice, then the financial institution is not required to restate those disclosures in the opt out notice. In these circumstances, the rule requires only that when the opt out and privacy notices are read together, they clearly disclose the categories of nonpublic personal information the institution intends to share and the categories of nonaffiliated third parties with whom it will share.

      One commenter suggested that, while a broker-dealer, fund, or registered adviser should have the option of providing an opt out notice that is sufficiently broad to cover anticipated disclosures, the institution also should be permitted to provide a customer who already has opted out with a new opt out notice in connection with a new financial product or service. If the consumer does not opt out a second time, the institution would be free to disclose nonpublic personal information obtained in connection with that financial product or service.

      We agree that a broker-dealer, fund, or registered adviser should have the flexibility to provide opt out notices that are either narrowly tailored to specific types of nonpublic personal information and types of nonaffiliated third parties or that are more broadly worded to anticipate future disclosure plans. We note, however, that when a consumer has elected to opt out of sharing certain nonpublic personal information, the opt out remains in effect until the consumer affirmatively revokes the opt out. Similarly, when a consumer opts out after receiving an opt out notice that is broad enough to cover the new type of information the institution intends to share, the consumer does not have to opt out again.

      Time by which opt out must be honored. We are adopting in the final rule the proposed requirement that a financial institution comply with an opt out election "as soon as reasonably practicable." 128 Many commenters asked us to clarify in the final rule when a financial institution must stop disclosing nonpublic personal information to nonaffiliated third parties after it receives an opt out. Suggestions for a more precise standard ranged from immediate to several months after receiving the opt out. We believe that a more general rule is appropriate in light of the wide range of practices among financial institutions. A broker-dealer, fund, or registered adviser might view a specific standard as a safe harbor in all circumstances and thus fail to implement an opt out as early as it could. In addition, a standard that reflects existing industry practices and capabilities is likely to become outmoded quickly as advances in technology increase efficiency. We therefore decline to adopt a more rigid standard.

      Section 248.8 Revised Privacy Notices

      We are adopting as proposed the rule regarding revised privacy notices.129 The rule prohibits a financial institution, directly or through its affiliates, from disclosing nonpublic personal information about its consumers to nonaffiliated third parties unless the institution first provided a copy of its privacy notice and opt out notice. The rule also requires that these notices be accurate when given.130 Thus, if a broker-dealer, fund, or registered adviser wants to disclose nonpublic personal information in a way that is not accurately described in its notices, the institution must provide new notices before disclosing that information. The rule also provides examples of when a new notice is required.131

      Section 248.9 Delivering Privacy and Opt Out Notices

      The requirements for delivery of initial, annual, and opt out notices were set out in three different sections of the proposed rules.132 The final rules combine in one section the requirements for delivery of each type of notice.133 The general provision requires that an institution provide a notice to a consumer in a manner such that the consumer can reasonably be expected to receive actual notice in writing, or, if the consumer agrees, electronically.134

      Posting initial notices on an Internet web site. The final rule retains the proposed example of posting a notice on an Internet web site and requiring a consumer to acknowledge receipt of the notice as a step in the process of obtaining a financial product or service, as one way to comply with the rule.135 A few commenters suggested that a financial institution be allowed to deliver initial notices simply by posting the institution's notice on its Internet web site. We believe that posting the notice on a web site alone would not be sufficient in all cases for a broker-dealer, fund, or registered adviser reasonably to expect that its consumers will receive the notice.136 Accordingly, we have not expanded the rule beyond the circumstances described in the proposed example.

      Posting annual notices on an Internet web site. At the suggestion of several commenters, the final rule clarifies that a broker-dealer, fund, or registered adviser may reasonably expect a customer who uses the institution's Internet web site to obtain financial products or services will receive actual notice if the customer has agreed to accept notices at the institution's web site, and if the institution continuously posts a current notice of its privacy policies and practices in a clear and conspicuous manner on the web site.137 We agree that it is appropriate to provide annual notices in this way for customers who conduct transactions electronically and agree to accept notices on a web site. We also believe that this revision will reduce the burden on broker-dealers, funds, and registered advisers while ensuring that customers who transact business electronically will have continuous access to institutions' privacy policies and practices.

      Householding. Two commenters requested that the Commission permit broker-dealers and funds to deliver a single privacy notice to consumers who share the same address ("householding"). The Commission currently permits householding of prospectuses and fund shareholder reports, and the commenters argue that the same justifications that support the existing householding rules, such as reducing the number of duplicate documents investors receive, would apply with respect to privacy notices.138 We agree that householding is appropriate in certain circumstances, and the final rule adds an example that allows a broker-dealer or fund to consider that customers have actually received an annual privacy notice if the institution includes the notice with or in a prospectus or shareholder report delivered under conditions set forth in rules permitting householding of those documents.139

      The example requires that the annual privacy notice be delivered with or in a prospectus or shareholder report that is householded because we believe that customers whose disclosure documents are householded also would consent to having their annual privacy notices householded. We cannot assume that the same would be true for other customers. The example also limits householding to annual privacy notices because we believe that any reduction in the number of initial notices consumers might receive due to householding would be minimal. Individuals who share the same address may not become consumers of a brokerdealer, fund, or registered adviser at the same time.

      Disclosures to customers requesting no communication. We received comment that the final rule clarify that a financial institution may honor a customer's request not to receive information from the institution about his or her relationship with the institution. The final rule clarifies that a broker-dealer, fund, or registered adviser need not send an annual privacy notice to a customer who affirmatively requests no communication from the institution, provided that the notice is available upon request.140

      Reaccessing a notice. The final rule provides an example that permits a broker-dealer, fund, or registered adviser to provide only the current privacy notice on a web site to someone seeking to obtain the privacy notice after having received the initial notice.141 This example responds to a request for clarification in the rule concerning potential confusion and burden that might result if the rule required a financial institution to make available every version of its privacy policies.

      Joint notices. The final rule affirms that two or more financial institutions may provide a joint notice as long as the notice is accurate with respect to each institution.142 This provision reflects requests by many commenters from the securities industry that the rule permit this flexibility. We believe that brokerdealers, funds, and registered advisers should be able to combine initial, annual, or revised disclosures in one document and to give, on a collective basis, a consumer only one copy of the notice. For example, a clearing broker could provide a joint notice with an introducing broker for which it clears transactions on a fully disclosed basis, or a fund complex could provide a joint notice for all the funds in the complex. We emphasize that the notice must be accurate for each institution that uses the notice, and must identify each institution by name.143

      B. Subpart B—Limits on Disclosure

      Sections 248.10 through 248.12 of Regulation S-P contain limitations concerning (i) disclosure of nonpublic personal information to nonaffiliated third parties, (ii) redisclosure or reuse of information that a financial institution discloses to other parties, and (iii) sharing of account number information for marketing purposes.

      Section 248.10 Limits on Disclosure of Nonpublic Personal Information to Nonaffiliated Third Parties

      We are adopting the limits on disclosure of nonpublic personal information to nonaffiliated third parties, substantially as proposed.144 Section 502(a) of the G-L-B Act generally prohibits a financial institution, directly or through its affiliates, from sharing nonpublic personal information about a consumer with a nonaffiliated third party unless the institution (i) provides the consumer with a notice of the institution's privacy policies and practices, (ii) provides the consumer with a clear and conspicuous notice that the consumer's nonpublic personal information may be disclosed to nonaffiliated third parties, (iii) gives the consumer an opportunity to opt out of that disclosure, and (iv) informs the consumer how to opt out.145

      Most commenters on this section focused on the question of what is a reasonable opportunity to opt out. Some suggested that the rule permit a financial institution to begin sharing information immediately after it provides the opt out and initial notice in connection with an electronic transaction, such as an ATM transaction. Others advocated a mandatory delay of 120 days after the notices are provided.

      We believe that the wide variety of suggestions underscores the appropriateness of a more general test rather than a mandatory waiting period in all cases. If a broker-dealer intends to disclose nonpublic personal information that it obtains through an isolated transaction and the consumer is provided a convenient means of opting out as part of the transaction, it would be reasonable not to force the brokerdealer to wait before sharing the information.146 For notices that are provided by mail, however, we believe the consumer should have additional time. In these latter circumstances, we consider it reasonable to permit the consumer to opt out by mailing back a form, by calling a toll-free number, or by any other reasonable means within 30 days after the date the opt out notice was mailed.147 The final rule also provides an example of a reasonable opportunity for opting out in connection with accounts opened electronically.148 However, we have not tried to anticipate every scenario and establish a specific period for each. Instead, the rule provides that the consumer must be given a reasonable opportunity to opt out and then includes some illustrative examples of what would be reasonable in different contexts.149

      Section 248.11 Limits on Redisclosure and Reuse of Information

      We are revising the limits on redisclosure and reuse to clarify their scope. The limits on redisclosure and reuse that apply to recipients of nonpublic personal information and their affiliates will depend on whether the information was provided under an exception in section 502(e) of the G-L-B Act.

      Section 502(c) of the G-L-B Act provides that a nonaffiliated third party that receives nonpublic personal information from a financial institution must not, directly or indirectly through an affiliate, disclose that information to any person that is not affiliated with the financial institution or the third party, unless the disclosure would be lawful if made directly by the financial institution. A broker-dealer, fund, or registered adviser generally may disclose nonpublic personal information to a nonaffiliated third party (i) for any purpose if the consumer has received a privacy and opt out notice and has not exercised the right to opt out, (ii) under section 502(b), and (iii) in accordance with specific enumerated exceptions under section 502(e).

      The limits on redisclosure and reuse in the proposed rule reflected our belief that implicit in the joint marketing and enumerated exceptions is the idea that information may be used only for the purposes for which the third party received it.150 The proposed rules implemented section 502(c) by imposing limits on redisclosure for a broker-dealer, fund, or registered adviser that receives information from a nonaffiliated financial institution, and for any nonaffiliated third party that receives nonpublic personal information from a broker-dealer, fund, or registered adviser.151 The proposed rules also implemented the implicit limitations on reuse by imposing limits on the ability of broker-dealers, funds, and registered advisers and nonaffiliated third parties to reuse nonpublic personal information they receive.152

      We sought comment on the correct interpretation of "lawful" in the context of section 502(c), and whether a recipient of nonpublic personal information could "lawfully" disclose information if the disclosure complied with a notice provided by the institution that initially made the disclosure. Finally, we invited comment on whether the rules should require a financial institution that discloses nonpublic personal information to a nonaffiliated third party to develop policies and procedures to ensure that the third party complies with the limits on redisclosure of that information.

      Limits on reuse and redisclosure. Commenters who disagreed with the proposal to impose limits on reuse argued that Congress, by addressing limits on redisclosures in section 502(c), provided the only limits that may be imposed on what a recipient of nonpublic personal information can do with that information. We disagree.

      Although section 502(c) does not expressly address reuse, reuse limitations are, as indicated, implicit in the provisions authorizing or permitting disclosures. For example, it would be inconsistent with the purposes of the Act to permit information disclosed in accordance with section 502(e)(1) (which permits disclosures as necessary to effect, administer, or enforce a transaction with a consumer or in connection with certain routine activities related to such a transaction) to be used for the third party recipient's marketing purposes. Moreover, permitting reuse without limits would undermine the protections afforded to a consumer who does not establish a customer relationship. Such a person does not receive notice that the disclosures under section 502(e) are even made because these disclosures do not entitle the consumer to any privacy or opt out notice. Thus, the limits on reuse are the only protection under the statute for a consumer who is not a customer. Accordingly, consistent with the purposes of the G-L-B Act, the rule limits the reuse of information received under an exception of the Act.153

      By contrast, when a consumer decides not to opt out after receiving adequate notices and the opportunity to do so, that consumer has decided to permit the broker-dealer, fund, or registered adviser to share his or her nonpublic personal information with the categories of entities identified in the institution's notices. The consumer's primary protection in the case of a disclosure falling outside the section 502(e) exceptions comes from receiving the mandatory disclosures and the right to opt out. The G-L-B Act provides additional protection in section 502(c) by restricting a recipient's ability to redisclose information to entities not affiliated with either the recipient or the financial institution making the initial disclosure. Thus, if a consumer permits a broker-dealer, fund, or registered adviser to disclose nonpublic personal information to the categories of nonaffiliated third parties that are described in the institution's notices, recipients of that nonpublic personal information appear authorized under the statute to make disclosures consistent with those notices.

      Limits on redisclosure and reuse when information is received under section 502(e). If a broker-dealer, fund, or registered adviser receives nonpublic personal information provided under section 502(e), it may disclose the information to its affiliates or to the affiliates of the financial institution from which it received the information. The broker-dealer, fund, or registered adviser also may disclose and use the information under the same type of exceptions in the ordinary course of business to carry out the activity covered by the exception under which the institution received the information.154 The affiliates of the broker-dealer, fund, or registered adviser may disclose and use the information, but only to the extent permissible for the broker-dealer, fund, or registered adviser.155

      These same general rules apply to a third party other than a broker-dealer, fund, or registered adviser that receives nonpublic personal information from a broker-dealer, fund, or registered adviser. Thus, the third party receiving the information under one of the section 502(e) exceptions may disclose the information to its affiliates or to the affiliates of the broker-dealer, fund, or registered adviser that made the disclosure. The third party also may disclose and use the information under one of the section 502(e) exceptions as noted in the rule. The affiliates of the third party may disclose and use the information only to the extent permissible for the third party.

      Limits on redisclosure and reuse when information is not received under section 502(e). If a broker-dealer, fund, or registered adviser receives nonpublic personal information outside one of the section 502(e) exceptions, it may disclose the information to (i) its affiliates, (ii) the affiliates of the financial institution that made the initial disclosure, or (iii) any other person if the disclosure would be lawful if made directly by the financial institution from which the information was received.156 Thus, the receiving broker-dealer, fund, or registered adviser may disclose under one of the section 502(e) exceptions.

      If a third party receives information from a broker-dealer, fund, or registered adviser outside one of the section 502(e) exceptions, the third party may disclose to its affiliates or to the affiliates of the broker-dealer, fund, or registered adviser. The third party also may disclose to any other person if the disclosure would be lawful if made by the broker-dealer, fund, or registered adviser. The third party's affiliates may disclose and use the information to the same extent permissible for the third party.

      If an entity receives information outside of one of the section 502(e) exceptions, that entity will in essence "step into the shoes" of the brokerdealer, fund, or registered adviser that made the initial disclosures. Thus, if the broker-dealer, fund, or registered adviser made the initial disclosures after representing to its consumers that it had carefully screened the entities to whom it intended to disclose the information, the receiving entity must comply with those representations. Otherwise, the subsequent disclosure by the receiving entity would not comply with the notices given to consumers and would not, therefore, be lawful. Even if these representations do not prevent the recipient from redisclosing the information, the recipient's ability to redisclose will be limited by whatever opt out instructions the consumer gave to the broker-dealer, fund, or registered adviser making the initial disclosures and by any new opt out instructions the consumer gives after the initial disclosure. The receiving entity, therefore, must have procedures in place to monitor continually the status of who opts out and to what extent. Given these practical limitations on the ability of a recipient to disclose under another institution's privacy and opt out notices, entities are most likely to redisclose under one of the section 502(e) exceptions (as implemented by sections 248.14 and 248.15 of the final rule).

      Monitoring third parties. Most commenters stated that financial institutions should not have to monitor compliance with the redisclosure and reuse provisions of the rule, and we have decided not to revise the rule to impose a specific duty on brokerdealers, funds, and registered advisers to monitor third parties' use of nonpublic personal information they provide. The rule does not, however, address whether obligations to monitor reuse and redisclosure may arise in other contexts. Most of the commenters who requested that we not impose such a duty stated that they have contracts in place that limit the recipient's use of the information. In addition, the limits on reuse as stated in the final rule provide a basis for an enforcement action to be brought against an entity that violates those limits.157

      Section 248.12 Limits on Sharing Account Number Information for Marketing Purposes

      We are revising the proposed rule regarding limits on sharing account number information for marketing purposes158 by (i) adding two exceptions that we believe are necessary to enable broker-dealers, funds, and registered advisers to engage in legitimate, routine business practices and that are unlikely to pose a significant potential for abuse, and (ii) clarifying that the prohibition does not apply in two circumstances frequently mentioned in the comments.159 Section 502(d) of the G-L-B Act prohibits a financial institution from disclosing, "other than to a consumer reporting agency, an account number or similar form of access number or access code for a credit card account, deposit account, or transaction account of a consumer to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail to the consumer." The proposal applied this statutory prohibition to disclosures made directly or indirectly by a brokerdealer, fund, or registered adviser, and sought comment on whether the rule should include any exceptions to the prohibition. Some commenters suggested various exceptions while other commenters supported a flat prohibition in order to protect consumers from unscrupulous practices.

      Disclosures to a financial institution's agent or service provider. Several financial institutions stated that they use agents or service providers to conduct marketing on the institution's behalf. This might occur, for example, when a broker-dealer instructs a service provider that assists in the delivery of required regulatory notices to include a "statement stuffer" about the brokerdealer's products and services. We recognize the need to disclose account numbers in this instance, and believe that this kind of disclosure poses little risk to the consumer.

      Several commenters argued that the final rule should exclude disclosures to agents because they effectively act as the financial institution in marketing the financial products and services of the broker-dealer, fund, or registered adviser. We are concerned, however, that the agent of these financial institutions may engage in practices contrary to the institution's instructions. While a broker-dealer, fund, or registered adviser frequently will use agents to assist it in marketing its products, providing agents access to a consumer's account number may erode a consumer's protections. Accordingly, we have added an exception to permit a broker-dealer, fund, or registered adviser to disclose account numbers to an agent for the purpose of marketing the institution's financial product or services as long as the agent has no authority to initiate charges to the account.160

      Encrypted numbers. Many commenters urged us to exercise our exemptive authority to permit the transmission of account numbers in encrypted form or to clarify that the prohibition applies only to disclosure to nonaffiliated third parties who are not subject to one of the exceptions under sections 248.13, 248.14, or 148.15. Several commenters noted that financial institutions frequently use encrypted account numbers and other internal identifiers of an account to ensure that a consumer's instructions are properly executed. The inability to continue using these internal identifiers would increase the likelihood of errors in processing a consumer's instructions. These commenters also noted that if internal identifiers are not used, a consumer would have to provide an account number in order to ensure proper handling of a request. This procedure could expose the consumer to a greater risk than would the use of an internal tracking system that preserves the confidentiality of a number that may be used to access the account. One commenter also noted that customer account numbers are protected by strict contractual confidentiality provisions.

      We believe an encrypted account number without the key is not the same as the number itself and thus falls outside the prohibition in section 502(d). The G-L-B Act focuses on numbers that provide access to an account. The encrypted number, however, operates as an identifier attached to an account for internal tracking purposes only, and without the key does not permit someone to access an account. For this reason the final rule clarifies that an account number, or similar form of access number or access code, does not include a number or code in an encrypted number form, as long as the financial institution does not provide the recipient with the means to decrypt the number.161

      C. Subpart C-Exceptions

      Sections 248.13 through 248.15 of Regulation S-P include exceptions from the provisions requiring financial institutions to provide privacy notices and opt out notices to consumers. These exceptions permit broker-dealers, funds, and registered advisers to disclose information to nonaffiliated third parties in circumstances such as maintaining or servicing a customer's account, or complying with federal, State, or local laws.

      Section 248.13 Exception to Opt Out Requirements for Service Providers and Joint Marketing

      We are adopting substantially as proposed an exception to the opt out requirements for service providers and joint marketing, with revisions to clarify the rule's scope.162 Section 502(b) of the G-L-B Act permits financial institutions to share information with a nonaffiliated third party without providing the consumer a right to opt out if the third party is to perform services for (or functions on behalf of) the financial institution, including marketing the institution's own products or services, or financial products or services offered under a joint agreement between two or more financial institutions. Section 502(b)(2) requires the financial institution to "fully disclose" to the consumer that it will provide this information to the nonaffiliated third party before sharing the information and to enter into a contract with the third party that requires the third party to maintain the confidentiality of the information. As noted in the proposed rule, this contract should be designed to ensure that the third party (i) will maintain the confidentiality of the information at least to the same extent as is required for the financial institution that discloses it, and (ii) will use the information solely for the purposes for which the information is disclosed or as otherwise permitted under the proposed rules.163

      Commenters expressed concern that routine servicing agreements between a financial institution and, for instance, a customer account servicer would be subject to the requirements of the proposed rules.164 These commenters noted that section 502(e) of the G-L-B Act contains several exceptions that permit broker-dealers, funds, and registered advisers to share information necessary to allow a third party to perform services for the institution. The commenters requested clarification that sharing information with a service provider under one of the section 502(e) exceptions is not subject to the requirements imposed under section 502(b)(2) of the G-L-B Act. We agree that when a broker-dealer, fund, or registered adviser is permitted to share nonpublic personal information with a nonaffiliated third party under section 502(e), the institution does not have to comply first with the requirements imposed by section 502(b)(2).

      A few commenters also argued that it is illogical to impose requirements on service providers that receive information under section 502(b)(2) when no requirements are imposed on service providers that receive information under section 502(e). We believe, however, that a plain reading of section 502(b)(2) leads to that result.165 We read the phrase "if the financial institution fully discloses * * *" as used in section 502(b)(2) to modify the phrase "This subsection shall not prevent a financial institution from providing nonpublic personal information to a nonaffiliated third party to perform services for or functions on behalf of the financial institution, * * *." We therefore conclude that any disclosure to a service provider not covered by section 502(e) must satisfy the disclosure and written contract requirements of section 502(b)(2).

      The Proposing Release requested comment on whether the rule should include safeguards beyond those provided by the G-L-B Act to protect a financial institution from the risks that can arise from agreements with third parties. The majority of commenters who addressed the issue argued that the rule should not. We agree that the protections set out in the statute, as implemented by section 248.13(a)(1), are adequate for purposes of the privacy rules. Those protections require a financial institution to provide the initial notice required by section 248.4 as well as to enter into a contractual agreement with a third party that prohibits the third party from disclosing or using the information other than to carry out the purposes for which the institution disclosed the information, including use under an exception in sections 248.14 or 248.15 in the ordinary course of business to carry out those purposes. These limitations will preclude recipients from sharing a consumer's nonpublic personal information through a chain of third party joint marketing agreements.

      Many commenters recommended that the Commission permit broker-dealers, funds, and registered advisers to grandfather prior joint marketing and servicing agreements, or permit institutions to comply with the requirements by notifying existing service providers about the privacy rules' requirements. One commenter stated that without a grandfather provision, institutions would need more than six months to review prior agreements and negotiate amendments with third parties. We believe that a balance must be struck that minimizes interference with existing contracts while preventing evasions of the regulation. To achieve these goals, the final rule provides that contracts entered into on or before July 1, 2000 must be brought into compliance with the provisions of section 248.13 by July 1, 2002.166

      Section 248.14 Exceptions to Notice and Opt Out Requirements for Processing and Servicing Transactions

      We have revised the proposed exceptions to notice and opt out requirements for processing and servicing transactions 167 to include disclosures made in connection with (i) servicing or processing financial products or services requested by the consumer or (ii) maintaining or servicing a customer account.168 As previously discussed, section 502(e) of the G-L-B Act creates exceptions to the requirements that apply to the disclosure of nonpublic personal information to nonaffiliated third parties. Paragraph (1) of that section sets out certain exceptions for disclosures made in connection with the administration, processing, servicing, and sale of a consumer's account. Proposed section 248.10 implemented those exceptions by restating them with only stylistic changes that were intended to make the exceptions easier to read. The Proposing Release noted that the exceptions set out in proposed sections 248.10 and 248.11 do not affect a financial institution's obligation to provide initial and annual notices of its privacy policies and practices.

      We received many comments from broker-dealers, funds, and registered advisers noting that, by deleting the statutory phrase "in connection with" from the exceptions for information shared (i) to service or process a financial product or service requested by the consumer or (ii) to maintain or service a customer account, we narrowed the application of the exception. We did not intend this result, and have changed the final rule accordingly.169

      Several other commenters requested that the final rule provide specific examples of situations that would fall within the exception for processing and servicing customer accounts (such as transfers from a broker-dealer to its registered representatives, or as necessary to arbitrate a dispute, with the consent of the consumer's fiduciary or representative). Others stated that certain services, such as those provided by attorneys, are "necessary" to effect, administer, or enforce a transaction. We believe that disclosures to these types of professionals and under the circumstances posited by the commenters may be necessary to effect, administer, or enforce a transaction in a given situation. However, we have not listed specific types of disclosures in the regulation as necessarily falling within the scope of the exception because we are concerned that a general statement could be applied inappropriately to shelter disclosures that, in fact, are not necessary to effect, administer, or enforce a transaction.

      Other commenters suggested that the final rule clarify, in situations in which a financial institution uses an agent to provide services to a consumer, that the consumer does not have to request directly or authorize the service provider to provide the financial product or service but may request it from the financial institution instead. For example, a consumer may ask the fund or its transfer agent for additional account information that the transfer agent provides as a service for the fund. We agree that the communication may be between the consumer and the service provider, and note that the rule governing agents as set out in the definition of "consumer" above provides the flexibility sought by the commenters. An individual will not be a consumer of an entity that is acting as agent for a broker-dealer, fund, or registered adviser in connection with that institution's providing a financial product or service to the consumer.

      Section 248.15 Other Exceptions to Notice and Opt Out Requirements

      We are adopting as proposed the section that includes "other" exceptions to the notice and opt out requirements. As noted above, section 502(e) of the G-L-B Act contains several exceptions to the requirements that otherwise would apply to the disclosures of nonpublic personal information to nonaffiliated third parties. The proposed rule set out those exceptions for disclosures that are not made in connection with the administration, processing, servicing, or sale of a consumer's account, and made stylistic changes to the statutory language that were intended to clarify the exceptions.170 The proposal also provided an example of the consent exception in the context of a consumer who consents to having a broker or investment adviser confirm the amount of assets in the customer's account to a nonaffiliated mortgage lender so that the lender can evaluate the customer's application for a loan. We invited comment on whether we should add safeguards to the exception for consent in order to minimize the potential for consumer confusion.

      Several commenters responded to the request for comment on whether the consent exception should include consumer safeguards, such as a requirement that the consent be written, be indicated by a signature on a separate line, or automatically terminate after a certain period of time. Some commenters favored the additional safeguards discussed in the proposal, while others maintained that safeguards are unnecessary. Several suggested that the consent exception include a provision noting that participation in a program where a consumer receives "bundled" products and services necessarily implies consent to the disclosure of information between the entities that provide the bundled products or services. Others suggested that certain terms and conditions be imposed on any consent agreement, such as a time by which the financial institution must stop disclosing nonpublic personal information once a consent is revoked.

      We have declined to elaborate on the requirements for obtaining consent or the consumer safeguards that should be in place when a consumer consents. We believe that the resolution of this issue is appropriately left to the particular circumstances of a given transaction. We note that any broker-dealer, fund, or registered adviser that obtains the consent of a consumer to disclose nonpublic personal information should take steps to ensure that the limits of the consent are well understood by both the institution and the consumer. We also note that a consumer may always revoke his or her consent. In light of the safeguards already in place, we have decided not to adopt additional safeguards in the consent exception.

      Many commenters offered specific suggestions for additional exceptions or revisions to the proposed exceptions. In some cases, the suggestions are accommodated elsewhere in the regulation (such as exceptions to permit disclosures to independent contractor registered representatives or attorneys to effect a transaction).171 In other cases, the suggestions are inconsistent with the statute.172 Accordingly, we have retained the statement of the exceptions as proposed.173

      D. Subpart D—Relation to Other Laws; Effective Date

      Sections 248.16 through 248.18 of Regulation S-P include provisions that explain the interaction between the regulation and certain other laws, and that provide an effective date and compliance date for the regulation.

      Section 248.16 Protection of Fair Credit Reporting Act

      We are adopting as proposed the section that explains the interaction between Regulation S-P and the Fair Credit Reporting Act.174 Section 506 of the G-L-B Act makes several amendments to the FCRA to vest rulemaking authority in various agencies and to restore the Banking Agencies' regular examination authority. Paragraph (c) of section 506 states that, except for these amendments to the FCRA, nothing in Title V of the G-L-B Act is to be construed to modify, limit, or supersede the operation of the FCRA, and no inference is to be drawn on the basis of the provisions of Title V whether information is transaction or experience information under section 603 of the FCRA. Proposed section 248.14 implemented section 506(c) of the G-L-B Act by restating the statute, making only minor stylistic changes intended to make the rule clearer. Comments about this provision focused on whether the Commission, by requiring annual notice of a consumer's right to opt out under the FCRA, was modifying, limiting, or superseding the operation of the FCRA. For the reasons explained in the discussion of section 248.6, above, we do not believe that the annual disclosure mandated by the G- L-B Act affects in any way the obligations imposed by the FCRA.

      Section 248.17 Relation to State laws.

      We are adopting as proposed the section that explains the interaction between Regulation S-P and State laws.175 Section 507 of the G-L-B Act provides that Title V does not preempt any State law that provides greater protections than are provided by Title V. Determinations of whether a State law or Title V provides greater protections are to be made by the Federal Trade Commission ("FTC") after consultation with the agency that regulates either the party filing a complaint or the financial institution about whom the complaint was filed, and may be initiated by any interested party or on the FTC's own motion. The proposed rule essentially restated section 507, stating that the proposed rules (as opposed to the statute) do not preempt State laws that provide greater protection for consumers than do the rules.

      Commenters on this section expressed concern about the potential differences between federal and State privacy laws. Several supported coordination and cooperation among federal and State regulators to ensure consistency in privacy policies. Some commenters requested clarification of whether a particular State law would be considered more restrictive, while others suggested that the final rules establish a choice of law principle for financial institutions operating in more than one State. These and other suggestions made by the commenters appear to exceed the scope of this rulemaking.

      Section 248.18 Effective Date; Transition Rule

      We are adopting as proposed the effective date for Regulation S-P of November 13, 2000, and are providing a compliance date of July 1, 2001.176 We also are adding a provision that clarifies the requirement that financial institutions provide initial privacy and opt out notices to customers by July 1, 2001, and a provision that phases in compliance with respect to existing service agreements.177

      Section 510 of the G-L-B Act states that, as a general rule, the relevant provisions of Title V take effect six months after the date on which rules are required to be adopted, i.e., November 12, 2000. However, section 510(1) authorizes us to prescribe a later date in the rules adopted under section 504. The Proposing Release sought comment on the effective date prescribed by the statute.178 It also would have required that financial institutions provide initial notices, within 30 days of the effective date of the final rule, to people who were customers as of the effective date. The Proposing Release noted that a financial institution would have to provide opt out notices before the rule's effective date if the institution wanted to continue sharing nonpublic personal information with nonaffiliated third parties without interruption.179

      The Congressional Privacy Caucus, several members of Congress, and other commenters have urged the Commission and the Agencies not to delay the effective date past the date set forth in the G-L-B Act.180 By contrast, the overwhelming majority of commenters from the securities industry who addressed this provision requested additional time to comply with the final rule. Commenters stated that six months would not be sufficient to take the steps needed to comply with the regulation, including preparing new disclosure forms, developing software needed to track opt outs, training employees, and creating management oversight systems. Several commenters suggested that it would be less effective and potentially more confusing for consumers to receive several notices around the end of the year 2000 than it would be for the notices to be delivered during a "rolling phase-in." Others noted that the proposed effective date would place a severe strain on financial institutions at a time when other year-end notices need to be prepared and delivered. Several commenters noted that financial institutions have not budgeted for the expenses in the current year that likely will be incurred. Requests for extensions of the effective date typically ranged from six to 24 months from the proposed effective date of the rule (i.e., from November 13, 2000).

      Many commenters also stated that a 30-day phase-in for initial notices to existing customers is not feasible, given the large number of notices, the short period of time allowed, and the competing demands on financial institutions at the time when the initial notices must be sent. A few suggested that the rule require initial notices to be sent only to people who establish customer relationships after the effective date of the rule, and allow a financial institution to send annual notices to existing customers at some point during the next 12 months and annually thereafter.

      We agree that six months may be insufficient in certain instances for a financial institution to have ensured that its forms, systems, and procedures comply with the rule. In order to accommodate situations requiring additional time, we will give financial institutions until July 1, 2001 to be in full compliance with the regulation. Financial institutions are expected, however, to begin compliance efforts promptly, to use the period prior to June 30, 2001 to implement and test their systems, and to be in full compliance by July 1, 2001. Given that this provides financial institutions more than 12 months in which to comply with the rules, we have determined that there no longer is any need for a separate phasein for providing initial notices. Thus, a financial institution will need to deliver all required opt out notices and initial notices before July 1, 2001. We believe that this extension represents a fair balance between those seeking prompt implementation of the protections afforded by the statute and those concerned about the reliability of the systems that are put in place.

      We encourage financial institutions to provide disclosures as soon as practicable. Broker-dealers, funds, and registered agents that do not disclose nonpublic personal information to third parties have fewer burdens under the regulation (both in terms of the notice requirements and opt out mechanism) and should therefore be able to provide privacy notices to their consumers sooner. Depending on the readiness of an institution to process opt out elections, institutions might wish to consider including the privacy and opt out notices in the same mailing as is used to provide tax information or account statements to consumers in the first quarter of 2001 to increase the likelihood that a consumer will not mistake the notices for an unwanted solicitation.

      The extension of the compliance date should provide much of the relief sought by those who suggested that initial notices should not be required for existing customers. By allowing financial institutions to deliver notices over a significantly longer period of time than was proposed, the concentrated burden that would have been imposed by the proposed rules is avoided. Accordingly, we have not adopted the suggestion that initial notices be required only for new customers after the effective date of the rule.

      Broker-dealers, funds, and registered advisers need not give initial notices to customers whose relationships have terminated before the date by which institutions must be in compliance with the rules. Thus, if an account is inactive according to a financial institution's policies before July 1, 2001, then no initial notice would be required in connection with that account. However, because these former customers would remain consumers, a broker-dealer, fund, or registered adviser would have to provide a privacy and opt out notice to them if the institution intended to disclose their nonpublic personal information to nonaffiliated third parties beyond the exceptions in sections 248.14 and 248.15.

      Full compliance with the rules' restrictions on disclosures is required on July 1, 2001. To be in full compliance, broker-dealers, funds, and registered advisers must have provided their existing customers with a privacy notice, an opt out notice, and a reasonable amount of time to opt out before that date. If these have not been provided, the disclosure restrictions will apply. This means that a brokerdealer, fund, or registered adviser would have to cease sharing customers' nonpublic personal information with nonaffiliated third parties on that date, unless it may share the information under an exception under sections 248.14 or 248.15. Broker-dealers, funds, and registered advisers that both provide the required notices and allow a reasonable period of time to opt out before July 1, 2001, may continue to share nonpublic personal information after that date for customers who do not opt out.

      E. Subpart E-Safeguard Procedures

      Section 248.30 Procedures To Safeguard Customer Information and Records

      Commenters on this section supported the proposal, and we are adopting this section as proposed. Section 501 of the G-L-B Act directs the Commission (and the Agencies) to establish appropriate standards for financial institutions relating to administrative, technical, and physical safeguards to protect customer records and information. The rules implement this section by requiring every brokerdealer, fund, and registered adviser to adopt policies and procedures to address the safeguards described above. Consistent with the Act, the proposed rule further requires that the policies and procedures be reasonably designed to: (i) insure the security and confidentiality of customer records and information; (ii) protect against any anticipated threats or hazards to the security or integrity of customer records and information; and (iii) protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

      Some commenters recommended that the Commission add an example to clarify that various financial institutions in a fund complex could satisfy the rule by adopting a single set of policies and procedures for the fund complex. We believe that a single set of policies and procedures for a fund complex could satisfy the rule's requirements, as long as those policies and procedures have been determined to be appropriate for each institution to which they apply.

      10 See infra discussion of sections 248.3(j), (k) (noting that variable annuities and variable life insurance contracts are insurance products and securities).

      11 See infra section 248.3(r).

      12 The Regulation also applies to any unregistered broker, dealer or fund in the United States. See section 248.1. In accordance with the G-L-B Act, however, Regulation S-P does not apply to any investment adviser that is not registered with the Commission. See G-L-B Act §§ 505(a)(5) (Commission has jurisdiction over broker-dealers, funds, and registered advisers); 505(a)(7) (Federal Trade Commission has jurisdiction over financial institutions not subject to the specific jurisdiction of the federal functional regulators). We also note that the privacy rules of Banking Agencies do not apply to foreign offices of financial institutions. See, e.g., Banking Agencies' Release, sections 40.1, 216.1, 332.1, 573.1.

      13 See, e.g., Alfadda v. Fenn, 935 F.2d 475 (2d Cir.), cert. denied, 502 U.S. 1005 (1991); see also Steele v. Bulova Watch Co., 344 U.S. 280 (1952).

      14 We note that a foreign broker-dealer, fund, or investment adviser that registers with the Commission also must comply with regulatory requirements concerning service of process in the United States. See Exchange Act rule 15b1-5(a) [17 CFR 240.15b1-5(a)] (requiring foreign broker-dealer that registers with the Commission to consent to service of process in the United States). See also Investment Company Act rule 7d-1(b)(7) [17 CFR 7d-1(b)(7)]; Investment Advisers Act rule 0-2 [17 CFR 275.0-2].

      15 See supra note 7.

      16 See Proposing Release, supra note 4, at discussion of section 248.2.

      17 The sample disclosures address solely the level of detail required and do not attempt to provide guidance on issues such as type size, margin width, or other characteristics that affect whether a notice is clear and conspicuous.

      18 Cf. Banking Agencies' Release, supra note 2, at sections 40.2, 216.2, 332.2, 573.2 ("Compliance with an example or use of a sample clause, to the extent applicable, constitutes compliance with this part.").

      19 Compare Banking Agencies' Release, supra note 2, sections 40.2, 216.2, 332.2, 573.2.

      20 G-L-B Act § 509(6).

      21 See supra discussion of section 248.2. We are unaware of any savings institution that is registered as a broker and would be subject to Regulation S-P.

      22 See also supra discussion of section 248.1 (privacy rules apply to the foreign offices of registered broker-dealers, funds, and advisers, in addition to the U.S. offices of all broker-dealers, funds, and registered advisers).

      23 Banking Agencies' Release, supra note 2, sections 40.1(b), 216.1(b), 332.1(b), 573.1(b).

      24 See Proposing Release, supra note 4, at discussion of proposed section 248.3(c).

      25 12 CFR part 226.

      26 Regulation DD, 12 CFR part 230.

      27 Many of these commenters expressed concern that the examples would invite litigation because of ambiguities inherent in terms used in the examples in the proposed rule such as "ample line spacing," "wide margins," and "explanations * * * subject to different interpretations."

      28 See section 248.3(c)(2).

      29 See 17 CFR 230.421(b).

      30 See section 248.3(c)(2)(ii)(E). Because we believe that privacy disclosures may be clear and conspicuous when combined with other disclosures, the rule does not mandate that privacy disclosures be provided on a separate piece of paper. The requirement is not necessary and would significantly increase the burden on financial institutions.

      31 Section 248.3(c)(2)(iii).

      32 See section 248.3(d).

      33 5 U.S.C. 552a.

      34 See section 248.3(f).

      35 See G-L-B Act § 502(a). See also sections 248.14 and 248.15. By contrast, the broker-dealer, fund, or registered adviser must give all "customers" a notice of the institution's privacy policy at the time of establishing a customer relationship and annually thereafter during the continuation of the customer relationship. G-L-B Act § 503(a).

      36 See proposed section 248.3(g)(1).

      37 See discussion of section 248.3(o) below.

      38 See section 248.3(g)(2)(i).

      39 Those consumers may not be customers, however. See infra discussion of section 248.3 (explaining how the definition of "customer" will be applied in the loan context). See section 248.4(c)(2).

      40 See proposed section 248.3(g)(2)(iii).

      41 See section 248.3(g)(2)(iii), (v).

      42 Section 248.3(g)(1).

      43 Similarly, a trust, partnership, or personal corporation that has an account with a brokerdealer, fund, or registered adviser would not be a customer for purposes of the privacy rules because these entities are not individuals.

      44 See section 248.3(g)(2)(vii)-(viii), 248.3(k)(2)(i)(D). Three commenters also requested clarification in the examples on whether an individual who uses a financial tool that a financial institution makes available on the Internet is the institution's consumer. The commenters noted that individuals generally use these tools on a one-time or sporadic basis, and the tool typically does not require the user to enter his or her name or address. Thus, the information provided through the Internet tool is not personally identifiable. We agree that under these circumstances the individual would not be the institution's "consumer" and that these circumstances are covered in the examples under the definition of "consumer" and personally identifiable financial information. See section 248.3(g)(2)(ii), 248.3(u)(2)(ii)(B).

      45 See section 248.3(h). The definition is used in sections 248.6(c)(1)(iv), 248.12(a), and 248.15(a)(5) of the final rules.

      46 15 U.S.C. 1681a(f).

      47 See discussion of section 248.3(a) above.

      48 See Form BD, Uniform Application for Broker-Dealer Registration, Explanation of Terms, 1. Form BD defines "control" to mean the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. In addition, there is a presumption of control for any person that (i) is a director, general partner, or officer exercising executive responsibility (or having similar status or functions); (ii) has the right to vote 25 percent or more of a class of voting securities or the power to sell or direct the sale of 25 percent or more of a class of voting securities; or (iii) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital.

      49 Id. See also section 248.3(i).

      50 See 15 U.S.C. 80a-2(a)(9).

      51 See section 248.3(k)(2)(ii).

      52 See e.g., SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959) (variable annuities); Exemption of Certain Variable Life Insurance Contracts and Their Issuers from Federal Securities Laws, Investment Company Act Release No. 7644 (Jan. 31, 1973) [38 FR 4315 (Feb. 13, 1973)] (variable life contracts).

      53 See section 248.3(k)(2)(i)(E).

      54 These individuals could include a contract owner and could also include any other individual who has the rights of a contract owner, such as the ability to direct underlying investments.

      55 See section 248.3(k)(2)(i)(A) (consumer who has a brokerage account (including a margin account) has a continuing relationship with a broker-dealer).

      56 The originating lender will then have a consumer relationship with the borrower.

      57 In those circumstances, the borrower will be entitled to receive initial and annual notices from the loan servicer.

      58 A broker-dealer who purchases loans for securitization would have to provide notice and opt out to borrowers before sharing nonpublic personal information about the borrowers with nonaffiliated third parties, unless the sharing was necessary to effect or administer the securitization. See section 248.14(a)(3).

      59 One commenter also requested that the Commission except from the notice requirements closed-end funds whose information about record owners is limited to name, address, and number of shares held and who neither have affiliates nor share nonpublic personal information with third parties. The G-L-B Act does not exempt closed-end funds from privacy provisions of Title V. Although closed-end funds may bear the costs of mailing initial privacy notices to new customers, they can reduce the burden of annual notices by including them with a shareholder report. See discussion of section 248.3(c) (definition of "clear and conspicuous").

      60 See Proposing Release, supra note 4, at text following n.37.

      61 See G-L-B Act § 509(6).

      62 The investment adviser may receive nonpublic personal information about the fund's shareholders in connection with performing services on behalf of the fund or servicing the shareholders' accounts. The G-L-B Act permits a fund to share this information with the adviser if the adviser is an affiliate or if the adviser is a nonaffiliated third party. See G-L-B Act §§ 502(b)(2), (e). See also sections 248.13, 248.14.

      63 Section 248.3(k)(2)(i)(A).

      64 Section 248.3(k)(2)(i)(D).

      65 See supra discussion of section 248.3(g).

      66 15 U.S.C. 78c(a)(5).

      67 The term also is used in the definition of "affiliate." See section 248.3(a).

      68 See G-L-B Act § 502(e)(5).

      69 69 12 U.S.C. 1843(k).

      70 G-L-B Act § 509(3); proposed section 248.3(m)(2). Two commenters requested that the rule clarify that an independent contractor registered representative of a broker-dealer is not a separate financial institution when acting in the capacity of a registered representative. We believe that the rules address this situation and need no further revision. An independent contractor registered representative is considered an "associated person" of a broker-dealer under the Exchange Act if the representative's activities are subject to control by the broker-dealer, such as when there is a principal and agent relationship. See Letter to Gordon S. Macklin, President, National Association of Securities Dealers, Inc. from Douglas Scarff, Director, Division of Market Regulation, Commission (June 18, 1982) (on file with the Commission). As discussed above, a broker-dealer's consumer is not considered a consumer of the broker-dealer's agent. See section 248.3(g)(2)(v). An independent contractor, however, also may be a registered adviser who as such, acts in a different capacity than as agent for the brokerdealer. In these circumstances, the registered representative is a different financial institution. Therefore, an investor who obtains investment advisory services from that registered representative acting as an investment adviser would be a consumer of the investment adviser.

      71 These entities will, however, be subject to the limits on reuse and redisclosure under section 248.11 with respect to any nonpublic personal information they receive from a nonaffiliated financial institution that has disclosure obligations under these rules.

      72 But see section 248.3(g)(2)(ii) (an individual is not a consumer of a broker-dealer, fund, or registered adviser if the individual provides the institution only with name, address, and general areas of interest in connection with a request for a prospectus, investment adviser brochure, or other information about financial products or services).

      73 15 U.S.C. 80b-2(a)(11).

      74 15 U.S.C. 80a-3. As noted in the Proposing Release, a business development company, which is an investment company but is not required to register with the Commission, is subject to Regulation S-P. See Proposing Release, supra note 4, at n.30. See also 15 U.S.C. 80a-2(a)(48). An entity that is not an "investment company" under the Investment Company Act, is not subject to Regulation S-P. See 15 U.S.C. 80a-3(c).

      75 The Banking Agencies (other than the Board of Governors of the Federal Reserve) and the Federal Trade Commission proposed alternative rule text for this approach. See Privacy of Consumer Financial Information, 65 FR 8770, 8790-91, 8804-05, 8811-12 (Feb. 22, 2000); Privacy of Consumer Financial Information, 65 FR 11174, 11189-90 (Mar. 1, 2000) (Federal Trade Commission proposal).

      76 See section 248.3(v)(1). See also 17 CFR 230.144A(d)(1), .903(b)(1)(i).

      77 Section 248.3(v)(2).

      78 See section 248.3(v)(3)(iii)(2).

      79 Compare Banking Agencies' Release, supra note 2, sections 40.3(p), 216.3(p), 332.3(p), 573.3(p) (definition of "publicly available information").

      80 See sections 248.3(t)(2).

      81 See section 248.3(t)(3).

      82 See Proposing Release, supra note 4, at discussion of proposed section 248.3(v).

      83 We note that names, addresses, and telephone numbers, if publicly available, will not be subject to the opt out provisions of the statute unless that information is "derivative information" (i.e., information that is part of a list, description, or other grouping of consumers that is derived from personally identifiable financial information that is not publicly available information). An investment adviser's client list is an example of this type of information, even if the list includes clients' names, addresses, and telephone numbers that are otherwise publicly available. In circumstances in which a consumer does not opt out, a financial institution may disclose nonpublic personal information about a consumer to a nonaffiliated third party if the disclosure is consistent with the institution's opt out and privacy notices.

      84 See section 248.3(u)(2)(i)(F).

      85 See section 248.3(u)(2)(ii)(B).

      86 See section 248.3(v)(1).

      87 As noted above, however, broker-dealers and funds that provide insurance products that also are securities and registered advisers who provide advice with respect to those products will be subject to this part with respect to their provision of those securities and advice about those securities. See supra discussion of section 248.1.

      88 G-L-B Act § 503(a).

      89 G-L-B Act § 502(a).

      90 See proposed section 248.4.

      91 Section 248.4(a)(1).

      92 17 CFR 240.10b-16. See Proposing Release, supra note 4, at text accompanying n.35.

      93 17 CFR 275.204-3(b) (requiring delivery of the brochure (i) not less than 48 hours before entering into an investment advisory contract with the client or (ii) at the time of entering into the contract as long as the client has at least 5 business days to cancel the contract without penalty).

      94 See section 248.4(e)(1)(i).

      95 See 15 U.S.C. 78eee-78fff-1.

      96 See section 248.4(e)(1)(ii).

      97 See section 248.4(e)(1)(iii).

      98 See, e.g, section 248.9(b)(1)(iii) (example of reasonable expectation that consumer will receive actual notice of initial privacy notice on Internet web site provides that consumer acknowledges receipt of notice as a necessary step to obtaining a particular financial product or service).

      99 See section 248.4(e)(1).

      100 See Proposing Release, supra note 4, at discussion of proposed section 248.4.

      101 See section 248.4(d).

      102 A few commenters noted that disclosure obligations arising from joint accounts are well settled under other rules, such as the regulations implementing the Equal Credit Opportunity Act, see 12 CFR part 202, and the Truth in Lending Act, 15 U.S.C. 1601. Commenters noted that under both Regulation B and Regulation Z, a financial institution is permitted to give one notice. The authorities cited include requirements that the financial institution give disclosures as appropriate to the "primary applicant" if readily apparent, see 12 CFR 202.9(f), or to a person "primarily liable on the account." See 12 CFR 226.5(b).

      103 See section 248.9(g).

      104 See discussion of section 248.9 below on how to provide opt out notices.

      105 If the surviving or acquiring institution does not deliver new notices, it must honor any opt outs the predecessor or acquired institution received from consumers.

      106 Proposing Release, supra note 4, at section discussing proposed section 248.4.

      107 See section 248.5(a).

      108 Proposed section 248.5(c)(1).

      109 See section 248.5(a)(2).

      110 The G-L-B Act states that "not less than annually during the continuation of [a customer] relationship, a financial institution shall provide a clear and conspicuous disclosure to such consumer [i.e., one with whom a customer relationship has been formed], * * * of such financial institution's policies and practices with respect to" the information enumerated in the Act. G-L-B Act § 503.

      111 See also discussion of section 248.9 below.

      112 Members of the banking industry also commented on the paragraph in this section regarding termination of a customer relationship and examples set forth in the Banking Agencies' proposing release. See section 248.5(b). We have made a technical revision to one of the examples in response to the only comment that specifically addressed the Commission's proposed examples. See section 248.5(b)(2)(iii).

      113 See section 248.6(e).

      114 Proposing Release, supra note 4, at discussion of proposed section 248.6.

      115 See 15 U.S.C. 1681a(d)(2)(A)(iii). Section 603(d)(2)(A)(iii) of the FCRA excludes from the definition of "consumer report" the communication of certain consumer information among affiliated entities if the consumer is notified about the disclosure of such information and given an opportunity to opt out of the disclosure of that information. The information that can be disclosed to affiliates under this provision includes, for instance, information from consumer reports and applications for financial products or services. In general, this information includes personal information provided directly by the consumer to the institution, such as income and assets, in addition to information contained within consumer reports.

      116 See, e.g., remarks of Sen. Gramm (noting that the privacy bill contains "for the first time a full disclosure requirement. It requires every bank in America, when you open your account to tell you precisely what their policy is: Do they share personal financial information within the bank? Do they share it outside the bank?"), 145 Cong. Rec. S13786 (daily ed. Nov. 3, 1999); remarks of Sen. Hagel, id. at S13876 ("Financial institutions would be required to disclose their privacy policies to their customers on a timely basis. If customers do not believe adequate protections exist at their institution, they can take their business elsewhere.").

      117 Commenters from other industries who addressed the issue argued that a financial institution should not be required to include FCRA disclosures in its annual notices. To the extent that broker-dealers share information about margin loans, they may be subject to the FCRA. As previously discussed, section 503(b)(4) of the G-L-B Act requires a financial institution's initial and annual notice to include the disclosures required, if any, under section 603(d)(2)(A)(iii) of the FCRA. The proposed rules implemented section 503(b)(4) of the G-L-B Act by requiring that a broker-dealer, fund, or registered adviser's initial and annual notice include any disclosures a financial institution makes under section 603(d)(2)(A)(iii) of the FCRA. Proposed section 248.6(a)(7). Several commenters noted that the FCRA requires disclosures of a consumer's right to opt out of affiliate sharing only once, and that the G-L-B Act states, in section 506(c), that nothing in the G-L-B Act is to be construed to modify, limit, or supersede the operation of the FCRA. These commenters maintain that the "if any" language of section 503(b)(4), read in the context of section 506, suggests that, because at most only one notice must be provided under the FCRA, section 503 should require only one FCRA disclosure under the privacy rules.

      As discussed above, we believe that in order to comply with the requirement that it disclose its policies and practices with respect to sharing information with affiliated and nonaffiliated third parties, a financial institution must describe the circumstances under which it will share information with affiliates. The ability of consumers to opt out of affiliate information sharing under the FCRA affects a financial institution's policies and practices with respect to disclosing information to its affiliates. Failing to include this information and an explanation of how the opt out right may be exercised would make the disclosures incomplete.

      In addition, section 503 does not distinguish between the disclosures to be provided in the initial notice from those to be provided in the annual notice. Thus, section 503 suggests that any disclosures that are required under the FCRA must be included in both the initial and annual notices.

      We interpret the "if any" language as an acknowledgment that not all institutions provide FCRA notices because not all institutions engage in the type of affiliate sharing covered by the FCRA. We do not believe that requiring the FCRA notice to appear as part of the annual notice under the privacy rules, modifies, limits, or supersedes the operation of the FCRA; financial institutions will have exactly the same FCRA obligations following the effective date of the privacy rules as they had before. The only difference will be that, as required by the G-L-B Act, a financial institution's initial and annual disclosures about its privacy policy and practices will need to reflect how the institution complies with the affiliate sharing provisions of the FCRA.

      118 See section 248.8(a).

      119 See section 248.7(d).

      120 See section 248.7(a)(2)(iv).

      121 See section 248.7(a)(2)(iii)(A).

      122 See section 248.7(a)(2)(ii)(D).

      123 See proposed section 248.8(e).

      124 See section 248.7(g)(1).

      125 See section 248.7(g)(2).

      126 See section 248.7(a)(1).

      127 See proposed section 248.8(a)(2)(i) (a financial institution "provides adequate notice * * * if [the institution] identifies all of the categories of nonpublic personal information that [the institution] discloses or reserves the right to disclose to nonaffiliated third parties as described in [section 248.6]").

      128 See section 248.7(e).

      129 See section 248.8. The final rule is in a separate section for emphasis.

      130 See section 248.8(a)(1).

      131 See section 248.8(b).

      132 See proposed sections 248.4(d) (initial notice), 248.5(b) (annual notice), and 248.8(b) (opt out notice).

      133 See section 248.9.

      134 Section 248.9(a).

      135 See section 248.9(b)(1)(iii).

      136 Nevertheless, there may be circumstances in which an Internet web site notice might be delivered in a way that will enable the brokerdealer, fund, or registered adviser to reasonably expect that the consumer will receive it.

      137 See section 248.9(c)(i).

      138 See Delivery of Disclosure Documents to Households, Investment Company Act Release No. 24123 (Nov. 4, 1999) [64 FR 62540 (Nov. 16, 1999)]. The Commission also has proposed rule amendments to permit householding of proxy or information statements. See Delivery of Proxy and Information Statements to Households, Investment Company Act Release No. 24124 (Nov. 4, 1999) [64 FR 62548 (Nov. 16, 1999)]. The comment period on this proposal ended January 18, 2000.

      139 See section 248.9(c)(2).

      140 See section 248.9(c)(1)(ii). A customer may request no communication or that the institution refrain from sending the annual notices. We note, however, that broker-dealers, funds, and registered advisers must provide customers with any communications (such as shareholder reports or confirmation statements) required under the federal securities laws. See, e.g., 15 U.S.C. 80a-29(e). These institutions also must provide customers with initial, opt out, and revised privacy notices. See sections 248.4, 248.7, 248.8.

      141 See section 248.9(e)(2)(iii).

      142 See section 248.9(f). See also Proposing Release, supra note 4, at paragraph following n.34 ("[t]he proposed rules do not prohibit two or more institutions from providing a joint initial, annual, or opt out notice * * *").

      143 Records concerning privacy notices delivered to consumers and consumer opt outs must be maintained in accordance with the recordkeeping requirements of 17 CFR 240.17a-4 (broker-dealers); 270.31a-2 (funds); 275.204-2 (registered advisers). See also section 248.30 (requiring broker-dealers, funds, and registered advisers to establish procedures and policies to safeguard customer information and records).

      144 Section 248.10.

      145 Proposed section 248.7 implemented these provisions by requiring a broker-dealer, fund, or registered adviser to give the consumer the initial notice required by section 248.4, the opt out notice required by section 248.8, and a reasonable opportunity to opt out.

      146 See section 248.10(a)(3)(iii).

      147 See section 248.10(a)(3)(i).

      148 See section 248.10(a)(3)(ii).

      149 Some commenters stated that the proposal inappropriately implied that the opportunity to opt out by mail is available only when a consumer has a customer relationship with the financial institution. See proposed section 248.7(a)(3)(i). The final rule deletes the reference to a customer relationship in that section to avoid creating that implication. See section 248.10(a)(3)(i).

      150 For example, as discussed further below in this section, permitted use for an enumerated exception would not include use for marketing purposes.

      151 See proposed section 248.12(a)(1), 248.12(b)(1).

      152 See proposed section 248.12(a)(2), 248.12(b)(2).

      153 See G-L-B Act § 504(a)(1) (authorizing the Commission to prescribe regulations necessary to carry out the purposes of Title V).

      154 See sections 248.14, 248.15.

      155 See section 248.11(a).

      156 The examples also provide that a brokerdealer, fund, or registered adviser may redisclose information according to the privacy notices of the institution making the initial disclosures, as limited by any opt out elections received by that institution. Section 248.11(b)(2).

      157 See section 248.11(c).

      158 See proposed section 248.13.

      159 See section 248.12.

      160 See section 248.12(b)(1).

      161 See section 248.12(c).

      162 See proposed section 248.9, section 248.13.

      163 See proposed section 248.9, (a)(2). The exceptions were set forth in proposed sections 248.10 and 248.11.

      164 See section 248.13.

      165 The statute states, in relevant part, that section 502(b)—shall not prevent a financial institution from providing nonpublic personal information to a nonaffiliated third party to perform services for or functions on behalf of the financial institution, including the marketing of the financial institution's own products or services, or financial products or services offered pursuant to joint agreements between two or more financial institutions that comply with the requirements imposed by the regulations prescribed under section 504, if the financial institution fully discloses the providing of such information and enters into a contractual agreement with the third party that requires the third party to maintain the confidentiality of such information.

      166 Section 248.18(c).

      167 See proposed section 248.10.

      168 Section 248.14.

      169 See section 248.14(a). 170 Proposed section 248.11.

      171 See section 248.14(a) (excepting from initial and opt out notice requirements disclosures to nonaffiliated third parties as necessary to effect a transaction that a consumer requests or in connection with servicing or processing a financial product that a consumer requests or authorizes).

      172 One commenter, for example, suggested that the rule completely exempt a financial institution from all of the requirements under Title V if the institution makes no disclosures other than those permitted by section 502(e).

      173 See section 248.15.

      174 Section 248.16.

      175 Section 248.17.

      176 Section 248.18(a).

      177 Section 248.18(b), (c).

      178 Because Nobvember 12, 2000 is a Sunday, the proposed rule provided an effective date of Monday, November 13, 2000. See proposed rule 248.16(a).

      179 See Proposing Release, supra note 4, at discussion of proposed section 248.16.

      180 See supra note 6.

      IV. Appendix-Sample Clauses

      In order to provide additional guidance to broker-dealers, funds, and registered advisers concerning the level of detail we believe is appropriate under the Act, we have prepared a variety of sample clauses for institutions to consider. We urge broker-dealers, funds, and registered advisers to carefully review whether these clauses accurately reflect a given institution's policies and practices before using the clauses. Broker-dealers, funds, and registered advisers are free to use different language and to include additional detail as they think is appropriate in their notices.

      V. Comparison Chart

      Below is a chart showing the comparison of the sections in the final privacy rules and the proposal. Only changes are noted.

      Proposal Content of provision Final rule
      4(d) How to provide initial notice. 9(a)
      N/A New product for existing customer. 4(d)
      4(d)(3) Oral delivery 9(d)
      4(d)(4) Retainable notice 9(e)
      N/A Joint relationships (privacy notice). 9(g)
      5(b) How to provide annual notice. 9(a)
      5(b) Actual notice of annual notice. 9(c)
      5(c) Terminated customer relationships. 5(b)
      N/A Delivering short-form initial notices. 6(d)
      7 Main operative provision. 10
      8(a) Opt out methods and opt out notice content. 7(a)
      8(b)(1) How to deliver opt out notices. 9(a)
      8(b)(2) Oral delivery 9(d)
      8(b)(3) Same form as initial notice. 7(b)
      8(b)(4) Initial notice must accompany opt out notice. 7(c)
      N/A Joint relationships (opt out notice). 7(d)
      8(d) Time to comply with opt out; continuing right to opt out. 7(e) & (f)
      8(e) Duration of opt out 7(g)
      8(c)(1) Revised notices 8(a)
      8(c)(2) How to deliver revised notice. 8(c)
      8(c)(3) Examples of when revised notice is required. 8(b)
      9 Exception for service providers and joint marketers. 13
      10 Exceptions for processing and servicing transactions. 14
      11 Other exceptions 15
      12 Redisclosure and reuse 11
      13 Sharing account number information. 12
      14 FCRA 16
      15 State law 17
      16 Effective date 18

      181 If you disclose or reserve the right to disclose nonpublic personal information to a nonaffiliated third party under other circumstances, you must comply with other provisions in the rules, notably sections 248.7, 248.8, and 248.13, if applicable. If you disclose or reserve the right to disclose nonpublic personal information to an affiliate you must comply with other provisions in the rules, notably section 248.6(a)(7), as applicable.

      182 You need to describe only those general categories that apply to your policies and practices. Accordingly, if you do not collect information from a "consumer reporting agency," for instance, then you need not describe that category in your notices.

      VI. Guidance for Certain Institutions

      To minimize the burden and costs to a broker-dealer, fund, or registered adviser ("you") and generally clarify the operation of the final rules, we have included this guidance that you may use in conjunction with the sample clauses in the Appendix. This guidance specifically applies to you if you:

      (1) do not have any affiliates;
      (2) only disclose nonpublic personal information to nonaffiliated third parties in accordance with an exception under sections 248.14 or 248.15, such as in connection with servicing or processing a financial product or service that a consumer requests or authorizes; and
      (3) do not reserve the right to disclose nonpublic personal information to nonaffiliated third parties, except under sections 248.14 and 248.15.181

      In addition, if you disclose nonpublic personal information in accordance with the exception in section 248.13 (for service providers and joint marketers) you also must include an accurate description of that information, as illustrated by the sample clause in section (K) below.

      In general, if you disclose nonpublic personal information to nonaffiliated third parties only as authorized under an exception, then your only responsibilities under the regulation are to provide initial and annual privacy notices to each of your customers. You do not need to provide an opt out notice or opt out rights to your customers.

      A. Initial notice to customers. You must provide an initial notice to each of your customers. A customer is a natural person who has a continuing relationship with you, as described in section 248.4(c). In general, an individual who opens a brokerage account or enters into an investment advisory contract (whether written or oral) with you is your customer. By contrast, an individual who establishes an account solely for the purpose of liquidating or purchasing securities as an accommodation, i.e., on a one-time basis, without the expectation of engaging in other transactions, is not your customer. In other words, you must provide initial and annual notices to each of your customers, but not to others.
      B. Time to provide initial notice. You must provide an initial privacy notice to each of your customers not later than when you establish a customer relationship (section 248.4(a)(1)). For example, you must provide a privacy notice to an individual not later than when that individual opens a brokerage account or purchases fund shares in his or her own name. Thus, you can provide the notice to a brokerage account customer together with the account agreement or to a fund shareholder with the application to purchase shares. If one of your existing customers obtains a new financial product or service from you, then you need not provide another initial notice to that customer (section 248.4(d)) if the earlier notice covered the subsequent product. For instance, if Alison Individual walks into Broker-Dealer for the first time on July 2, 2001, to open a cash account, then Broker-Dealer complies with section 248.4(a)(1) of the rules if it provides an initial notice to Alison together with the account agreement. When Alison opens her cash account, she becomes a customer of Broker-Dealer. Alison maintains her cash account and, six months later, returns to the Broker-Dealer to open a margin account. If the initial notice that the Broker-Dealer provided to Alison was accurate with respect to the margin account, then the Broker-Dealer need not provide another initial notice to her when she opens the margin account because it has provided a notice to Alison that covered the margin account when she opened her cash account.
      C. Method of providing the initial notice. You must provide your initial notice so that each customer can reasonably be expected to receive it (section 248.9(a)). For example, you may provide the initial notice by mailing a printed copy of it together with a prospectus. Similarly, you may provide the initial notice by hand-delivering a printed copy of it to the customer together with a brokerage account application or an investment advisory contract.
      D. Compliance with initial notice requirement for existing customers by compliance date. You must provide an initial notice to each of your current customers not later than July 1, 2001 (section 248.18(b)). You may do so by mailing a printed copy of the notice to the customer's last known address.
      E. Annual notice. During the continuation of the customer relationship, you must provide an annual notice to the customer, as described in section 248.5(a). You must provide an annual notice to each customer at least once in any period of 12 consecutive months during which the customer relationship exists. You may define the 12-consecutive-month period, but must consistently apply that period to the customer. You may define the 12-consecutive-month period as a calendar year and provide the annual notice to the customer once in each calendar year following the calendar year in which you provided the initial notice. You do not need to provide an annual notice in addition to an initial notice in the same 12-month period.

      For example, assume that Broker-Dealer defines the 12-consecutivemonth period as a calendar year and provides annual notices to all of its customers on October 1 of each year. If Alison Individual opens a cash account with Broker-Dealer on July 2, 2001, thereby becoming a customer, then Broker-Dealer must provide an initial notice to Alison together with the account agreement or earlier. Broker-Dealer must provide an annual notice to Alison by December 31, 2002. If Broker-Dealer provides an annual notice to Alison on October 1, 2002, as it does for other customers, then it must provide the next annual notice to Alison not later than October 1, 2003.
      F. Method of providing the annual notice. Like the initial notice, you must provide the annual notice so that each customer can reasonably be expected to receive actual notice of it, in writing (section 248.9(a)). You may do so by mailing a printed copy of the notice to the customer's last known address.
      G. Joint accounts. If two or more customers jointly obtain a financial product or service, then you may provide one initial notice to those customers jointly. Similarly, you may provide one annual notice to those customers jointly (section 248.9(g)).
      H. Information described in the initial and annual notices. The initial and annual notices must include an accurate description of the following items of information:

      • The categories of nonpublic personal information that you collect (section 248.6(a)(1));


      • The fact that you do not disclose nonpublic personal information about your current and former customers to affiliates or nonaffiliated third parties, except as authorized by sections 248.14 and 248.15 (section 248.6(a)(2)-(4)). When describing the categories with respect to those parties, you are required to state only that you make disclosures to other nonaffiliated third parties as permitted by law (section 248.6(c));


      • Your policies and practices with respect to protecting the confidentiality and security of nonpublic personal information (section 248.6(a)(8)).

      For each of these items of information above, you may use a sample clause from the Appendix.

      Note: You may use a sample clause only if that clause accurately describes your actual policies and practices.
      I. Example of notice. If Broker-Dealer (i) does not have any affiliates and (ii) only discloses nonpublic personal information to nonaffiliated third parties as authorized under sections 248.14 and 248.15, Broker-Dealer may comply with the requirements of section 248.6 of the rules by using the following notice, if applicable.

      Broker-Dealer collects nonpublic personal information about you from the following sources:

      • Information we receive from you on applications or other forms;


      • Information about your transactions with us or others; and


      • Information we receive from a consumer reporting agency.182

      We do not disclose any nonpublic personal information about you to anyone, except as permitted by law.

      If you decide to close your account(s) or become an inactive customer, we will adhere to the privacy policies and practices as described in this notice.

      Broker-Dealer restricts access to your personal and account information to those employees who need to know that information to provide products or services to you. Broker-Dealer maintains physical, electronic, and procedural safeguards to guard your nonpublic personal information.
      J. Initial and annual notices must be clear and conspicuous. We emphasize that you must ensure that both the initial and annual notices are clear and conspicuous, as defined in section 248.3(c).
      K. Example of notice for disclosure to service providers and joint marketers. If you disclose nonpublic personal information in accordance with the exception in section 248.13, for service providers and joint marketers, you also must include an accurate description of that information. You may comply with the requirements of section 248.13 of the rules by including the following sample clause, if applicable, in the example of notice described in section (I) above:

      We may disclose all of the information we collect, as described [describe location in the notice, such as "above" or "below"] to companies that perform marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements.
      L. Internal controls/supervision. The Commission expects brokers-dealers, funds, and registered advisers to create appropriate internal control systems and exercise appropriate supervision over compliance with this rule. Compliance systems could include the maintenance of copies of the notices provided to consumers and customers, documentation in customer files showing compliance, and procedures for handling and monitoring opt out requests.

      VII. Cost-Benefit Analysis

      The Commission is sensitive to the costs and benefits that result from its rules and understands that the rules may impose costs on broker-dealers, funds, and registered advisers.

      Nevertheless, the rules implement the privacy provisions of Title V and, we believe, impose no costs in addition to those that would result from compliance with the G-L-B Act.

      We believe that the requirements to provide opt out notices and to protect customer information will benefit consumers and customers by protecting the privacy of their nonpublic personal information. In addition, the requirements to provide initial and annual privacy notices will allow customers to compare the privacy policies of financial institutions.

      We also believe that the rules provide greater certainty to the private sector on how to comply with the G-L-B Act because they are consistent with and comparable to the rules adopted by the Agencies. The examples in the rules and the sample clauses in the Appendix also should provide guidance on how the rules will be enforced with respect to broker-dealers, funds, and registered advisers. Finally, in order to reduce compliance burdens, the rules allow broker-dealers, funds, and registered advisers flexibility to distribute notices and to adopt policies and procedures to protect customer information that are best suited to the institution's business and needs. These benefits are difficult to quantify, and we received no data from commenters.

      We estimate that approximately 5500 broker-dealers, 4300 funds, and 8100 registered advisers will be required to comply with the rules. In the first year after the rules are adopted, these institutions must comply with the following requirements: (i) Prepare notices describing the institution's privacy policies; (ii) provide an initial privacy notice and opt out notice to each consumer; (iii) provide an initial privacy notice to each new customer (who did not receive a notice when he or she was a consumer); (iv) provide an annual privacy notice to each existing customer; (v) adopt policies and procedures that address the protection of customer information and records. After the first year, broker-dealers, funds, and registered advisers would be required to revise notices only to reflect changes in their privacy policies. Similarly, these institutions would have to revise their policies and procedures on safeguarding customer information as appropriate to ensure the protection of the information.

      In the Proposing Release, we estimated certain costs of complying with the proposed rules.183 We estimated that a registered adviser would spend on average $615 to draft a privacy notice,184 and a broker-dealer or fund would spend on average $4920 to draft a privacy notice.185 Therefore, we estimated a one-time cost to the industry of approximately $53.2 million to draft privacy notices.186 For mailing the notices, we estimated that it would cost broker-dealers, funds, and registered advisers $2.6 million to provide to their customers initial notices in the first year after adoption, and the same amount to provide annual notices to customers each year after that.187 In addition, we assumed that most broker-dealers, funds, and registered advisers currently have in place procedures to protect customer information. Thus, we estimated that each institution would on average require approximately 30 hours to review and revise its policies and procedures, with a one-time cost to the industry to comply with the rules of approximately $80.6 million.188 We received two comments on the cost-benefit analysis, both of which opined that we underestimated the costs and burdens of complying with Regulation S-P. One commenter suggested that we increase our estimate of the cost to mail annual notices to reflect the cost of providing revised privacy notices.189 This commenter suggested that the cost for privacy notices would increase annual mailing costs by approximately $1.3 million per year.190

      These commenters further noted that our estimates did not address other costs of compliance, including: Modifying existing systems and databases, developing new systems to track delivery of privacy notices and (if necessary) opt out elections, and training personnel. One commenter estimated that the overall cost of implementing the rules for a large firm would be at least $1 million. The other commenter provided no estimates for these additional costs. Neither commenter provided any specific data to explain the amount of time or the costs associated with the time they believe will be required to implement the rules.

      The cost of developing and maintaining records of delivery of privacy notices and opt out elections, and costs for personnel training will vary greatly depending upon the size of the financial institution, its customer base, number of affiliates, and the extent to which the institution intends to share information. We have been unable to obtain any reliable information with which to quantify the amount of these costs. We recognize that the costs for a large institution that shares information with affiliates and nonaffiliated third parties and that has many customers may exceed $1 million, and that this could increase the compliance costs of the rules. We also believe that the costs for a small institution, such as a registered adviser, that has far fewer customers and does not share with affiliates or nonaffiliated third parties will be significantly less.

      As discussed above, the privacy notices will allow customers of broker-dealers, funds, and registered advisers to compare the privacy policies of different institutions. This information is likely to result in some customers moving their accounts or relationships from one institution to another whose policies are better suited to the customers' needs. We are unable to estimate the number of customers who may make this transfer or the resulting economic impact on the industry. We do not believe, however, that customers would move their accounts from broker-dealers, funds, or investment advisers to a different type of financial institution (such as a bank), because we have no basis for assuming that the privacy policies adopted by 17,900 broker-dealers, investment companies, and registered investment advisers would not be sufficiently varied to address the needs of any customer.

      183 See Proposing Release, supra note 4, at section IV.

      184 For purposes of the Paperwork Reduction Act, Commission staff has estimated that an investment adviser would require 4 hours of professional time (at $150 per hour) and 1 hour of clerical or administrative time (at $15 per hour) to prepare (or revise) its privacy notice, for a total of $615 ((4 x $150) + (1 x $15) = $615).

      185 For purposes of the Paperwork Reduction Act, Commission staff has estimated that a broker-dealer or investment company would require 32 hours of professional time and 8 hours of clerical or administrative time to prepare (or revise) its privacy notice, for a total of $4920 ((32 x $150) + (8 x $15) = $4920).

      186 This amount equals the sum of the costs for broker-dealers, funds, and registered advisers ((5500 + 4300) x $4920) + (8,100 x $615) = $53.2 million. The amount of time required for each institution to prepare (or revise) its privacy notices will vary depending on the extent to which (i) the institution shares information and (ii) the institution's sharing policy differs for certain consumers or customers. An institution that does not share information with affiliates or nonaffiliated third parties may provide a simplified notice. See section 248.6(c)(5). An institution that has many affiliates and has different policies on sharing based on the affiliate or the customer is likely to require much more time to draft its notices. Our estimate was based on the assumption that most broker-dealers and funds share nonpublic personal information about consumers or customers with their affiliates (or as permitted under one of the exceptions discussed above), but many fewer share information with nonaffiliated third parties, and that registered advisers generally do not share with affiliates or nonaffiliated third parties. For purposes of the Paperwork Reduction Act, Commission staff has estimated that a registered adviser would require, on average, about 5 hours, and a broker-dealer or fund would require from 5 to over 100 hours, with an average of about 40 hours, to prepare (or revise) its privacy notice.

      187 We assumed that broker-dealers, funds, and registered advisers generally would include the initial privacy notices to customers with disclosure documents or account statements that customers currently receive, and that the statements generally would be assembled and sent by organizations that specialize in mailing and distribution. The individual cost per institution would vary significantly depending on the number of the institution's customers. The estimate was based on an average additional cost per mailing of $0.02 for 130.7 million investor accounts. We assumed there are 53 million brokerage accounts, 77.3 million individual fund shareholders (see Investment Company Institute, 1999 Mutual Fund Fact Book 41 (May 1999)), and 400,000 customers of registered advisers. We noted that the estimated number of accounts may be significantly higher than the actual number because we were unable to estimate the number of individual accounts used for personal, family, or household purposes.

      188 The estimate represented the costs of 30 hours of professional time (at $150 per hour) ((5500 + 4300 + 8100) x 30 x $150 = $80.6 million). Our estimates were based on staff conversations with representatives from the industry. We understand that many large institutions currently have comprehensive policies and procedures for protecting customer information and records. Although the policies of those institutions may need little revision, there may be many departments or other divisions that will participate in the review. Smaller institutions that need less comprehensive policies may devote more time to implementation or revision of their policies and procedures.

      189 See section 248.8.

      190 This estimate was based on a cost of $0.02 per mailing to 130.7 million accounts every other year ($0.02 x 130.7 x 5 = $1.3 million). One commenter stated that it would cost $0.40 per piece to mail the privacy notices, the same cost as mailing a confirmation statement. We believe that this commenter assumed that it would have to provide a privacy notice to its existing customers in a separate mailing (as a confirmation must be sent). The extended compliance date should permit broker-dealers, funds, and registered advisers to mail privacy notices to existing customers together with another mailing, such as an account statement or shareholder report, so that the costs will be significantly reduced. The other commenter used our estimate of $0.02 in its estimate of mailing costs, and we have continued to use that estimate in our final cost-benefit analysis.

      VIII. Paperwork Reduction Act

      Certain provisions of the rules contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The Commission published notice soliciting comments on the collection of information requirements in the Proposing Release,191 and submitted these requirements to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. OMB approved the regulation's information collection requirements.192 An agency may not conduct or sponsor, and a person is not required to respond to, an information collection unless it displays a currently valid OMB control number.193

      191 See Proposing Release, supra note 4, at section V.

      192 The title for the collections of information is: "Regulation S-P." The OMB control number for Regulation S-P is 3235-0537 (expiration date April 30, 2003).

      193 44 U.S.C. 3506(c)(1)(B)(v).

      IX. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA" or "analysis") for Regulation S-P in accordance with 5 U.S.C. 604. The following summarizes the FRFA. A copy of the FRFA may be obtained by contacting Penelope W. Saltzman, Securities and Exchange Commission, 450 5th Street, NW., Washington, DC 20549-0506.

      The analysis explains that Regulation S-P implements provisions of Title V and that, in general, Title V requires financial institutions to provide notice to consumers about the institution's privacy policies and practices. The statute also restricts the ability of a financial institution to share nonpublic personal information about consumers with nonaffiliated third parties, and allows consumers to prevent the institution from sharing nonpublic personal information about them with certain nonaffiliated third parties by "opting out" of the information sharing. In addition, Title V requires the Commission to establish appropriate standards for financial institutions subject to their jurisdiction to safeguard customer information and records.

      Section 504 of the G-L-B Act authorizes the Commission and the Agencies to prescribe "such regulations as may be necessary" to carry out the purposes of Title V. As discussed in the analysis, we believe that by adopting rules implementing Title V that are consistent with and comparable to those of the Agencies, we will provide the private sector greater certainty on how to comply with the statute and clearer guidance on how the rules will be enforced with respect to the financial institutions subject to Title V that are under the Commission's jurisdiction.

      The analysis states that the Proposing Release solicited comments on the IRFA, but we received none. Several commenters who addressed the proposed rules, however, suggested that the Commission reduce compliance burdens by, among other things, providing model forms, providing additional examples, adding additional flexibility for providing the initial notice, and extending the effective date. In response to these comments, we have provided a guide to assist brokerdealers, funds, and registered advisers in complying with the rules. The rules also include an Appendix with sample clauses that could be used in privacy notices under appropriate circumstances, and should be of particular help to small entities. Other revisions to the rules include: (i) A compliance date of July 1, 2001 (to allow more time to comply and more opportunity to include initial notices with other mailings); (ii) an example that permits householding annual privacy notices with prospectuses or investor reports delivered under the Commission's householding rules; 194 and (iii) permitting delivery of an initial notice within a reasonable time after establishing the customer relationship in two additional circumstances.195 As explained in the analysis, the rules will affect all broker-dealers, funds, and registered advisers, including small entities.196 We estimate that approximately 1000 out of 5500 brokerdealers, 227 out of 4300 funds, and 1500 out of 8100 registered advisers are small entities.

      The analysis explains that subject to certain exceptions, the rules generally require that a financial institution provide all of its customers the following notices: (i) An initial privacy notice (not later than when the customer relationship is established or, by July 1, 2001 for individuals who are your customers on that date); (ii) an opt out notice (before sharing the customer's nonpublic personal information with nonaffiliated third parties); and (iii) an annual privacy notice for the duration of the customer relationship.

      The rules also require a financial institution to provide its consumers an initial privacy notice and an opt out notice prior to disclosing the individual's nonpublic personal information with nonaffiliated third parties. If the institution does not intend to share that information about its consumers, then it need not provide them with a privacy or opt out notice.

      The many exceptions to the general rules stated above are set forth in sections 248.13, 248.14, and 248.15. The analysis notes that in cases in which a financial institution enters into a contract with a nonaffiliated third party to undertake joint marketing or to have the third party perform certain functions on behalf of the institution, no opt out notice need be given. In those cases, the institution must disclose to the consumer that it is providing the information and enter into a contract with the third party that restricts the third party's use of the information and requires the third party to maintain confidentiality of the information.

      As discussed in the analysis, compliance requirements will vary depending, for example, on an institution's information sharing practices, whether the institution already has or discloses a privacy policy, and whether the institution already has established an opt out mechanism. A financial institution would have to summarize its practices regarding its collection, sharing, and safeguarding of certain nonpublic personal information in its initial and annual notices. However, if the institution does not share that information (or shares only to the extent permitted under the exceptions), its privacy notice may be brief. We believe that many financial institutions already have privacy policies in place as part of usual and customary business practices, and that many broker-dealers, funds, and investment advisers currently do not share nonpublic personal information about consumers with nonaffiliated third parties except as would be consistent with one of the many exceptions in the rules.197 In the Proposing Release, we estimated that a registered adviser would spend an average of 5 hours to prepare a privacy notice, and a broker-dealer or fund would spend approximately 40 hours on average to prepare a privacy notice. We further understand that those institutions that do share information under one of the permitted exceptions generally have contract provisions that prohibit the third party's use of the information for purposes other than the purpose for which the information was shared. Thus we believe that, as a result of the rules, many financial institutions will not have to provide opt out notices to consumers, will have brief annual privacy notices for customers, and will not need to revise their contracts with nonaffiliated third parties to restrict those parties' use of information.

      To minimize the burden and costs of distributing privacy policies, the rules do not specify the method for distributing required notices. As discussed more fully in the analysis, a financial institution may include an initial privacy statement with other required disclosure statements, and may include an annual notice with periodic account statements. We estimate that the costs of distributing the notices will be minimal because an institution will include the notices in mailings or distributions that it already sends to consumers and customers.

      The analysis explains that the rules require every broker-dealer, fund, and registered adviser to adopt policies and procedures reasonably designed to safeguard customer records and information. The IRFA noted, and we continue to believe, that most if not all financial institutions already have policies and procedures to address the safety and confidentiality of consumer records and information. Nevertheless, financial institutions may review and revise their policies after the rules are adopted. The amount of time an institution will spend reviewing and revising its policies will depend, among other things, on the institution's current policies and its sharing practices. The rules do not specify the means by which institutions must ensure the safety of customer information and records in order to allow each institution to tailor its policies and procedures to its own systems of information gathering and transfer, and the needs of its customers. As noted in the IRFA, Commission staff estimated that in the first year after the rules are adopted, a financial institution would spend an average of 30 hours to adopt or revise its policies.

      Two commenters argued that we underestimated the costs of implementing Regulation S-P. As explained in the analysis, the commenters did not provide estimates of the amount of time or the costs to implement the rules. We have been unable to obtain reliable information regarding these costs. Therefore, we have not provided an estimate of the cost of implementing the rules for individual institutions or for the industry as a whole. Although we recognize that the cost of implementing the rules may be $1 million or more for a large institution that shares information with affiliates and nonaffiliated third parties, we believe the costs for small institutions that do not share nonpublic personal information about consumers will be substantially less.

      The analysis explains that the Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. As noted above, we believe that a number of revisions made to the final rules will benefit small entities. Finally, the analysis notes that the rules contain performance rather than design standards. The rules do not specify the (i) form of privacy notices, (ii) method of delivery of the notices to customers and consumers, or (iii) policies and procedures that broker-dealers, funds, and registered advisers must adopt to ensure the privacy of the financial information and records of their customers and consumers. Therefore, the rules provide these entities substantial flexibility that allows them to meet the requirements of Regulation S-P in a way that best suits the institution's individual needs.

      194 See section 248.9(c)(2).

      195 See section 248.4(e)(1)(ii) and (iii).

      196 For purposes of the Regulatory Flexibility Act, under the Exchange Act a small entity is a broker or dealer that (i) had total capital of less than $500,000 on the date in its prior fiscal year as of which its audited financial statements were prepared or, if not required to file audited financial statements, on the last business day of its prior fiscal year, and (ii) is not affiliated with any person that is not a small entity and is not affiliated with any person that is not a small entity. 17 CFR 240.0-10. Under the Investment Company Act a "small entity" is an investment company that, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year. 17 CFR 270.0-10. Under the Investment Advisers Act, a small entity is an investment adviser that "(i) manages less than $25 million in assets, (ii) has total assets of less than $5 million on the last day of its most recent fiscal year, and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that manages $25 million or more in assets, or any person that had total assets of $5 million or more on the last day of the most recent fiscal year. 17 CFR 275.0-7.

      197 For example, as noted in the Proposing Release, investment advisers have fiduciary duties under state law that limit their ability to share information with third parties. See Proposing Release, supra note 4, at n.4. This and other assumptions discussed in this section also are based on staff conversations with representatives from the securities industry.

      X. Analysis of Effects on Efficiency, Competition, and Capital Formation

      Section 23(a)(2) of the Exchange Act 198 requires the Commission, in adopting rules under the Exchange Act, to consider the anti-competitive effects of any rules it adopts. The rules, which implement Title V, apply to all brokerdealers, funds, and registered advisers. Each of these institutions must provide initial and annual privacy notices to customers as well as initial notices and opt out forms to consumers before the institution shares nonpublic personal information about consumers with nonaffiliated third parties. These institutions also must establish standards for protecting customer information and records. Other financial institutions will be subject to substantially similar privacy notice and opt out requirements under rules adopted by the Agencies.199 Under the G-L-B Act, these agencies also are required to adopt rules addressing policies and procedures for protecting customer information.200 Therefore, all financial institutions will have to bear the costs of implementing the rules or substantially similar rules. The rules do not dictate the privacy policies of any financial institution. Some customers may move their accounts from one institution to another based on the institution's privacy policies. Thus, the rules may promote competition among financial institutions based on customers' preferences regarding privacy policies.

      Section 3(f) of the Exchange Act 201 and section 2(c) of the Investment Company Act 202 require the Commission, when engaging in rulemaking that requires it to consider or determine whether an action is necessary or appropriate in the public interest, to consider whether the action will promote efficiency, competition, and capital formation. We solicited comment on these matters in connection with the proposed rules but received no comment.203 Our analysis on competition is discussed above. The rules will result in additional costs for financial institutions, which may affect the efficiency of these institutions. On the other hand, the rules will allow customers of financial institutions to compare privacy policies, which may result in customers choosing to do business with a financial institution based on its policies. We are not aware of any effect the rules will have on capital formation.

      198 15 U.S.C. 78w(a)(2).

      199 See, e.g., Banking Agencies' Release, supra note 2.

      200 G-L-B Act § 501(b).

      201 15 U.S.C. 78c(f).

      202 15 U.S.C. 80a-2(c).

      203 See Proposing Release, supra note 4, at section VII.

      XI. Statutory Authority

      The Commission is adopting Regulation S-P under the authority set forth in section 504 of the G-L-B Act [15 U.S.C. 6804], sections 17 and 23 of the Exchange Act [15 U.S.C. 78q, 78w], sections 31 and 38 of the Investment Company Act [15 U.S.C. 80a-30(a), 80a-37], and sections 204 and 211 of the Investment Advisers Act [15 U.S.C. 80b-4, 80b-11].

      Text of Rules

      List of Subjects in 17 CFR Part 248

      Brokers, Dealers, Investment advisers, Investment companies, Privacy, Reporting and recordkeeping requirements.

      For the reasons set out in the preamble, the Commission amends Title 17, Chapter II of the Code of Federal Regulations by adding a new part 248 to read as follows:

      PART 248-REGULATION S-P: PRIVACY OF CONSUMER FINANCIAL INFORMATION

      Authority: 15 U.S.C. 6801-6809; 15 U.S.C. 78q, 78w, 80a-30(a), 80a-37, 80b-4, and 80b-11.

      § 248.1 Purpose and scope.

      (a) Purpose. This part governs the treatment of nonpublic personal information about consumers by the financial institutions listed in paragraph (b) of this section. This part:
      (1) Requires a financial institution to provide notice to customers about its privacy policies and practices;
      (2) Describes the conditions under which a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties; and
      (3) Provides a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting out" of that disclosure, subject to the exceptions in §§ 248.13, 248.14, and 248.15.
      (b) Scope. This part applies only to nonpublic personal information about individuals who obtain financial products or services primarily for personal, family, or household purposes from the institutions listed below. This part does not apply to information about companies or about individuals who obtain financial products or services primarily for business, commercial, or agricultural purposes. This part applies to brokers, dealers, and investment companies, as well as to investment advisers that are registered with the Commission. It also applies to foreign (non-resident) brokers, dealers, investment companies and investment advisers that are registered with the Commission. These entities are referred to in this part as "you." This part does not apply to foreign (non-resident) brokers, dealers, investment companies and investment advisers that are not registered with the Commission. Nothing in this part modifies, limits, or supersedes the standards governing individually identifiable health information promulgated by the Secretary of Health and Human Services under the authority of sections 262 and 264 of the Health Insurance Portability and Accountability Act of 1996 (42 U.S.C. 1320d-1320d-8).

      § 248.2 Rule of construction.

      The examples in this part and the sample clauses in appendix A of this part provide guidance concerning the rule's application in ordinary circumstances. The facts and circumstances of each individual situation, however, will determine whether compliance with an example or use of a sample clause, to the extent applicable, constitutes compliance with this part.

      § 248.3 Definitions.

      As used in this part, unless the context requires otherwise:

      (a) Affiliate of a broker, dealer, or investment company, or an investment adviser registered with the Commission means any company that controls, is controlled by, or is under common control with the broker, dealer, or investment company, or investment adviser registered with the Commission. In addition, a broker, dealer, or investment company, or an investment adviser registered with the Commission will be deemed an affiliate of a company for purposes of this part if:
      (1) That company is regulated under Title V of the G-L-B Act by the Federal Trade Commission or by a Federal functional regulator other than the Commission; and
      (2) Rules adopted by the Federal Trade Commission or another federal functional regulator under Title V of the G-L-B Act treat the broker, dealer, or investment company, or investment adviser registered with the Commission as an affiliate of that company.
      (b) Broker has the same meaning as in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
      (c)
      (1) Clear and conspicuous means that a notice is reasonably understandable and designed to call attention to the nature and significance of the information in the notice.
      (2) Examples.
      (i) Reasonably understandable. You make your notice reasonably understandable if you:
      (A) Present the information in the notice in clear, concise sentences, paragraphs, and sections;
      (B) Use short explanatory sentences or bullet lists whenever possible;
      (C) Use definite, concrete, everyday words and active voice whenever possible;
      (D) Avoid multiple negatives;
      (E) Avoid legal and highly technical business terminology whenever possible; and
      (F) Avoid explanations that are imprecise and readily subject to different interpretations.
      (ii) Designed to call attention. You design your notice to call attention to the nature and significance of the information in it if you:
      (A) Use a plain-language heading to call attention to the notice;
      (B) Use a typeface and type size that are easy to read;
      (C) Provide wide margins and ample line spacing;
      (D) Use boldface or italics for key words; and
      (E) Use distinctive type size, style, and graphic devices, such as shading or sidebars when you combine your notice with other information.
      (iii) Notices on web sites. If you provide a notice on a web page, you design your notice to call attention to the nature and significance of the information in it if you use text or visual cues to encourage scrolling down the page if necessary to view the entire notice and ensure that other elements on the web site (such as text, graphics, hyperlinks, or sound) do not distract attention from the notice, and you either:
      (A) Place the notice on a screen that consumers frequently access, such as a page on which transactions are conducted; or
      (B) Place a link on a screen that consumers frequently access, such as a page on which transactions are conducted, that connects directly to the notice and is labeled appropriately to convey the importance, nature, and relevance of the notice.
      (d) Collect means to obtain information that you organize or can retrieve by the name of an individual or by identifying number, symbol, or other identifying particular assigned to the individual, irrespective of the source of the underlying information.
      (e) Commission means the Securities and Exchange Commission.
      (f) Company means any corporation, limited liability company, business trust, general or limited partnership, association, or similar organization.
      (g)
      (1) Consumer means an individual who obtains or has obtained a financial product or service from you that is to be used primarily for personal, family, or household purposes, or that individual's legal representative.
      (2) Examples.
      (i) An individual is your consumer if he or she provides nonpublic personal information to you in connection with obtaining or seeking to obtain brokerage services or investment advisory services, whether or not you provide brokerage services to the individual or establish a continuing relationship with the individual.
      (ii) An individual is not your consumer if he or she provides you only with his or her name, address, and general areas of investment interest in connection with a request for a prospectus, an investment adviser brochure, or other information about financial products or services.
      (iii) An individual is not your consumer if he or she has an account with another broker or dealer (the introducing broker-dealer) that carries securities for the individual in a special omnibus account with you (the clearing broker-dealer) in the name of the introducing broker-dealer, and when you receive only the account numbers and transaction information of the introducing broker-dealer's consumers in order to clear transactions.
      (iv) If you are an investment company, an individual is not your consumer when the individual purchases an interest in shares you have issued only through a broker or dealer or investment adviser who is the record owner of those shares.
      (v) An individual who is a consumer of another financial institution is not your consumer solely because you act as agent for, or provide processing or other services to, that financial institution.
      (vi) An individual is not your consumer solely because he or she has designated you as trustee for a trust.
      (vii) An individual is not your consumer solely because he or she is a beneficiary of a trust for which you are a trustee.
      (viii) An individual is not your consumer solely because he or she is a participant or a beneficiary of an employee benefit plan that you sponsor or for which you act as a trustee or fiduciary.
      (h) Consumer reporting agency has the same meaning as in section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)).
      (i) Control of a company means the power to exercise a controlling influence over the management or policies of a company whether through ownership of securities, by contract, or otherwise. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 percent of the voting securities of any company is presumed to control the company. Any person who does not own more than 25 percent of the voting securities of any company will be presumed not to control the company. Any presumption regarding control may be rebutted by evidence, but, in the case of an investment company, will continue until the Commission makes a decision to the contrary according to the procedures described in section 2(a)(9) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(9)).
      (j) Customer means a consumer who has a customer relationship with you.
      (k)
      (1) Customer relationship means a continuing relationship between a consumer and you under which you provide one or more financial products or services to the consumer that are to be used primarily for personal, family, or household purposes.
      (2) Examples.
      (i) Continuing relationship. A consumer has a continuing relationship with you if:
      (A) The consumer has a brokerage account with you, or if a consumer's account is transferred to you from another broker-dealer;
      (B) The consumer has an investment advisory contract with you (whether written or oral);
      (C) The consumer is the record owner of securities you have issued if you are an investment company;
      (D) The consumer holds an investment product through you, such as when you act as a custodian for securities or for assets in an Individual Retirement Arrangement;
      (E) The consumer purchases a variable annuity from you;
      (F) The consumer has an account with an introducing broker or dealer that clears transactions with and for its customers through you on a fully disclosed basis;
      (G) You hold securities or other assets as collateral for a loan made to the consumer, even if you did not make the loan or do not effect any transactions on behalf of the consumer; or
      (H) You regularly effect or engage in securities transactions with or for a consumer even if you do not hold any assets of the consumer.
      (ii) No continuing relationship. A consumer does not, however, have a continuing relationship with you if you open an account for the consumer solely for the purpose of liquidating or purchasing securities as an accommodation, i.e., on a one time basis, without the expectation of engaging in other transactions.
      (1) Dealer has the same meaning as in section 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
      (m) Federal functional regulator means:
      (1) The Board of Governors of the Federal Reserve System;
      (2) The Office of the Comptroller of the Currency;
      (3) The Board of Directors of the Federal Deposit Insurance Corporation;
      (4) The Director of the Office of Thrift Supervision;
      (5) The National Credit Union Administration Board; and
      (6) The Securities and Exchange Commission.
      (n)
      (1) Financial institution means any institution the business of which is engaging in activities that are financial in nature or incidental to such financial activities as described in section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
      (2) Financial institution does not include:
      (i) Any person or entity with respect to any financial activity that is subject to the jurisdiction of the Commodity Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.);
      (ii) The Federal Agricultural Mortgage Corporation or any entity chartered and operating under the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.); or
      (iii) Institutions chartered by Congress specifically to engage in securitizations, secondary market sales (including sales of servicing rights), or similar transactions related to a transaction of a consumer, as long as such institutions do not sell or transfer nonpublic personal information to a nonaffiliated third party.
      (o)
      (1) Financial product or service means any product or service that a financial holding company could offer by engaging in an activity that is financial in nature or incidental to such a financial activity under section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
      (2) Financial service includes your evaluation or brokerage of information that you collect in connection with a request or an application from a consumer for a financial product or service.
      (p) G-L-B Act means the Gramm-Leach-Bliley Act (Pub. L. No. 106-102, 113 Stat. 1338 (1999)).
      (q) Investment adviser has the same meaning as in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)).
      (r) Investment company has the same meaning as in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), and includes a separate series of the investment company.
      (s)
      (1) Nonaffiliated third party means any person except:
      (i) Your affiliate; or
      (ii) A person employed jointly by you and any company that is not your affiliate (but nonaffiliated third party includes the other company that jointly employs the person).
      (2) Nonaffiliated third party includes any company that is an affiliate solely by virtue of your or your affiliate's direct or indirect ownership or control of the company in conducting merchant banking or investment banking activities of the type described in section 4(k)(4)(H) or insurance company investment activities of the type described in section 4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. §§ 1843(k)(4)(H) and (I)).
      (t)
      (1) Nonpublic personal information means:
      (i) Personally identifiable financial information; and
      (ii) Any list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived using any personally identifiable financial information that is not publicly available information.
      (2) Nonpublic personal information does not include:
      (i) Publicly available information, except as included on a list described in paragraph (t)(1)(ii) of this section or when the publicly available information is disclosed in a manner that indicates the individual is or has been your consumer; or
      (ii) Any list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived without using any personally identifiable financial information that is not publicly available information.
      (3) Examples of lists.
      (i) Nonpublic personal information includes any list of individuals' names and street addresses that is derived in whole or in part using personally identifiable financial information that is not publicly available information, such as account numbers.
      (ii) Nonpublic personal information does not include any list of individuals' names and addresses that contains only publicly available information, is not derived in whole or in part using personally identifiable financial information that is not publicly available information, and is not disclosed in a manner that indicates that any of the individuals on the list is a consumer of a financial institution.
      (u)
      (1) Personally identifiable financial information means any information:
      (i) A consumer provides to you to obtain a financial product or service from you;
      (ii) About a consumer resulting from any transaction involving a financial product or service between you and a consumer; or
      (iii) You otherwise obtain about a consumer in connection with providing a financial product or service to that consumer.
      (2) Examples.
      (i) Information included. Personally identifiable financial information includes:
      (A) Information a consumer provides to you on an application to obtain a loan, credit card, or other financial product or service;
      (B) Account balance information, payment history, overdraft history, and credit or debit card purchase information;
      (C) The fact that an individual is or has been one of your customers or has obtained a financial product or service from you;
      (D) Any information about your consumer if it is disclosed in a manner that indicates that the individual is or has been your consumer;
      (E) Any information that a consumer provides to you or that you or your agent otherwise obtain in connection with collecting on a loan or servicing a loan;
      (F) Any information you collect through an Internet "cookie" (an information collecting device from a web server); and
      (G) Information from a consumer report.
      (ii) Information not included. Personally identifiable financial information does not include:
      (A) A list of names and addresses of customers of an entity that is not a financial institution; or
      (B) Information that does not identify a consumer, such as aggregate information or blind data that does not contain personal identifiers such as account numbers, names, or addresses.
      (v)
      (1) Publicly available information means any information that you reasonably believe is lawfully made available to the general public from:
      (i) Federal, State, or local government records;
      (ii) Widely distributed media; or
      (iii) Disclosures to the general public that are required to be made by federal, State, or local law.
      (2) Examples.
      (i) Reasonable belief.
      (A) You have a reasonable belief that information about your consumer is made available to the general public if you have confirmed, or your consumer has represented to you, that the information is publicly available from a source described in paragraphs (v)(1)(i)-(iii) of this section;
      (B) You have a reasonable belief that information about your consumer is made available to the general public if you have taken steps to submit the information, in accordance with your internal procedures and policies and with applicable law, to a keeper of federal, State, or local government records that is required by law to make the information publicly available.
      (C) You have a reasonable belief that an individual's telephone number is lawfully made available to the general public if you have located the telephone number in the telephone book or the consumer has informed you that the telephone number is not unlisted.
      (D) You do not have a reasonable belief that information about a consumer is publicly available solely because that information would normally be recorded with a keeper of federal, State, or local government records that is required by law to make the information publicly available, if the consumer has the ability in accordance with applicable law to keep that information nonpublic, such as where a consumer may record a deed in the name of a blind trust.
      (ii) Government records. Publicly available information in government records includes information in government real estate records and security interest filings.
      (iii) Widely distributed media. Publicly available information from widely distributed media includes information from a telephone book, a television or radio program, a newspaper, or a web site that is available to the general public on an unrestricted basis. A web site is not restricted merely because an Internet service provider or a site operator requires a fee or a password, so long as access is available to the general public.
      (w) You means:
      (1) Any broker or dealer;
      (2) Any investment company; and
      (3) Any investment adviser registered with the Commission under the Investment Advisers Act of 1940.

      Subpart A—Privacy and Opt Out Notices

      § 248.4 Initial privacy notice to consumers required.

      (a) Initial notice requirement. You must provide a clear and conspicuous notice that accurately reflects your privacy policies and practices to:
      (1) Customer. An individual who becomes your customer, not later than when you establish a customer relationship, except as provided in paragraph (e) of this section; and
      (2) Consumer. A consumer, before you disclose any nonpublic personal information about the consumer to any nonaffiliated third party, if you make such a disclosure other than as authorized by §§ 248.14 and 248.15.
      (b) When initial notice to a consumer is not required. You are not required to provide an initial notice to a consumer under paragraph (a) of this section if:
      (1) You do not disclose any nonpublic personal information about the consumer to any nonaffiliated third party, other than as authorized by §§ 248.14 and 248.15; and
      (2) You do not have a customer relationship with the consumer.
      (c) When you establish a customer relationship.
      (1) General rule. You establish a customer relationship when you and the consumer enter into a continuing relationship.
      (2) Special rule for loans. You do not have a customer relationship with a consumer if you buy a loan made to the consumer but do not have the servicing rights for that loan.
      (3) Examples of establishing customer relationship. You establish a customer relationship when the consumer:
      (i) Effects a securities transaction with you or opens a brokerage account with you under your procedures;
      (ii) Opens a brokerage account with an introducing broker or dealer that clears transactions with and for its customers through you on a fully disclosed basis;
      (iii) Enters into an advisory contract with you (whether in writing or orally); or
      (iv) Purchases shares you have issued (and the consumer is the record owner of the shares), if you are an investment company.
      (d) Existing customers. When an existing customer obtains a new financial product or service from you that is to be used primarily for personal, family, or household purposes, you satisfy the initial notice requirements of paragraph (a) of this section as follows:
      (1) You may provide a revised privacy notice, under § 248.8, that covers the customer's new financial product or service; or
      (2) If the initial, revised, or annual notice that you most recently provided to that customer was accurate with respect to the new financial product or service, you do not need to provide a new privacy notice under paragraph (a) of this section.
      (e) Exceptions to allow subsequent delivery of notice.
      (1) You may provide the initial notice required by paragraph (a)(1) of this section within a reasonable time after you establish a customer relationship if:
      (i) Establishing the customer relationship is not at the customer's election;
      (ii) Providing notice not later than when you establish a customer relationship would substantially delay the customer's transaction and the customer agrees to receive the notice at a later time; or
      (iii) A nonaffiliated broker or dealer or investment adviser establishes a customer relationship between you and a consumer without your prior knowledge.
      (2) Examples of exceptions.
      (i) Not at customer's election. Establishing a customer relationship is not at the customer's election if the customer's account is transferred to you by a trustee selected by the Securities Investor Protection Corporation ("SIPC") and appointed by a United States Court.
      (ii) Substantial delay of customer's transaction. Providing notice not later than when you establish a customer relationship would substantially delay the customer's transaction when you and the individual agree over the telephone to enter into a customer relationship involving prompt delivery of the financial product or service.
      (iii) No substantial delay of customer's transaction. Providing notice not later than when you establish a customer relationship would not substantially delay the customer's transaction when the relationship is initiated in person at your office or through other means by which the customer may view the notice, such as on a web site.
      (f) Delivery. When you are required to deliver an initial privacy notice by this section, you must deliver it according to § 248.9. If you use a short-form initial notice for non-customers according to § 248.6(d), you may deliver your privacy notice according to § 248.6(d)(3).

      § 248.5 Annual privacy notice to customers required.

      (a)
      (1) General rule. You must provide a clear and conspicuous notice to customers that accurately reflects your privacy policies and practices not less than annually during the continuation of the customer relationship. Annually means at least once in any period of 12 consecutive months during which that relationship exists. You may define the 12-consecutive-month period, but you must apply it to the customer on a consistent basis.
      (2) Example. You provide a notice annually if you define the 12-consecutive-month period as a calendar year and provide the annual notice to the customer once in each calendar year following the calendar year in which you provided the initial notice. For example, if a customer opens an account on any day of year 1, you must provide an annual notice to that customer by December 31 of year 2.
      (b)
      (1) Termination of customer relationship. You are not required to provide an annual notice to a former customer.
      (2) Examples. Your customer becomes a former customer when:
      (i) The individual's brokerage account is closed;
      (ii) The individual's investment advisory contract is terminated;
      (iii) You are an investment company and the individual is no longer the record owner of securities you have issued; or
      (iv) You are an investment company and your customer has been determined to be a lost securityholder as defined in 17 CFR 240.17a-24(b).
      (c) Special rule for loans. If you do not have a customer relationship with a consumer under the special provision for loans in § 248.4(c)(2), then you need not provide an annual notice to that consumer under this section.
      (d) Delivery. When you are required to deliver an annual privacy notice by this section, you must deliver it according to § 248.9.

      § 248.6 Information to be included in privacy notices.

      (a) General rule. The initial, annual, and revised privacy notices that you provide under §§ 248.4, 248.5, and 248.8 must include each of the following items of information that applies to you or to the consumers to whom you send your privacy notice, in addition to any other information you wish to provide:
      (1) The categories of nonpublic personal information that you collect;
      (2) The categories of nonpublic personal information that you disclose;
      (3) The categories of affiliates and nonaffiliated third parties to whom you disclose nonpublic personal information, other than those parties to whom you disclose information under §§ 248.14 and 248.15;
      (4) The categories of nonpublic personal information about your former customers that you disclose and the categories of affiliates and nonaffiliated third parties to whom you disclose nonpublic personal information about your former customers, other than those parties to whom you disclose information under §§ 248.14 and 248.15;
      (5) If you disclose nonpublic personal information to a nonaffiliated third party under § 248.13 (and no other exception applies to that disclosure), a separate statement of the categories of information you disclose and the categories of third parties with whom you have contracted;
      (6) An explanation of the consumer's right under § 248.10(a) to opt out of the disclosure of nonpublic personal information to nonaffiliated third parties, including the method(s) by which the consumer may exercise that right at that time;
      (7) Any disclosures that you make under section 603(d)(2)(A)(iii) of the Fair Credit Reporting Act (15 U.S.C. 1681a(d)(2)(A)(iii)) (that is, notices regarding the ability to opt out of disclosures of information among affiliates);
      (8) Your policies and practices with respect to protecting the confidentiality and security of nonpublic personal information; and
      (9) Any disclosure that you make under paragraph (b) of this section.
      (b) Description of nonaffiliated third parties subject to exceptions. If you disclose nonpublic personal information to third parties as authorized under §§ 248.14 and 248.15, you are not required to list those exceptions in the initial or annual privacy notices required by §§ 248.4 and 248.5. When describing the categories with respect to those parties, you are required to state only that you make disclosures to other nonaffiliated third parties as permitted by law.
      (c) Examples.
      (1) Categories of nonpublic personal information that you collect. You satisfy the requirement to categorize the nonpublic personal information that you collect if you list the following categories, as applicable:
      (i) Information from the consumer;
      (ii) Information about the consumer's transactions with you or your affiliates;
      (iii) Information about the consumer's transactions with nonaffiliated third parties; and
      (iv) Information from a consumerreporting agency.
      (2) Categories of nonpublic personal information you disclose.
      (i) You satisfy the requirement to categorize the nonpublic personal information that you disclose if you list the categories described in paragraph (e)(1) of this section, as applicable, and a few examples to illustrate the types of information in each category.
      (ii) If you reserve the right to disclose all of the nonpublic personal information about consumers that you collect, you may simply state that fact without describing the categories or examples of the nonpublic personal information you disclose.
      (3) Categories of affiliates and nonaffiliated third parties to whom you disclose. You satisfy the requirement to categorize the affiliates and nonaffiliated third parties to whom you disclose nonpublic personal information if you list the following categories, as applicable, and a few examples to illustrate the types of third parties in each category:
      (i) Financial service providers;
      (ii) Non-financial companies; and
      (iii) Others.
      (4) Disclosures under exception for service providers and joint marketers. If you disclose nonpublic personal information under the exception in § 248.13 to a nonaffiliated third party to market products or services that you offer alone or jointly with another financial institution, you satisfy the disclosure requirement of paragraph (a)(5) of this section if you:
      (i) List the categories of nonpublic personal information you disclose, using the same categories and examples you used to meet the requirements of paragraph (a)(2) of this section, as applicable; and
      (ii) State whether the third party is:
      (A) A service provider that performs marketing services on your behalf or on behalf of you and another financial institution; or
      (B) A financial institution with which you have a joint marketing agreement.
      (5) Simplified notices. If you do not disclose, and do not wish to reserve the right to disclose, nonpublic personal information to affiliates or nonaffiliated third parties except as authorized under §§ 248.14 and 248.15, you may simply state that fact, in addition to the information you must provide under paragraphs (a)(1), (a)(8), (a)(9), and (b) of this section.
      (6) Confidentiality and security. You describe your policies and practices with respect to protecting the confidentiality and security of nonpublic personal information if you do both of the following:
      (i) Describe in general terms who is authorized to have access to the information; and
      (ii) State whether you have security practices and procedures in place to ensure the confidentiality of the information in accordance with your policy. You are not required to describe technical information about the safeguards you use.
      (d) Short-form initial notice with opt out notice for non-customers.
      (1) You may satisfy the initial notice requirements in §§ 248.4(a)(2), 248.7(b), and 248.7(c) for a consumer who is not a customer by providing a short-form initial notice at the same time as you deliver an opt out notice as required in § 248.7.
      (2) A short-form initial notice must:
      (i) Be clear and conspicuous;
      (ii) State that your privacy notice is available upon request; and
      (iii) Explain a reasonable means by which the consumer may obtain the privacy notice.
      (3) You must deliver your short-form initial notice according to § 248.9. You are not required to deliver your privacy notice with your short-form initial notice. You instead may simply provide the consumer a reasonable means to obtain your privacy notice. If a consumer who receives your short-form notice requests your privacy notice, you must deliver your privacy notice according to § 248.9.
      (4) Examples of obtaining privacy notice. You provide a reasonable means by which a consumer may obtain a copy of your privacy notice if you:
      (i) Provide a toll-free telephone number that the consumer may call to request the notice; or
      (ii) For a consumer who conducts business in person at your office, maintain copies of the notice on hand that you provide to the consumer immediately upon request.
      (e) Future disclosures. Your notice may include:
      (1) Categories of nonpublic personal information that you reserve the right to disclose in the future, but do not currently disclose; and
      (2) Categories of affiliates or nonaffiliated third parties to whom you reserve the right in the future to disclose, but to whom you do not currently disclose, nonpublic personal information.
      (f) Sample clauses. Sample clauses illustrating some of the notice content required by this section are included in Appendix A of this part.

      § 248.7 Form of opt out notice to consumers; opt out methods.

      (a)
      (1) Form of opt out notice. If you are required to provide an opt out notice under § 248.10(a), you must provide a clear and conspicuous notice to each of your consumers that accurately explains the right to opt out under that section. The notice must state:
      (i) That you disclose or reserve the right to disclose nonpublic personal information about your consumer to a nonaffiliated third party;
      (ii) That the consumer has the right to opt out of that disclosure; and
      (iii) A reasonable means by which the consumer may exercise the opt out right.
      (2) Examples.
      (i) Adequate opt out notice. You provide adequate notice that the consumer can opt out of the disclosure of nonpublic personal information to a nonaffiliated third party if you:
      (A) Identify all of the categories of nonpublic personal information that you disclose or reserve the right to disclose, and all of the categories of nonaffiliated third parties to which you disclose the information, as described in § 248.6(a)(2) and (3) and state that the consumer can opt out of the disclosure of that information; and
      (B) Identify the financial products or services that the consumer obtains from you, either singly or jointly, to which the opt out direction would apply.
      (ii) Reasonable opt out means. You provide a reasonable means to exercise an opt out right if you:
      (A) Designate check-off boxes in a prominent position on the relevant forms with the opt out notice;
      (B) Include a reply form together with the opt out notice;
      (C) Provide an electronic means to opt out, such as a form that can be sent via electronic mail or a process at your web site, if the consumer agrees to the electronic delivery of information; or
      (D) Provide a toll-free telephone number that consumers may call to opt out.
      (iii) Unreasonable opt out means. You do not provide a reasonable means of opting out if:
      (A) The only means of opting out is for the consumer to write his or her own letter to exercise that opt out right; or
      (B) The only means of opting out as described in any notice subsequent to the initial notice is to use a check-off box that you provided with the initial notice but did not include with the subsequent notice.
      (iv) Specific opt out means. You may require each consumer to opt out through a specific means, as long as that means is reasonable for that consumer.
      (b) Same form as initial notice permitted. You may provide the opt out notice together with or on the same written or electronic form as the initial notice you provide in accordance with § 248.4.
      (c) Initial notice required when opt out notice delivered subsequent to initial notice. If you provide the opt out notice after the initial notice in accordance with § 248.4, you must also include a copy of the initial notice with the opt out notice in writing or, if the consumer agrees, electronically.
      (d) Joint relationships.
      (1) If two or more consumers jointly obtain a financial product or service from you, you may provide a single opt out notice. Your opt out notice must explain how you will treat an opt out direction by a joint consumer.
      (2) Any of the joint consumers may exercise the right to opt out. You may either:
      (i) Treat an opt out direction by a joint consumer as applying to all of the associated joint consumers; or
      (ii) Permit each joint consumer to opt out separately.
      (3) If you permit each joint consumer to opt out separately, you must permit one of the joint consumers to opt out on behalf of all of the joint consumers.
      (4) You may not require all joint consumers to opt out before you implement any opt out direction.
      (5) Example. If John and Mary have a joint brokerage account with you and arrange for you to send statements to John's address, you may do any of the following, but you must explain in your opt out notice which opt out policy you will follow:
      (i) Send a single opt out notice to John's address, but you must accept an opt out direction from either John or Mary;
      (ii) Treat an opt out direction by either John or Mary as applying to the entire account. If you do so, and John opts out, you may not require Mary to opt out as well before implementing John's opt out direction; or
      (iii) Permit John and Mary to make different opt out directions. If you do so:
      (A) You must permit John and Mary to opt out for each other.
      (B) If both opt out, you must permit both to notify you in a single response (such as on a form or through a telephone call).
      (C) If John opts out and Mary does not, you may only disclose nonpublic personal information about Mary, but not about John and not about John and Mary jointly.
      (e) Time to comply with opt out. You must comply with a consumer's opt out direction as soon as reasonably practicable after you receive it.
      (f) Continuing right to opt out. A consumer may exercise the right to opt out at any time.
      (g) Duration of consumer's opt out direction.
      (1) A consumer's direction to opt out under this section is effective until the consumer revokes it in writing or, if the consumer agrees, electronically.
      (2) When a customer relationship terminates, the customer's opt out direction continues to apply to the nonpublic personal information that you collected during or related to that relationship. If the individual subsequently establishes a new customer relationship with you, the opt out direction that applied to the former relationship does not apply to the new relationship.
      (h) Delivery. When you are required to deliver an opt out notice by this section, you must deliver it according to § 248.9.

      § 248.8 Revised privacy notices.

      (a) General rule. Except as otherwise authorized in this part, you must not, directly or through any affiliate, disclose any nonpublic personal information about a consumer to a nonaffiliated third party other than as described in the initial notice that you provided to that consumer under § 248.4, unless:
      (1) You have provided to the consumer a clear and conspicuous revised notice that accurately describes your policies and practices;
      (2) You have provided to the consumer a new opt out notice;
      (3) You have given the consumer a reasonable opportunity, before you disclose the information to the nonaffiliated third party, to opt out of the disclosure; and
      (4) The consumer does not opt out.
      (b) Examples.
      (1) Except as otherwise permitted by §§ 248.13, 248.14, and 248.15, you must provide a revised notice before you:
      (i) Disclose a new category of nonpublic personal information to any nonaffiliated third party;
      (ii) Disclose nonpublic personal information to a new category of nonaffiliated third party; or
      (iii) Disclose nonpublic personal information about a former customer to a nonaffiliated third party, if that former customer has not had the opportunity to exercise an opt out right regarding that disclosure.
      (2) A revised notice is not required if you disclose nonpublic personal information to a new nonaffiliated third party that you adequately described in your prior notice.
      (c) Delivery. When you are required to deliver a revised privacy notice by this section, you must deliver it according to § 248.9.

      § 248.9 Delivering privacy and opt out notices.

      (a) How to provide notices. You must provide any privacy notices and opt out notices, including short-form initial notices that this part requires so that each consumer can reasonably be expected to receive actual notice in writing or, if the consumer agrees, electronically.
      (b)
      (1) Examples of reasonable expectation of actual notice. You may reasonably expect that a consumer will receive actual notice if you:
      (i) Hand-deliver a printed copy of the notice to the consumer;
      (ii) Mail a printed copy of the notice to the last known address of the consumer;
      (iii) For the consumer who conducts transactions electronically, post the notice on the electronic site and require the consumer to acknowledge receipt of the notice as a necessary step to obtaining a particular financial product or service; or
      (iv) For an isolated transaction with the consumer, such as an ATM transaction, post the notice on the ATM screen and require the consumer to acknowledge receipt of the notice as a necessary step to obtaining the particular financial product or service.
      (2) Examples of unreasonable expectation of actual notice. You may not, however, reasonably expect that a consumer will receive actual notice of your privacy policies and practices if you:
      (i) Only post a sign in your branch or office or generally publish advertisements of your privacy policies and practices; or
      (ii) Send the notice via electronic mail to a consumer who does not obtain a financial product or service from you electronically.
      (c) Annual notices only.
      (1) You may reasonably expect that a customer will receive actual notice of your annual privacy notice if:
      (i) The customer uses your web site to access financial products and services electronically and agrees to receive notices at the web site and you post your current privacy notice continuously in a clear and conspicuous manner on the web site; or
      (ii) The customer has requested that you refrain from sending any information regarding the customer relationship, and your current privacy notice remains available to the customer upon request.
      (2) Example of reasonable expectation of receipt of annual privacy notice. You may reasonably expect that consumers who share an address will receive actual notice of your annual privacy notice if you deliver the notice with or in a stockholder or shareholder report under the conditions in 17 CFR 270.30d-1(f) or 17 CFR 270.30d-2(b), or with or in a prospectus under the conditions in 17 CFR 230.154.
      (d) Oral description of notice insufficient. You may not provide any notice required by this part solely by orally explaining the notice, either in person or over the telephone.
      (e) Retention or accessibility of notices for customers.
      (1) For customers only, you must provide the initial notice required by § 248.4(a)(1), the annual notice required by § 248.5(a), and the revised notice required by § 248.8, so that the customer can retain them or obtain them later in writing or, if the customer agrees, electronically.
      (2) Examples of retention or accessibility. You provide a privacy notice to the customer so that the customer can retain it or obtain it later if you:
      (i) Hand-deliver a printed copy of the notice to the customer;
      (ii) Mail a printed copy of the notice to the last known address of the customer; or
      (iii) Make your current privacy notice available on a web site (or a link to another web site) for the customer who obtains a financial product or service electronically and agrees to receive the notice at the web site.
      (f) Joint notice with other financial institutions. You may provide a joint notice from you and one or more of your affiliates or other financial institutions, as identified in the notice, as long as the notice is accurate with respect to you and the other institutions.
      (g) Joint relationships. If two or more consumers jointly obtain a financial product or service from you, you may satisfy the initial, annual, and revised notice requirements of paragraph (a) of this section by providing one notice to those consumers jointly.

      Subpart B—Limits on Disclosures

      § 248.10 Limits on disclosure of nonpublic personal information to nonaffiliated third parties.

      (a)
      (1) Conditions for disclosure. Except as otherwise authorized in this part, you may not, directly or through any affiliate, disclose any nonpublic personal information about a consumer to a nonaffiliated third party unless:
      (i) You have provided to the consumer an initial notice as required under § 248.4;
      (ii) You have provided to the consumer an opt out notice as required in § 248.7;
      (iii) You have given the consumer a reasonable opportunity, before you disclose the information to the nonaffiliated third party, to opt out of the disclosure; and
      (iv) The consumer does not opt out.
      (2) Opt out definition. Opt out means a direction by the consumer that you not disclose nonpublic personal information about that consumer to a nonaffiliated third party, other than as permitted by §§ 248.13, 248.14, and 248.15.
      (3) Examples of reasonable opportunity to opt out. You provide a consumer with a reasonable opportunity to opt out if:
      (i) By mail. You mail the notices required in paragraph (a)(1) of this section to the consumer and allow the consumer to opt out by mailing a form, calling a toll-free telephone number, or any other reasonable means within 30 days after the date you mailed the notices.
      (ii) By electronic means. A customer opens an on-line account with you and agrees to receive the notices required in paragraph (a)(1) of this section electronically, and you allow the customer to opt out by any reasonable means within 30 days after the date that the customer acknowledges receipt of the notices in conjunction with opening the account.
      (iii) Isolated transaction with consumer. For an isolated transaction, such as the provision of brokerage services to a consumer as an accommodation, you provide the consumer with a reasonable opportunity to opt out if you provide the notices required in paragraph (a)(1) of this section at the time of the transaction and request that the consumer decide, as a necessary part of the transaction, whether to opt out before completing the transaction.
      (b) Application of opt out to all consumers and all nonpublic personal information.
      (1) You must comply with this section, regardless of whether you and the consumer have established a customer relationship.
      (2) Unless you comply with this section, you may not, directly or through any affiliate, disclose any nonpublic personal information about a consumer that you have collected, regardless of whether you collected it before or after receiving the direction to opt out from the consumer.
      (c) Partial opt out. You may allow a consumer to select certain nonpublic personal information or certain nonaffiliated third parties with respect to which the consumer wishes to opt out.

      § 248.11 Limits on redisclosure and reuse of information.

      (a)
      (1) Information you receive under an exception. If you receive nonpublic personal information from a nonaffiliated financial institution under an exception in § 248.14 or 248.15, your disclosure and use of that information is limited as follows:
      (i) You may disclose the information to the affiliates of the financial institution from which you received the information;
      (ii) You may disclose the information to your affiliates, but your affiliates may, in turn, disclose and use the information only to the extent that you may disclose and use the information; and
      (iii) You may disclose and use the information pursuant to an exception in §§ 248.14 or 248.15 in the ordinary course of business to carry out the activity covered by the exception under which you received the information.
      (2) Example. If you receive a customer list from a nonaffiliated financial institution in order to provide accountprocessing services under the exception in §§ 248.14(a), you may disclose that information under any exception in § 248.14 or 248.15 in the ordinary course of business in order to provide those services. You could also disclose that information in response to a properly authorized subpoena or in the ordinary course of business to your attorneys, accountants, and auditors. You could not disclose that information to a third party for marketing purposes or use that information for your own marketing purposes.
      (b)
      (1) Information you receive outside of an exception. If you receive nonpublic personal information from a nonaffiliated financial institution other than under an exception in §§ 248.14 or 248.15, you may disclose the information only:
      (i) To the affiliates of the financial institution from which you received the information;
      (ii) To your affiliates, but your affiliates may, in turn, disclose the information only to the extent that you can disclose the information; and
      (iii) To any other person, if the disclosure would be lawful if made directly to that person by the financial institution from which you received the information.
      (2) Example. If you obtain a customer list from a nonaffiliated financial institution outside of the exceptions in §§ 248.14 and 248.15:
      (i) You may use that list for your own purposes;
      (ii) You may disclose that list to another nonaffiliated third party only if the financial institution from which you purchased the list could have lawfully disclosed the list to that third party. That is, you may disclose the list in accordance with the privacy policy of the financial institution from which you received the list, as limited by the opt out direction of each consumer whose nonpublic personal information you intend to disclose, and you may disclose the list in accordance with an exception in §§ 248.14 or 248.15, such as in the ordinary course of business to your attorneys, accountants, or auditors.
      (c) Information you disclose under an exception. If you disclose nonpublic personal information to a nonaffiliated third party under an exception in §§ 248.14 or 248.15, the third party may disclose and use that information only as follows:
      (1) The third party may disclose the information to your affiliates;
      (2) The third party may disclose the information to its affiliates, but its affiliates may, in turn, disclose and use the information only to the extent that the third party may disclose and use the information; and
      (3) The third party may disclose and use the information pursuant to an exception in §§ 248.14 or 248.15 in the ordinary course of business to carry out the activity covered by the exception under which it received the information.
      (d) Information you disclose outside of an exception. If you disclose nonpublic personal information to a nonaffiliated third party other than under an exception in §§ 248.14 or 248.15, the third party may disclose the information only:
      (1) To your affiliates;
      (2) To its affiliates, but its affiliates, in turn, may disclose the information only to the extent the third party can disclose the information; and
      (3) To any other person, if the disclosure would be lawful if you made it directly to that person.

      § 248.12 Limits on sharing account number information for marketing purposes.

      (a) General prohibition on disclosure of account numbers. You must not, directly or through an affiliate, disclose, other than to a consumer reporting agency, an account number or similar form of access number or access code for a consumer's credit card account, deposit account, or transaction account to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail to the consumer.
      (b) Exceptions. Paragraph (a) of this section does not apply if you disclose an account number or similar form of access number or access code:
      (1) To your agent or service provider solely in order to perform marketing for your own products or services, as long as the agent or service provider is not authorized to directly initiate charges to the account; or
      (2) To a participant in a private label credit card program or an affinity or similar program where the participants in the program are identified to the customer when the customer enters into the program.
      (c) Example—Account number. An account number, or similar form of access number or access code, does not include a number or code in an encrypted form, as long as you do not provide the recipient with a means to decode the number or code.

      Subpart C—Exceptions

      § 248.13 Exception to opt out requirements for service providers and joint marketing.

      (a) General rule.
      (1) The opt out requirements in §§ 248.7 and 248.10 do not apply when you provide nonpublic personal information to a nonaffiliated third party to perform services for you or functions on your behalf, if you:
      (i) Provide the initial notice in accordance with § 248.4; and
      (ii) Enter into a contractual agreement with the third party that prohibits the third party from disclosing or using the information other than to carry out the purposes for which you disclosed the information, including use under an exception in §§ 248.14 or 248.15 in the ordinary course of business to carry out those purposes.
      (2) Example. If you disclose nonpublic personal information under this section to a financial institution with which you perform joint marketing, your contractual agreement with that institution meets the requirements of paragraph (a)(1)(ii) of this section if it prohibits the institution from disclosing or using the nonpublic personal information except as necessary to carry out the joint marketing or under an exception in §§ 248.14 or 248.15 in the ordinary course of business to carry out that joint marketing.
      (b) Service may include joint marketing. The services a nonaffiliated third party performs for you under paragraph (a) of this section may include marketing of your own products or services or marketing of financial products or services offered pursuant to joint agreements between you and one or more financial institutions.
      (c) Definition of joint agreement. For purposes of this section, joint agreement means a written contract pursuant towhich you and one or more financial institutions jointly offer, endorse, or sponsor a financial product or service.

      § 248.14 Exceptions to notice and opt out requirements for processing and servicing transactions.

      (a) Exceptions for processing and servicing transactions at consumer's request. The requirements for initialnotice in § 248.4(a)(2), for the opt out in §§ 248.7 and 248.10, and for initial notice in § 248.13 in connection with service providers and joint marketing, do not apply if you disclose nonpublic personal information as necessary to effect, administer, or enforce a transaction that a consumer requests or authorizes, or in connection with:
      (1) Processing or servicing a financial product or service that a consumer requests or authorizes;
      (2) Maintaining or servicing the consumer's account with you, or with another entity as part of a private label credit card program or other extension of credit on behalf of such entity; or
      (3) A proposed or actual securitization, secondary market sale (including sales of servicing rights), or similar transaction related to a transaction of the consumer.
      (b) Necessary to effect, administer, or enforce a transaction means that the disclosure is:
      (1) Required, or is one of the lawful or appropriate methods, to enforce your rights or the rights of other persons engaged in carrying out the financial transaction or providing the product or service; or
      (2) Required, or is a usual, appropriate, or acceptable method:
      (i) To carry out the transaction or the product or service business of which the transaction is a part, and record, service, or maintain the consumer's account in the ordinary course of providing the financial service or financial product;
      (ii) To administer or service benefits or claims relating to the transaction or the product or service business of which it is a part;
      (iii) To provide a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product to the consumer or the consumer's agent or broker;
      (iv) To accrue or recognize incentives or bonuses associated with the transaction that are provided by you or any other party;
      (v) To underwrite insurance at the consumer's request or for reinsurance purposes, or for any of the following purposes as they relate to a consumer's insurance: Account administration, reporting, investigating, or preventing fraud or material misrepresentation, processing premium payments, processing insurance claims, administering insurance benefits (including utilization review activities), participating in research projects, or as otherwise required or specifically permitted by federal or State law; or (vi) In connection with:
      (A) The authorization, settlement, billing, processing, clearing, transferring, reconciling or collection of amounts charged, debited, or otherwise paid using a debit, credit, or other payment card, check, or account number, or by other payment means;
      (B) The transfer of receivables, accounts, or interests therein; or
      (C) The audit of debit, credit, or other payment information.

      § 248.15 Other exceptions to notice and opt out requirements.

      (a) Exceptions to notice and opt out requirements. The requirements for initial notice in § 248.4(a)(2), for the opt out in §§ 248.7 and 248.10, and for initial notice in § 248.13 in connection with service providers and joint marketing do not apply when you disclose nonpublic personal information:
      (1) With the consent or at the direction of the consumer, provided that the consumer has not revoked the consent or direction;
      (2)
      (i) To protect the confidentiality or security of your records pertaining to the consumer, service, product, or transaction;
      (ii) To protect against or prevent actual or potential fraud, unauthorized transactions, claims, or other liability;
      (iii) For required institutional risk control or for resolving consumer disputes or inquiries;
      (iv) To persons holding a legal or beneficial interest relating to the consumer; or
      (v) To persons acting in a fiduciary or representative capacity on behalf of the consumer;
      (3) To provide information to insurance rate advisory organizations, guaranty funds or agencies, agencies that are rating you, persons that are assessing your compliance with industry standards, and your attorneys, accountants, and auditors;
      (4) To the extent specifically permitted or required under other provisions of law and in accordance with the Right to Financial Privacy Act of 1978 (12 U.S.C. 3401 et seq.), to law enforcement agencies (including a federal functional regulator, the Secretary of the Treasury, with respect to 31 U.S.C. Chapter 53, Subchapter II (Records and Reports on Monetary Instruments and Transactions) and 12 U.S.C. Chapter 21 (Financial Recordkeeping), a State insurance authority, with respect to any person domiciled in that insurance authority's State that is engaged in providing insurance, and the Federal Trade Commission), self-regulatory organizations, or for an investigation on a matter related to public safety;
      (5)
      (i) To a consumer reporting agency in accordance with the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.), or
      (ii) From a consumer report reported by a consumer reporting agency;
      (6) In connection with a proposed or actual sale, merger, transfer, or exchange of all or a portion of a business or operating unit if the disclosure of nonpublic personal information concerns solely consumers of such business or unit; or
      (7)
      (i) To comply with federal, State, or local laws, rules and other applicable legal requirements;
      (ii) To comply with a properly authorized civil, criminal, or regulatory investigation, or subpoena or summons by federal, State, or local authorities; or
      (iii) To respond to judicial process or government regulatory authorities having jurisdiction over you for examination, compliance, or other purposes as authorized by law.
      (b) Examples of consent and revocation of consent.
      (1) A consumer may specifically consent to your disclosure to a nonaffiliated mortgage lender of the value of the assets in the consumer's brokerage or investment advisory account so that the lender can evaluate the consumer's application for a mortgage loan.
      (2) A consumer may revoke consent by subsequently exercising the right to opt out of future disclosures of nonpublic personal information as permitted under § 248.7(f).

      Subpart D—Relation to Other Laws; Effective Date

      § 248.16 Protection of Fair Credit Reporting Act.

      Nothing in this part shall be construed to modify, limit, or supersede the operation of the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.), and no inference shall be drawn on the basis of the provisions of this part regarding whether information is transaction or experience information under section 603 of that Act.

      § 248.17 Relation to State laws.

      (a) In general. This part shall not be construed as superseding, altering, or affecting any statute, regulation, order, or interpretation in effect in any State, except to the extent that such State statute, regulation, order, or interpretation is inconsistent with the provisions of this part, and then only to the extent of the inconsistency.
      (b) Greater protection under State law. For purposes of this section, a State statute, regulation, order, or interpretation is not inconsistent with the provisions of this part if the protection such statute, regulation, order, or interpretation affords any consumer is greater than the protection provided under this part, as determined by the Federal Trade Commission, after consultation with the Commission, on the Federal Trade Commission's own motion, or upon the petition of any interested party.

      § 248.18 Effective date; transition rule.

      (a) Effective date. This part is effective November 13, 2000. In order to provide sufficient time for you to establish policies and systems to comply with the requirements of this part, the compliance date for this part is July 1, 2001.
      (b)
      (1) Notice requirement for consumers who are your customers on the compliance date. By July 1, 2001, you must have provided an initial notice, as required by § 248.4, to consumers who are your customers on July 1, 2001.
      (2) Example. You provide an initial notice to consumers who are your customers on July 1, 2001, if, by that date, you have established a system for providing an initial notice to all new customers and have mailed the initial notice to all your existing customers.
      (c) Two-year grandfathering of service agreements. Until July 1, 2002, a contract that you have entered into with a nonaffiliated third party to perform services for you or functions on your behalf satisfies the provisions of § 248.13(a)(2), even if the contract does not include a requirement that the third party maintain the confidentiality of nonpublic personal information, as long as you entered into the agreement on or before July 1, 2000.

      §§ 248.19-248.29 [Reserved]

      § 248.30 Procedures to safeguard customer records and information.

      Every broker, dealer, and investment company, and every investment adviser registered with the Commission must adopt policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information. These policies and procedures must be reasonably designed to:

      (a) Insure the security and confidentiality of customer records and information;
      (b) Protect against any anticipated threats or hazards to the security or integrity of customer records and information; and
      (c) Protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

      Appendix A to Part 248—Sample Clauses

      Financial institutions, including a group of financial holding company affiliates that use a common privacy notice, may use the following sample clauses, if the clause is accurate for each institution that uses the notice. (Note that disclosure of certain information, such as assets, income, and information from a consumer reporting agency, may give rise to obligations under the Fair Credit Reporting Act, such as a requirement to permit a consumer to opt out of disclosures to affiliates or designation as a consumer reporting agency if disclosures are made to nonaffiliated third parties.)

      A-1—Categories of Information You Collect (All Institutions)

      You may use this clause, as applicable, to meet the requirement of § 248.6(a)(1) to describe the categories of nonpublic personal information you collect.

      Sample Clause A-1:

      We collect nonpublic personal information about you from the following sources:

      • Information we receive from you on applications or other forms;


      • Information about your transactions with us, our affiliates, or others; and


      • Information we receive from a consumer reporting agency.

      A-2—Categories of Information You Disclose (Institutions That Disclose Outside of the Exceptions)

      You may use one of these clauses, as applicable, to meet the requirement of § 248.6(a)(2) to describe the categories of nonpublic personal information you disclose. You may use these clauses if you disclose nonpublic personal information other than as permitted by the exceptions in §§ 248.13, 248.14, and 248.15.

      Sample Clause A-2, Alternative 1:

      We may disclose the following kinds of nonpublic personal information about you:

      • Information we receive from you on applications or other forms, such as [provide illustrative examples, such as "your name, address, social security number, assets, and income"];


      • Information about your transactions with us, our affiliates, or others, such as [provide illustrative examples, such as "your account balance, payment history, parties to transactions, and credit card usage"]; and


      • Information we receive from a consumer reporting agency, such as [provide illustrative examples, such as "your creditworthiness and credit history"].

      Sample Clause A-2, Alternative 2:

      We may disclose all of the information that we collect, as described [describe location in the notice, such as "above" or "below"].

      A-3—Categories of Information You Disclose and Parties to Whom You Disclose (Institutions That Do Not Disclose Outside of the Exceptions)

      You may use this clause, as applicable, to meet the requirements of §§ 248.6(a)(2), (3), and (4) to describe the categories of nonpublic personal information about customers and former customers that you disclose and the categories of affiliates and nonaffiliated third parties to whom you disclose. You may use this clause if you do not disclose nonpublic personal information to any party, other than as permitted by the exceptions in §§ 248.14 and 248.15.

      Sample Clause A-3:

      We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law.

      A-4—Categories of Parties to Whom You Disclose (Institutions That Disclose Outside of the Exceptions)

      You may use this clause, as applicable, to meet the requirement of § 248.6(a)(3) to describe the categories of affiliates and nonaffiliated third parties to whom you disclose nonpublic personal information. You may use this clause if you disclose nonpublic personal information other than as permitted by the exceptions in §§ 248.13, 248.14, and 248.15, as well as when permitted by the exceptions in §§ 248.14 and 248.15.

      Sample Clause A-4:

      We may disclose nonpublic personal information about you to the following types of third parties:

      • Financial service providers, such as [provide illustrative examples, such as "mortgage bankers, securities broker-dealers, and insurance agents"];


      • Non-financial companies, such as [provide illustrative examples, such as "retailers, direct marketers, airlines, and publishers"]; and


      • Others, such as [provide illustrative examples, such as "non-profit organizations"].

      We may also disclose nonpublic personal information about you to nonaffiliated third parties as permitted by law.

      A-5—Service Provider/Joint Marketing Exception

      You may use one of these clauses, as applicable, to meet the requirements of § 248.6(a)(5) related to the exception for service providers and joint marketers in § 248.13. If you disclose nonpublic personal information under this exception, you must describe the categories of nonpublic personal information you disclose and the categories of third parties with whom you have contracted.

      Sample Clause A-5, Alternative 1:

      We may disclose the following information to companies that perform marketing services on our behalf or to other financial institutions with which we have joint marketing agreements:

      • Information we receive from you on applications or other forms, such as [provide illustrative examples, such as "your name, address, social security number, assets, and income"];


      • Information about your transactions with us, our affiliates, or others, such as [provide illustrative examples, such as "your account balance, payment history, parties to transactions, and credit card usage"]; and


      • Information we receive from a consumer reporting agency, such as [provide illustrative examples, such as "your creditworthiness and credit history"].

      Sample Clause A-5, Alternative 2:

      We may disclose all of the information we collect, as described [describe location in the notice, such as "above" or "below"] to companies that perform marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements.

      A-6—Explanation of Opt Out Right (Institutions That Disclose Outside of the Exceptions)

      You may use this clause, as applicable, to meet the requirement of § 248.6(a)(6) to provide an explanation of the consumer's right to opt out of the disclosure of nonpublic personal information to nonaffiliated third parties, including the method(s) by which the consumer may exercise that right. You may use this clause if you disclose nonpublic personal information other than as permitted by the exceptions in §§ 248.13, 248.14, and 248.15.

      Sample Clause A-6:

      If you prefer that we not disclose nonpublic personal information about you to nonaffiliated third parties, you may opt out of those disclosures, that is, you may direct us not to make those disclosures (other than disclosures permitted by law). If you wish to opt out of disclosures to nonaffiliated third parties, you may [describe a reasonable means of opting out, such as "call the following toll-free number: (insert number)"].

      A-7—Confidentiality and Security (All Institutions)

      You may use this clause, as applicable, to meet the requirement of § 248.6(a)(8) to describe your policies and practices with respect to protecting the confidentiality and security of nonpublic personal information.

      Sample Clause A-7:

      We restrict access to nonpublic personal information about you to [provide an appropriate description, such as "those employees who need to know that information to provide products or services to you"]. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information.

      By the Commission.

      Dated: June 22, 2000.

      Margaret H. McFarland,
      Deputy Secretary.

    • 00-65 Nasdaq Is Establishing The Primex Auction System As A New Facility

      View PDF File

      INFORMATIONAL

      Primex Auction System

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Technology
      Trading & Market Making

      Trading Systems



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) and Nasdaq® Boards have agreed to establish the Primex Auction SystemTM, a new trading system designed to replicate a competitive trading crowd in an extended electronic environment. Nasdaq will operate the system as a facility of The Nasdaq Stock Market® under an agreement between Nasdaq and Primex Trading N.A., L.L.C., the venture that holds the license to the system. Nasdaq is offering the system as an additional execution service to any NASD member, further enhancing opportunities for price and size improvement. The system, which is scheduled to start operating at the end of the first quarter of 2001, will be available for Nasdaq-listed securities and exchange-listed securities traded in the Nasdaq InterMarket.SM

      The Nasdaq-operated Primex facility will allow, on a voluntary basis, market makers and others, including order entry firms and electronic communications networks (ECNs), to enter market orders and executable limit orders into the system for exposure to a broad electronic crowd. These orders may immediately interact with other interest or orders already resident within the Primex Auction System, or may elicit other responses from the crowd during the exposure, all dynamically priced within the context of the best publicly displayed bid and offer. Participants entering orders into the system may place minimum price improvement conditions on the orders they enter to attempt to obtain prices for those orders superior to the best publicly displayed prices. All interaction of trading interest within Primex will be anonymous until the end of the day. Customer orders that do not result in an execution in Primex may be internalized by the firm that entered the order or routed to another Nasdaq execution system.

      The system has been designed to increase order exposure and interaction, and provides an effective means for the market atlarge to independently price customer orders, particularly in the coming decimal environment. While participation in the Primex Auction System is voluntary, Nasdaq believes it will provide a useful means for seeking price and size improvement in the Nasdaq Stock Market and therefore should assist firms in satisfying their best execution duties. Moreover, the Primex Auction System will provide benefits and incentives for market makers to participate. Market makers that use the system for their customers can still maintain control of their order flow and commit capital for the benefit of their customers' orders.

      Primex would be open to any NASD member in good standing and to non-NASD members that an NASD member is willing to sponsor and authorize.

      Questions/Further Information

      The NASD and Nasdaq Boards want to provide members with information regarding the way the Primex Auction System will operate and the rules that will govern its use. This synopsis is intended to provide members with a detailed overview of the System and its rules.

      If you have questions or comments on how the Primex Auction System will operate, please contact Eugene Lopez, Senior Vice President, Department of Trading and Market Services, Nasdaq, at (202) 728-6998; or Richard C. Strasser, Director, Department of Trading and Market Services, Nasdaq, at (202) 728-8338 no later than October 16, 2000.

      HOW THE PRIMEX AUCTION SYSTEM AND ITS RULES WILL WORK

      This Notice is intended to provide NASD members with a descriptive overview of how the Primex Auction System will operate and how the rules governing its use will work. The Primex Auction System will be made available on a voluntary basis to any interested NASD member that is in good standing and has executed the necessary agreements and forms with Nasdaq or its affiliate. Non-NASD members may access Primex through a Participant by becoming a sponsored Subscriber of the Participant. Users will be permitted to access Primex through: a Primex Auction Workstation service; an Application Programming Interface; a FIX programming interface; a Computer to Computer Interface; and possibly, in the future, through an Internet browser. The system will be available through a new network, independent of Nasdaq's existing network. The system offering the Primex facility will interface, however, with other Nasdaq services, such as the Small Order Execution SystemSM (SOESSM), Computer Assisted Execution SystemSM (CAESSM), Automated Confirmation Transaction ServiceSM (ACTSM), and when it becomes available, Super-Montage.

      Voluntary Nature Of The System

      Nasdaq will offer the Primex facility to any NASD member that chooses to use this type of system to obtain price improvement or enhanced liquidity for its customer or principal orders. The facility is meant to serve as a means, but certainly not as the exclusive acceptable means, for obtaining price improvement. No NASD rule will require an NASD member to use Primex in meeting a member's best execution obligations.

      Types Of Primex Participants

      There will be two categories of participants in the Primex Auction System: Crowd Participant and Primex Auction Market Maker (PAMM).1 Becoming a Participant automatically entitles that entity to be a Crowd Participant for any eligible security. Crowd Participants may expose orders to the Primex Crowd or respond to the orders of other Participants during an auction. A Participant also may choose to register as a PAMM, on a stock-by-stock basis, which entitles that Participant to certain privileges and subjects it to certain responsibilities for those stocks, as discussed below. All users may expose orders to the Primex Crowd, regardless of their status. The remainder of this Notice is divided into three parts: the first part describes the way Participants may enter orders seeking price improvement; the second part describes the way Crowd Participants may respond to orders seeking price improvement; and the third part explains trade processing, anonymity, and sponsored access.

      1. Primex Order Entry

      Types Of Orders Accepted And Exposure Duration

      The Primex Auction System will not be a display facility for limit orders and thus will not be an ECN Display Alternative. The System will accept only market orders and executable limit orders.2 Only the size and side of an order will be communicated to the Crowd, and only for the time during which the order is available for execution.

      Participants will have a range of alternatives regarding the manner in which their orders may be exposed, depending on the characteristics of those orders and the way Participants choose to use the system for their customers. Participants that enter orders will specify the maximum exposure period, which can be "zero" seconds (i.e., immediate), 15 seconds, or 30 seconds. This duration effectively is the maximum time of the auction for that order, which is in keeping with a goal of the Primex Auction System to speed the execution process while providing meaningful opportunities for price improvement and enhanced liquidity. Thus, an order may be executed well before the maximum exposure time has expired provided it can be matched with other interest that satisfies any conditions placed on the order by the Participant that entered it, such as a minimum amount of price improvement. Orders entered with a specified price may only be exposed to seek an immediate execution in whole or in part (referred to in the System as a "zero second" auction). Unpriced market orders for at least 10,000 shares or $200,000 in market value may be exposed for immediate execution in a zero second auction as well.

      In a zero second auction an order exposed to the Crowd would interact with other orders on the opposite side of the market already being exposed within the System or Indications that respond automatically to orders during an auction. Any unexecuted portion of any order will be returned to the entering Participant at which time it may be internalized, or routed to other Nasdaq execution systems for execution as would be consistent with the Participant broker/dealer's best execution responsibilities. Choices regarding unexecuted portions of orders are decided by the Participant entering an order at the time of order entry.

      Crowd Participant Watch List For Eligible Securities

      Crowd Participants may monitor the availability of orders exposed in an auction through the use of a Watch List. Nasdaq will notify a Crowd Participant electronically when an order in a security on that Participant's Watch List is exposed during an auction and available for response by the Crowd Participant.

      Conditions And Match Parameters

      The Primex Auction System will allow a Participant to place certain conditions and match parameters on the orders that it enters into the System. These vary depending on whether the Participant is a Crowd Participant or a PAMM. All Participants may enter orders (as principal, riskless principal, or agent) and all may place a Minimum Relative Price Improvement condition on agency and riskless principal orders they expose to the System. This condition establishes the minimum amount of price improvement, relative to the best publicly displayed bid or offer (NBBO), that the order must receive before it will be executed against in whole or in part by any Crowd interest.

      In addition, PAMMs (but not Crowd Participants) are entitled, but not obligated, to place match parameters on the orders that they expose to the Primex Auction System in stocks in which they are registered as a PAMM. These match parameters provide a PAMM with a level of control over its order flow, allowing the PAMM to commit capital and provide executions to its customer orders in conjunction with the exposure process. There are three types of match parameters: (1) Two Cent Match; (2) 50 Percent Match; and (3) Block Facilitation Match. In addition, PAMMs may expose clean cross orders to the Crowd.

      Two Cent Match Parameter: Orders entered with this parameter will be executed against any interest in the Crowd during its exposure, at the time such interest is available, provided such Crowd interest would provide price improvement that is more than two cents superior to the NBBO at that time. If there is Crowd interest that would provide more than two cents price improvement to the order, in whole or in part, that interest will execute against the order accordingly. If there is Crowd interest for any part of the order but such interest does not satisfy the Two Cent Match parameter, then the entire order will be immediately executed against the PAMM that entered it at the best price that was nonetheless offered by the Crowd, at the time such Crowd interest is available and regardless of the size of that interest. If at the end of the exposure any portion of an order remains unexecuted, that portion will be executed against the PAMM that entered the order at the NBBO at that time.

      For example: The NBBO for a security is $20 - 20.10. A PAMM enters a customer order to buy 2,000 shares and has placed a Two Cent Match Parameter on that order. The PAMM selects a maximum exposure period of 15 seconds for the order. A Crowd Participant responds with an offer to sell 1,000 shares for two cents superior to the NBBO (i.e., $20.08). Because the PAMM that entered the original order is willing to match the price of any Crowd interest within two cents of the NBBO, the entire 2,000 shares of the original customer order will be executed against the PAMM that entered it at the improved price of $20.08. Had the Crowd offered a Response to sell at a price equivalent to $20.07 or less, such Crowd interest would execute against the customer order. If an unexecuted balance still remained at the end of the 15 seconds, such balance of the customer's order would be executed against that PAMM at the best displayed offer at that time.

      50 Percent Match: Orders entered with this parameter will be executed against any interest in the Crowd during its exposure at the price(s) and size of such Crowd interest for no more than 50 percent of the order. Any execution with the Crowd will immediately cause the Primex Auction System to provide the order with an additional execution of like size and price against the PAMM that entered it. Any unexecuted portion of the order will be executed immediately against the PAMM that entered it at the NBBO at that time.

      For example: The NBBO for a security is $20 - 20.10. A PAMM for that security enters into the Primex Auction System an order to buy 2,000 shares for a customer and places a 50 Percent Match parameter on that order. The PAMM selects an exposure time of 15 seconds. During its exposure, the order elicits the following executions by other Crowd Participants (which could be in the form of Indications, Responses, or contra-side orders to sell): 200 shares at $20.04 and 500 shares at $20.05. Primex will execute these transactions and immediately match each one as they occur by executing an additional 200 shares and 500 shares, at $20.04 and $20.05, respectively, against the PAMM that entered the original customer order. If there is no other interest from the Crowd at the end of the 15-second exposure period, Primex will cause the remaining balance of 600 shares to be automatically executed against the PAMM that entered the order at the best publicly displayed offer at that time. If the best offer publicly displayed were still $20.10 at this time, this would result in the PAMM selling the balance of 600 shares to the customer at $20.10.

      Block Facilitation Match: This parameter is similar to the 50 Percent Match parameter, but it applies to orders that are for at least 10,000 shares. A PAMM entering an order with the Block Facilitation Match can specify a maximum exposure time of 0, 15 or 30 seconds whereas orders with the 50 Percent Match parameter (unless they are of block size) must be exposed for a maximum of 15 or 30 seconds. Any unexecuted portion of an order with this parameter will be executed immediately against the PAMM that entered it at the NBBO.

      Clean Cross Exposure

      Finally, a PAMM may enter Clean Cross orders for the accounts of two separate customers where the cross is for at least 10,000 shares. Clean Cross orders are exposed in a zero second auction. The two sides of the Clean Cross will execute against each other at the midpoint of the NBBO unless there is superior-priced interest in the Primex Auction System that breaks up either or both sides of the cross. To break up a side of a cross the resident Crowd interest must total at least 10,000 shares in the aggregate and be at a price or prices that are all superior to the bid-ask midpoint by at least a whole cent. Any unexecuted interest will be returned to the PAMM unexecuted.

      Market Maker Guarantees

      PAMMs may choose to establish pre-set execution guarantees for each customer order they enter. This guarantee allows a PAMM to automatically provide an execution to its own customers within the system, at size levels established by the PAMM, for any unexecuted portion of an order at the end of its exposure.

      Phase-In Of Primex Auction Market Maker Obligations

      In addition to being able to enter the match parameters and clean cross exposure discussed above, it is anticipated that a PAMM in a given security will be entitled to share in the execution revenues that the Primex Auction System generates. To maintain its status as a PAMM, however, a Participant must demonstrate its commitment to the System and the Crowd, after a brief phase-in period, by exposing a certain minimum number of its customer orders to the System.

      Specifically, for the first calendar quarter in which the System is operational, any Participant may become a Primex Auction Market Maker (and thus be entitled to the benefits of being a PAMM) without regard to the percentage of its customer orders it submits to the System. Beginning with the second calendar quarter in which the System is operational, a Participant may maintain its status as a PAMM only if it exposed to the System at least 50 percent of its eligible customer orders (i.e., those under 1100 shares) during the previous calendar quarter. Beginning with the third calendar quarter in which the System is operational, and each calendar quarter thereafter, a Participant may maintain its status as a PAMM only if it submitted at least 80 percent of its eligible customer orders during the previous calendar quarter. Of course, a Nasdaq market maker that chooses not to become a PAMM for any stock will never be prevented from using the System at any time by either entering orders or responding to auctions as a Crowd Participant.

      2. Responding To Orders Seeking Price Improvement

      Any Crowd Participant may submit (either as principal or agent) either Indications or Responses to the Primex Auction System to interact with orders that become available in Primex. These Indications or Responses are not exposed or communicated to any Participant, except to the extent they result in an execution with an order. Responses may be either a fixedprice Response (e.g., sell 1,000 shares at $20) or a relative-priced Response (e.g., buy 1000 at the bid plus three cents).

      Types Of Indications

      There are two types of Indications: (1) Predefined Relative Indication (PRI) and Go-Along Indication. A Crowd Participant may use PRIs to act as "intelligent agents" in the System that respond automatically, at dynamically updated prices, to an order that becomes available during an auction. PRIs have no specific, fixed price. Rather, they are expressed, at the time of their entry, in terms relative to the best bid or offer that exists when the System activates the PRI against orders in an auction. PRIs must be for a certain minimum number of shares depending on the amount of price improvement over the NBBO (if any) that the PRI would offer. For example, a PRI that would respond at the NBBO must be for at least 3000 shares when it is entered, whereas a PRI that offers three cents or more price improvement superior to the NBBO may be for as few as 1,000 shares. The Primex Auction System will never execute an order at a price outside of the current NBBO.

      A Crowd Participant may submit a Go-Along Indication to the Primex Auction System to respond automatically to orders that become available during an auction where there has been at least one other contemporaneous Crowd execution at the NBBO. Go-Along Indications have no specific price but will match against orders at the best publicly displayed bid or offer that exists when the Go-Along Indication is activated (provided there is no other interest available within the System). A Go-Along Indication must be for at least 10,000 shares.

      Crowd Participant Restrictions On Order Interaction

      Crowd Participants may restrict the types of orders with which their Indications and Responses will interact. Specifically, they may elect to have their Responses and Indications interact with all available orders or only with public customer orders (i.e., no proprietary orders). Participants that enter orders, however, may not limit the type of interest that may respond to those orders.

      Order Interaction

      Orders entered by two or more Participants may interact with one another (as well as with Responses and Indications). Responses and Indications may not interact with one another. Market orders that are matched against other market orders being auctioned are executed at the midpoint of the NBBO.

      3. Trade Processing, Anonymity And Sponsored Access

      The Primex Auction System will process all trade activity among Participants on an anonymous basis until the end of the day. After facilitating an execution, Primex will send an execution report to all Participants involved. The execution report will indicate the details of the transaction but will not contain the identity of the contraparty. For regulatory and other necessary purposes, the NASD, Nasdaq, and the National Securities Clearing Corporation (NSCC) will have the ability to determine the identity of the actual contra-parties at any time. At the end of each trading day, the actual original contra-party for executions obtained within Primex will be made available to the Participants involved through Nasdaq's systems.

      Matches within the Primex Auction System are executed and reported through Nasdaq systems for public tape reporting and forwarding to NSCC for clearing, where necessary. Participants (or their clearing firms) will be responsible for the clearance and settlement of all trades executed through the Primex Auction System to the extent permitted by their clearing firm. Thus, for Participants that are correspondents of other clearing firms, such correspondents must be authorized by their clearing firm before using the System. The System provides tools for clearing firms to establish, monitor, and modify clearing limits on a real-time basis. Executions within Primex cannot be re-allocated to different clearing firms after the execution.

      Non-NASD members may access Primex through an NASD member Participant by becoming a sponsored Subscriber of that NASD member Participant, to the extent authorized by the member. For Participants that sponsor other Subscribers, the Primex Auction System provides tools for sponsors to establish, monitor, and modify credit limits for their Subscribers on a real-time basis. Firms that sponsor non-NASD members may always monitor all activity and execution reports involving the sponsored entity in real-time through the System.


      Endnotes

      1 A PAMM in a Nasdaq-listed security must be registered as a Nasdaq market maker in that security. A PAMM in an ITS/CAES eligible security must be registered as an ITS/CAES market maker in that security.

      2 Executable limit orders include marketable limit orders as well as orders priced at-thequote or between-the-quote.

    • 00-64 SEC Approves Rule Changes To Amend Mediation Fee Structure

      View PDF File

      INFORMATIONAL

      Mediation Fees

      Effective Date: November 1, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Dispute Resolution
      Mediation



      Executive Summary

      On August 11, 2000, the Securities and Exchange Commission (SEC) approved a change to the Code of Arbitration Procedure (Code) to permit NASD Dispute Resolution, Inc., (NASD Dispute ResolutionSM) to implement a new fee structure for its mediation services.1 When the rule change becomes effective, NASD Dispute Resolution will replace its current flat fee for cases filed directly as mediations with a sliding-scale fee schedule that will result in lower fees to mediate smaller claims.

      The rule change also affects cases filed as arbitrations that move to mediation. NASD Dispute Resolution will now charge the parties in such cases a mediation filing fee, except that no fee will be charged if a case involves claims of $25,000 or less. Previously, no mediation filing fee was assessed when parties in arbitration decided to mediate. However, as an inducement to parties to mediate cases in arbitration, parties will no longer pay the arbitration adjournment fee if they choose to mediate with NASD Dispute Resolution. The rule change also makes it clear that parties that choose to mediate can adjourn their arbitration, so they are not participating in two processes simultaneously. The rule change becomes effective for mediations filed on or after November 1, 2000.2

      Attachment A outlines the Code changes.

      Questions/Further Information

      Questions regarding this Notice may be directed to Kenneth L. Andrichik, Associate Vice President and Director of Mediation, NASD Dispute Resolution, at (212) 858-3915, e-mail:
      ken.andrichik@nasd.com;

      Elizabeth McCoy, Assistant Director of Mediation, NASD Dispute Resolution, at (212) 858-4341, e-mail:
      elizabeth.mccoy@nasd.com; or Louise Corso, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-6939, e-mail:
      louise.corso@nasd.com.

      Background

      NASD Regulation initiated a mediation program in 1995 to provide an additional dispute resolution option for parties. The mediation program provides public customers, member firms, and associated persons with an alternative and effective means for resolving their disputes.

      NASD Dispute Resolution reviewed its mediation program, which is currently subsidized by the National Association of Securities Dealers, Inc. (NASD®), and determined to adjust its mediation fee schedule. The new mediation fee schedule helps offset the operational costs of the mediation program while preserving mediation as a costeffective alternative to arbitration for parties with claims of any dollar value. Mediation fees remain payable only after opposing parties agree to submit a case to mediation.

      The major changes approved by the SEC are summarized in this Notice. Attachment A includes all of the textual changes to the Code.

      Mediation Case Filing Fees For Cases Filed Directly In Mediation

      About 15 percent of the mediation cases filed annually are filed directly in mediation. NASD Dispute Resolution presently charges $150 per party for customer cases and $250 per party for intra-industry cases, regardless of the amount in dispute.3 NASD Dispute Resolution will replace the flat fee with a sliding scale fee schedule detailed in new Rule 10407(a). The new schedule lists the filing fees for customers and associated persons, as well as the filing fees for member firms. The filing fees are lowest for the smallest claims but increase as the amount in controversy increases. For all claims, regardless of the amount in dispute, customers and members will pay less than the corresponding filing fees for arbitration.

      Mediation Case Filing Fees For Cases Initially Filed In Arbitration

      About 85 percent of the mediation cases filed annually are first filed in arbitration and later move to mediation. Under new Rule 10407(b), NASD Dispute Resolution will charge mediation filing fees for cases over $25,000 to parties choosing mediation after the arbitration case is already filed. For cases of $25,000 or less, consistent with its efforts to provide incentives for parties to mediate small claims, NASD Dispute Resolution will not impose any filing fees under the new rule. For higher dollar-value cases, because NASD Dispute Resolution would like to continue to encourage members and investors to mediate although they may have an arbitration case pending, total filing fees will be smaller than for those cases filed directly in mediation.

      Adjourning Arbitration During Mediation

      NASD Dispute Resolution will amend Rule 10403 of the Code in two ways. First, new language is added to Rule 10403(a) to make it clear that parties in an arbitration that agree to submit a matter for mediation can also agree to adjourn the arbitration. The parties can do so notwithstanding Rule 10319 that gives arbitrators discretion to adjourn an arbitration proceeding. NASD Dispute Resolution believes that this rule change benefits the parties by saving them time and money and by relieving them of the problems of proceeding in two arenas at the same time. Moreover, this change is consistent with the approach taken by other alternative dispute resolution providers.

      Second, NASD Dispute Resolution has added a new provision, Rule 10403(b), that encourages the use of the NASD Dispute Resolution mediation program. Whenever the mediation is conducted through NASD Dispute Resolution, the parties will avoid payment of arbitration adjournment fees.

      Additional Efforts To Encourage Mediation Of Small Claims

      In addition to changing the Code, NASD Dispute Resolution has recently asked its mediators to help reduce the cost of mediation for small cases by agreeing to charge reduced rates to mediate claims involving $25,000 or less. Over half of all NASD Dispute Resolution mediators have agreed to charge $50 an hour for mediations in which the disputed amount is $25,000 or less.


      Endnotes

      1 Exchange Act Release No. 43147 (August 11, 2000) (File No. SR-NASD-00-11), 65 Federal Register 50582 (August 18, 2000).

      2 The new rule will be effective for any mediation filed on or after November 1, 2000, i.e., those filed directly as mediations and those converted from a pending arbitration.

      3 These fees are currently outlined in Rules 10205(j) and 10332(i).


      Attachment A

      Text Of Amendments

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

      Rule 10205. Schedule of Fees for Industry and Clearing Controversies

      (a) - (i) No change.
      [(j) Each party to a matter submitted to a mediation administered by the Association where there is no Association arbitration proceeding pending shall pay an administrative fee of $250. The parties to a mediation administered by the Association shall pay all of the mediator's charges, including the mediator's travel and other expenses. The charges shall be specified in the Submission Agreement and shall be apportioned equally among the parties unless they agree otherwise. Each party shall deposit with the Association their proportional share of the anticipated mediator charges and expenses, as determined by the Director of Mediation, prior to the first mediation session. Mediator charges, except travel and other expenses, are as follows:
      (1) Initial Mediation Session: $600 or four (4) times the mediator's hourly rate agreed to by the parties and the mediator; and
      (2) Additional Mediation Sessions: $150 per hour, or such other hourly rate agreed to by the parties and the mediator.]

      Rule 10332. Schedule of Fees for Customer Disputes

      (a) - (h) No change.
      [(i) Each party to a matter submitted to a mediation administered by the Association where there is no Association arbitration proceeding pending shall pay an administrative fee of $150.]
      [(j) The parties to a mediation administered by the Association shall pay all of the mediator's charges, including the mediator's travel and other expenses. The charges shall be specified in the Submission Agreement and shall be apportioned equally among the parties unless they agree otherwise. Each party shall deposit with the Association their proportional share of the anticipated mediator charges and expenses, as determined by the Director of Mediation, prior to the first mediation session. Mediator charges, except travel and other expenses, are as follows:
      (1) Initial Mediation Session: $600 or four (4) times the mediator's hourly rate agreed to by the parties and the mediator; and
      (2) Additional Mediation Sessions: $150 per hour, or such other hourly rate agreed to by the parties and the mediator.]

      Rule 10403. Arbitration Proceedings

      (a) Unless the parties agree otherwise, the submission of a matter for mediation shall not stay or otherwise delay the arbitration of a matter pending under this Code. When all parties agree to stay the arbitration in order to mediate the claim, the arbitration proceeding shall be stayed, notwithstanding any provision to the contrary in this Code.
      (b) If mediation is conducted through NASD Dispute Resolution, no adjournment fees will be charged for staying the arbitration proceeding in order to mediate.

      Rule 10407. Mediation Fees

      (a) Filing Fees: Cases Filed Directly in Mediation
      Each party to a matter submitted directly to a mediation administered by the Association shall pay an administrative fee to the Association in the amounts indicated in the schedule below, unless such fee is specifically waived by the Director of Mediation.
      Amount in Controversy Customer and Associated Person Fees Member Fee Total Fees
      $.01-$25,000 $ 50 $150 $200
      $25,000.01-$100,000 $150 $300 $450
      Over $100,000 $300 $500 $800
      (b) Filing Fees: Cases Initially Filed in Arbitration
      When a matter is initially filed in arbitration and subsequently submitted to a mediation administered by the Association, each party shall pay an administrative fee to the Association in the amounts indicated in the schedule below, unless such fee is specifically waived by the Director of Mediation.
      Amount in Controversy Customer and Associated Person Fees Member Fee Total Fees
      $.01-$25,000 $ 0 $ 0 $ 0
      $25,000.01-$100,000 $100 $150 $250
      Over $100,000 $250 $500 $750
      (c) Mediator Fees and Expenses
      The parties to a mediation administered by the Association shall pay all of the mediator's charges, including the mediator's travel and other expenses. The charges shall be specified in the Submission Agreement and shall be apportioned equally among the parties unless they agree otherwise. Each party shall deposit with the Association its proportional share of the anticipated mediator charges and expenses, as determined by the Director of Mediation, prior to the first mediation session.

    • 00-63 NASD Regulation Provides Guidance On The Use Of Installment Payments To Satisfy Arbitration Awards

      View PDF File

      INFORMATIONAL

      Arbitration Awards

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management

      Arbitration Awards
      Motions to Vacate
      Nonpayment Of Awards
      Suspension Proceedings



      Executive Summary

      In August 2000, the National Association of Securities Dealers, Inc. (NASD®) published Notice to Members 00-55 which announced that NASD Dispute Resolution, Inc. (NASD Dispute ResolutionSM) will require firms to certify in writing that they have complied with arbitration awards within 30 days of receipt of the award notice.

      This Notice is intended to provide guidance to members on the use of installment payments to satisfy arbitration awards, in light of the Securities and Exchange Commission (SEC) Rule 15c3-1 (the Net Capital Rule).

      Questions/Further Information

      Questions regarding this Notice may be directed to Susan M. DeMando, Director, Member Regulation, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8411; or Daniel M. Sibears, Senior Vice President, Member Regulation, NASD Regulation, at (202) 728-6911.

      Background

      Rule 10330(h) of the Code of Arbitration Procedure (Code) requires that all monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. NASD By-Laws, Article VI, Sec. 3 provides for the suspension or cancellation of membership or registration for, among other reasons, the failure to comply with an award of arbitrators properly rendered pursuant to NASD rules, where a timely motion to vacate or modify such award has not been made pursuant to applicable law or where such a motion has been denied; or for failure to comply with a written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to NASD Rule 9510 Series.

      Based on these rules, NASD Dispute Resolution will institute a suspension proceeding for failure to pay an arbitration award against the member firm or associated person, unless a basis for nonpayment is established.

      In Notice to Members 00-55, five possible bases were listed including, "the parties have agreed to installment payments of the amount awarded or have otherwise agreed to settle the action."

      Interpretative Guidance

      This Notice is intended to provide guidance to members that seek to satisfy an arbitration award through the use of installment payments, in light of the Net Capital Rule.

      Basis For The Use Of Installment Payments

      According to the SEC's interpretation of the Net Capital Rule:

      "A broker/dealer that is the subject of an adverse award in an arbitration proceeding should book said award as an actual liability at the time the award is made, even though the appeal process has not been exhausted and no judgment has been rendered, because grounds for revision on appeal are very limited."

      An agreement among the parties to installment payments of the amount awarded does not change the requirement to book the award as an actual liability at the time the award is made. While an installment plan indicates the payment terms of the liability, it does not reduce the liability. A broker/dealer must reflect the entire amount of the arbitration award as a liability.

      As a result, the use of installment payments to satisfy an arbitration award is only appropriate when the broker/dealer has sufficient net capital to conduct a securities business after recording the full liability.

      Example 1

      Claimant Jones received an arbitration award for $120,000 against Firm ABC. The claimant has agreed to installment payments of $5,000 per month from the broker/dealer. This payment plan would be permissible for any broker/dealer in the financial position to include the entire $120,000 as a liability of the firm and still maintain sufficient net capital to continue to conduct a securities business. That is, after recording the entire amount of the arbitration award as a liability, the firm is still in compliance with the Net Capital Rule.

      Example 2

      Claimant Smith received an arbitration award for $60,000 against Firm DEF. The firm has excess net capital of $40,000. Since the $60,000 award is greater than the firm's excess net capital, the required recording of the arbitration award will place the firm under its minimum net capital requirement. Installment payments are mute as the firm does not have sufficient net capital to continue to conduct a securities business.

      Sub-Loans

      An acceptable alternative to the cessation of business is if the claimant is willing to subordinate the amount of the arbitration award pursuant to an approved sub-loan meeting all the conditions of the Net Capital Rule, Appendix D.

      However, the NASD will not approve debt sub-loans if, at the time of signing, the firm's debt-to-debt-equity ratio would exceed 70 percent. Therefore, the use of debt sub-loans may not be available to all firms and their claimants.

      Members are reminded that for sub-loans to be added back in their net capital computation, they must be approved by their self-regulatory organization. By virtue of subordinating an arbitration award through a sub-loan, claimants become junior to other creditors in the event of the broker/dealer's insolvency. Therefore, claimants should clearly understand the risks associated with any such subordination prior to entering into the agreement.

    • 00-62 SEC Approves Day-Trading Rules

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      INFORMATIONAL

      Day-Trading Rules

      Effective Date: October 16, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading & Market Making

      Day Trading
      Risk Disclosure



      Executive Summary

      On July 10, 2000, the Securities and Exchange Commission (SEC) approved rule changes proposed by the National Association of Securities Dealers, Inc. (NASD®) that require a firm that is promoting a day-trading strategy to furnish a risk disclosure statement to a noninstitutional customer prior to opening an account for the customer. The firm will further be required to either: (1) approve the customer's account for a daytrading strategy; or (2) obtain from the customer a written agreement that the customer does not intend to use the account for day-trading purposes. As part of the account approval process, the firm will be required to make a threshold determination that day trading is appropriate for the customer.

      The new rules are included with this Notice (see Attachment A). These rules become effective on October 16, 2000. The day-trading rules will not apply to an existing customer unless the customer opens a new account at a firm that is promoting a day-trading strategy.

      Questions/Further Information

      Questions regarding this Notice may be directed to Eric Moss, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8982.

      Day-Trading Rules

      In general, day traders seek to profit from very small movements in the price of a security. Such a strategy often requires aggressive trading of a brokerage account. As a result, day trading generally requires a significant amount of capital, a sophisticated understanding of securities markets and trading techniques, and high risk tolerance. Even experienced day traders with in-depth knowledge of the securities markets may suffer severe and unexpected financial losses.

      To address investor protection concerns arising from day-trading activities, the NASD is amending its rules to include new Rule 2360 and 2361. As noted above, these rules will require a firm that is promoting a day-trading strategy to furnish a risk disclosure statement to a noninstitutional customer prior to opening an account for the customer.1 The firm will further be required to either:

      (1) approve the customer's account for a day-trading strategy; or
      (2) obtain from the customer a written agreement that the customer does not intend to use the account for day-trading purposes.

      A firm will not be permitted to rely on the written agreement from the customer if the firm knows that the customer intends to use the account for day trading. In addition, if a customer signs the written agreement stating that he/she does not intend to use the account for day-trading purposes, but the firm later discovers that the customer is using the account for day-trading activities, then the firm will be required to approve the customer's account for day trading in accordance with the rule as soon as practicable, but in no event later than 10 days from the date of discovery.

      Account Approval Requirement

      As part of the account approval process, the firm will be required to make a threshold determination that day trading is appropriate for the customer. In making this determination, the firm will be required to exercise reasonable diligence to ascertain the essential facts relative to the customer, including his or her: investment objectives; investment and trading experience and knowledge; financial situation; tax status; employment status; marital status and number of dependents; and age. The firm also will be required to prepare a record setting forth the basis on which the firm has approved the customer's account. Any record or written statement prepared or obtained by the firm pursuant to the rule change will have to be preserved in accordance with NASD Rule 3110(a).

      The day-trading rules define "daytrading strategy" to mean "an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities." The NASD believes that this definition includes those instances where an individual regularly transmits one or more purchase and sale (i.e., "round-trip") transactions in a single day. In addition, although as a practical matter, day trading typically requires electronic delivery of orders, the definition of "day-trading strategy" includes orders transmitted by non-electronic means, such as by telephone.

      Risk Disclosure Requirement

      The day-trading rules require a firm that is promoting a day-trading strategy to deliver a disclosure statement to the customer discussing the unique risks posed by day trading. The day-trading rules require firms to deliver the disclosure statement to each customer individually, by mail or electronic means, prior to the opening of the account. This approach protects against a firm posting the disclosure statement in a remote place on its Web site and claiming that it was delivered to all customers in such a manner. The day-trading rules do not require customers to sign the disclosure statement. The NASD believes that it is sufficient for firms to have written procedures in place for delivery of the document and to be able to identify those procedures to any examiners.

      The disclosure statement includes several factors that a customer should consider before engaging in day trading, including that the customer should be prepared to lose all of the funds that he or she uses for day trading and that day trading on margin may result in losses beyond the initial investment. The disclosure statement is set forth in Rule 2361(a) in Attachment A. The firm will be permitted to develop an alternative risk disclosure statement, provided that the alternative statement is substantially similar to the mandated statement and is filed with, and approved by, NASD Regulation's Advertising Department.

      For more information about the filing process and related fees, please contact the Advertising Regulation Department at 9509 Key West Avenue, Rockville, MD 20850, telephone (240) 386-4500.

      Members That Promote Day Trading

      A member will be subject to the day-trading rules if it affirmatively promotes day-trading activities or strategies through advertising, training seminars, or direct outreach programs. For instance, a firm generally will be subject to the new rules if its advertisements address the benefits of day trading, rapid-fire trading, or momentum trading, or encourages persons to trade or profit like a professional trader. A firm also will be subject to the new rules if it promotes its daytrading services through a third party. Moreover, the fact that many of a firm's customers are engaging in a day-trading strategy will be relevant in determining whether a firm has promoted itself in this way.2

      The day-trading rules only will be triggered by firms' general promotional efforts or by firmsponsored promotional efforts. The day-trading rules clarify that a member will not be deemed to be promoting a day-trading strategy for purposes of the rule solely by engaging in the following actions:

      (1) promoting efficient execution services or lower execution costs based on multiple trades;
      (2) providing general investment research or advertising the high quality or prompt availability of such general research; or
      (3) having a Web site that provides general financial information or news or that allows the multiple entry of intra-day purchases and sales of the same securities.

      However, firms may not promote day trading through individuals in an effort to circumvent the rules. In addition, if a principal or officer of the firm is aware that brokers in the firm are soliciting customers for day trading, then the firm will be deemed to be promoting day trading.


      Endnotes

      1 For purpose of the day-trading rules, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under NASD Rule 3110(c)(4). Rule 3110(c)(4) defines "institutional account" to mean the account of (1) a bank, savings and loan association, insurance company, or registered investment company; (2) an investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or agency or office performing like functions); or (3) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

      2 The new rules do not define the term "promoting a day-trading strategy." However, firms may submit their advertisements to NASD Regulation's Advertising Department for review and guidance on whether the content of the advertisement constitutes such activity for purposes of the new rules.


      Attachment A

      Text Of New Rules

      (Note: All language is new.)

      Rule 2360. Approval Procedures for Day-Trading Accounts

      (a) No member that is promoting a day-trading strategy, directly or indirectly, shall open an account for or on behalf of a non-institutional customer, unless, prior to opening the account, the member has furnished to the customer the risk disclosure statement set forth in Rule 2361 and has:
      (1) approved the customer's account for a day-trading strategy in accordance with the procedures set forth in paragraph (b) and prepared a record setting forth the basis on which the member has approved the customer's account; or
      (2) received from the customer a written agreement that the customer does not intend to use the account for the purpose of engaging in a day-trading strategy, except that the member may not rely on such agreement if the member knows that the customer intends to use the account for the purpose of engaging in a day-trading strategy.
      (b) In order to approve a customer's account for a day-trading strategy, a member shall have reasonable grounds for believing that the daytrading strategy is appropriate for the customer. In making this determination, the member shall exercise reasonable diligence to ascertain the essential facts relative to the customer, including:
      (1) Investment objectives;
      (2) Investment and trading experience and knowledge (e.g., number of years, size, frequency and type of transactions);
      (3) Financial situation, including: estimated annual income from all sources, estimated net worth (exclusive of family residence), and estimated liquid net worth (cash, securities, other);
      (4) Tax status;
      (5) Employment status (name of employer, self-employed or retired);
      (6) Marital status and number of dependents; and
      (7) Age.
      (c) If a member that is promoting a day-trading strategy opens an account for a non-institutional customer in reliance on a written agreement from the customer pursuant to paragraph (a)(2) and, following the opening of the account, knows that the customer is using the account for a day-trading strategy, then the member shall be required to approve the customer's account for a day-trading strategy in accordance with paragraph (a)(1) as soon as practicable, but in no event later than 10 days following the date that such member knows that the customer is using the account for such a strategy.
      (d) Any record or written statement prepared or obtained by a member pursuant to this rule shall be preserved in accordance with Rule 3110(a).
      (e) For purposes of this rule, the term "day-trading strategy" means an overall trading strategy characterized by the regular transmission by a customer of intraday orders to effect both purchase and sale transactions in the same security or securities.
      (f) For purposes of this rule, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).
      (g) A firm will not be deemed to be "promoting a day-trading strategy" for purposes of this rule solely by its engaging in the following activities:
      (1) Promoting efficient execution services or lower execution costs based on multiple trades;
      (2) Providing general investment research or advertising the high quality or prompt availability of such general research; and
      (3) Having a Web site that provides general financial information or news or that allows the multiple entry of intraday purchases and sales of the same securities.

      Rule 2361. Day-Trading Risk Disclosure Statement

      (a) Except as provided in paragraph (b), no member that is promoting a day-trading strategy, directly or indirectly, shall open an account for or on behalf of a non-institutional customer unless, prior to opening the account, the member has furnished to each customer, individually, in writing or electronically, the following disclosure statement:
      You should consider the following points before engaging in a daytrading strategy. For purposes of this notice, a "day-trading strategy" means an overall trading strategy characterized by the regular transmission by a customer of intraday orders to effect both purchase and sale transactions in the same security or securities.
      Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
      Be cautious of claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.
      Day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
      Day trading requires knowledge of a firm's operations. You should be familiar with a securities firm's business practices, including the operation of the firm's order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
      Day trading will generate substantial commissions, even if the per trade cost is low. Day trading involves aggressive trading, and generally you will pay commissions on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.
      Day trading on margin or short selling may result in losses beyond your initial investment. When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
      Potential Registration Requirements. Persons providing investment advice for others or managing securities accounts for others may need to register as either an "Investment Advisor" under the Investment Advisors Act of 1940 or as a "Broker" or "Dealer" under the Securities Exchange Act of 1934. Such activities may also trigger state registration requirements.
      (b) In lieu of providing the disclosure statement specified in paragraph (a), a member that is promoting a day-trading strategy may provide to the customer, individually, in writing or electronically, prior to opening the account, an alternative disclosure statement, provided that:
      (1) The alternative disclosure statement shall be substantially similar to the disclosure statement specified in paragraph (a); and
      (2) The alternative disclosure statement shall be filed with the Association's Advertising Department (Department) for review at least 10 days prior to use (or such shorter period as the Department may allow in particular circumstances) for approval and, if changes are recommended by the Association, shall be withheld from use until any changes specified by the Association have been made or, if expressly disapproved, until the alternative disclosure statement has been refiled for, and has received, Association approval. The member must provide with each filing the anticipated date of first use.
      (c) For purposes of this rule, the term "day-trading strategy" shall have the meaning provided in Rule 2360(e).
      (d) For purposes of this Rule, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).

    • 00-61 NASD Regulation Files Rule Proposal With SEC Requiring Delivery Of Margin Disclosure Statement To Customers

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      INFORMATIONAL

      Margin

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management

      Customer Disclosures
      Margin



      Executive Summary

      On September 5, 2000, NASD Regulation, Inc. (NASD RegulationSM) filed with the Securities and Exchange Commission (SEC) a rule proposal that would require members to deliver to non-institutional customers a specified disclosure statement that discusses the operation of margin accounts and the risks associated with trading on margin. Members would be permitted to develop an alternative margin disclosure statement, provided that the alternative disclosure statement is substantially similar to the mandated statement and incorporates all of the relevant concepts. The rule proposal would require that the disclosure statement be provided to customers prior to or at the opening of a margin account and to all margin customers on an annual basis. As proposed, members would be required to provide the disclosure statement to existing margin customers at the time of the next annual statement to the customer, but not to exceed 180 days from the effective date of the rule change. (See SR-NASD-00-55). A copy of this rule filing can be found at the NASDR Web Site (See www.nasdr.com/filings/rf00_55.htm).

      The SEC will publish the proposed rule change in the Federal Register, indicating a time period during which members and other interested parties may comment. When SEC publication has taken place, NASD Regulation will notify members of the comment period in the NASD Regulation executive representative weekly e-mail broadcast. Those interested in commenting on the proposed rule change should submit comments directly to the SEC prior to the close of the comment period indicated in the Federal Register release. Before becoming effective, the proposed rule change must be approved by the SEC. Members, however, should consider providing the margin disclosure statement described in this Notice to customers on a voluntary basis prior to SEC action on the proposed requirements.

      Attachment A provides a sample disclosure statement.

      Questions/Further Information

      Questions concerning this proposal may be directed to Stephanie M. Dumont, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Background

      The recent growth in the level of customer margin account balances, coupled with the increase in customer inquiries and complaints to NASD Regulation and SEC staffs relating to the handling of margin accounts, has raised concerns as to whether investors understand the operation and risks associated with margin trading. NASD Regulation staff believes that investors' misconceptions about margin requirements, particularly with respect to maintenance margin, may cause investors to underestimate the risks of margin trading and to misunderstand the operation of and reasons for margin calls. Investors who cannot satisfy margin calls have had substantial portions of their accounts liquidated to satisfy these margin calls. Such liquidations can create realized losses for these customers that may far exceed the risk of loss they would have faced if they had not engaged in margin trading.

      In this regard, a recent report issued by the General Accounting Office (GAO) noted that the SEC has determined from the customer complaints it has received that many investors who traded online did not understand margin requirements.1 The lack of disclosures relating to when firms would sell securities in a margin account to cover margin loans was among the leading margin-related complaints that the SEC received.

      The GAO Report also collected and summarized information from 12 online broker/dealers.2 All of the online firms contacted did provide their customers the limited information currently required on margin trading.3 Some firms also provided additional information relating to margin, such as requirements for account opening, procedures for selling securities to cover account losses, or special requirements for volatile stocks. However, nearly half of the firms contacted automatically4 opened margin accounts for new customers without providing the customer with information relating to the risks associated with margin trading. At three firms that automatically opened margin accounts, customers would find out about their account type only if they read and understood their account agreements, which SEC staff indicated were written in legal language and may be difficult for investors to understand. Three of the 12 online broker/dealers contacted did take "extra measures" to ensure that their customers understood that stocks could be sold to cover outstanding loans in a margin account. These firms included information on their Web sites that explained that accounts could be liquidated in fastmoving markets before the customary period.

      The GAO Report concluded that better investor protection information, including information relating to margin requirements, was needed on Web sites of some online broker/dealers. In this regard, the GAO Report recommended that the SEC ensure that broker/dealers with online trading systems include accurate and complete information on their Web sites regarding, among other things, margin requirements.

      Specific Areas Of Concern

      Based on customer complaints and inquiries it has received, NASD Regulation staff identified several areas associated with margin trading that may have generated confusion and misunderstanding between customers and members. These include:

      Margin Calls - Notification

      Some investors hold the mistaken belief that their broker/dealer must contact them for a margin call to be valid, and that their broker/dealer cannot liquidate securities in their account to meet the call unless a specified number of days have passed and/or the broker/dealer has contacted the customer. There are no such restrictions in Regulation T or National Association of Securities Dealers, Inc. (NASD®) Rule 2520. Moreover, securities that have been purchased on margin by a customer are collateral for the margin loan and are, therefore, subject to the security claim of the broker/dealer until they are fully paid. Thus, if a broker/dealer believes that the collateral for the margin loan is at risk, the broker/dealer is entitled to take any steps necessary to protect its financial interests, including immediate liquidation without notice to the customer. Some broker/dealers will attempt to notify their customers of margin calls, but they are not required to do so. However, even if a broker/dealer has contacted a customer and provided a specific date by which the customer can meet a margin call, the broker/dealer can still take necessary steps to protect its financial interests, including immediate liquidation, without further notice to the customer.

      Extensions Of Time On Margin Calls

      Some investors believe they are automatically entitled to an extension of time to meet margin calls. While an extension of time to meet initial margin requirements may be available to the customer under certain conditions, it is only granted if the clearing firm chooses to request an extension from its Designated Examining Authority; the customer does not have a right to an automatic extension.

      In addition, some investors believe that when a maintenance margin call has been issued that they are entitled to one or more extensions of time to meet the call; however, there is no mechanism for extending maintenance margin calls. If the customer fails to meet a maintenance margin call, the broker/dealer can, under certain circumstances, take a charge to its net capital in lieu of collecting the call, but the broker/dealer is not required to do so, and the customer has no right to demand it.

      Right To Dictate Which Security Is Liquidated

      Some investors believe that they have the right to control which securities are liquidated to meet a maintenance margin call if there is more than one security in the account. There is no provision in the margin rules that gives the customer the right to control liquidation decisions. As discussed above, because the securities are collateral for the margin loan, the broker/dealer has the right to control the disposition of the collateral in order to protect its interests. In this regard, the broker/dealer may choose which securities in the margin account to liquidate, and this selection need not relate to factors associated with the individual customer. For example, the broker/dealer may choose a particular security in a customer's account to liquidate based on a high concentration of the security held by customers firmwide.

      Members Raising Their Maintenance Margin Requirements

      Some members have increased their "house" maintenance margin requirements as a result of concerns about the volatility and extreme price run-ups on certain stocks and the risks to their customers and the member's own potential exposure to losses from margin defaults. These changes in policy often take effect immediately and will result in the issuance of a maintenance margin call. A customer's failure to satisfy the call will usually cause the member to liquidate a portion of the customer's account.

      Some investors believe that a member must provide 30 days written notice before implementing this type of change. While SEC Rule 10b-16 requires members to disclose to customers the credit terms (interest rates and methods of calculating interest) for margin transactions and requires advance written notice of such changes, it does not require advance notice of the amount of margin required.

      NASD Regulation Web Page Relating To Margin

      To increase investor and member awareness of issues relating to margin, NASD Regulation created a Web page (www.nasdr.com/5700.htm) dedicated to margin-related information for members and investors. An easily accessible direct link to this Web page has been provided on the NASD Regulation homepage. Among other things, the Web page provides investor guidance on margin, including some basic facts about the mechanics of margin accounts, specific examples illustrating the operation of a margin transaction and statistics on outstanding margin debt. In addition, NASD Regulation provides an "account statement stuffer," which describes basic information about purchasing on margin and managing a margin account. NASD Regulation has received requests for over 600,000 copies of this statement stuffer. In addition, approximately 20 firms have requested electronic copies of this statement stuffer for in-house printing purposes.

      Proposed Requirements

      Although NASD Regulation recognizes that some members are providing disclosures to customers relating to margin, the content of these disclosures is not consistent from firm to firm and may not always be in a form that is understandable to investors. As such, NASD Regulation has filed with the SEC a proposed rule change that would require members to deliver to noninstitutional customers a specified disclosure statement that discusses the operation of margin accounts and the risks associated with trading on margin.5 Members would be required to deliver the disclosure statement, in writing or electronically, to customers on an individual basis,6 prior to or at the opening of a margin account. The proposed rule change also would require members to deliver the disclosure statement annually to all non-institutional customers with margin accounts. Members would be required to provide the disclosure statement to existing margin customers at the time of the next annual statement to the customer, but not to exceed 180 days from the effective date of the rule change. A sample margin disclosure statement is provided as Attachment A, which:

      • describes the operation of a margin account;


      • emphasizes that customers should carefully review their margin agreements; and


      • clarifies some of the risks associated with margin trading, including that the customer can lose more funds than initially deposited, the firm can force the sale of the securities in the customer's account without notice to the customer, the firm can dictate which security is selected for liquidation, and the customer is not entitled to an extension of time on a margin call.

      Members would be permitted to develop an alternative margin disclosure statement, provided that the alternative disclosure statement is substantially similar to the mandated statement and incorporates all of the relevant concepts. Under the proposed rule, disclosure at or prior to the opening of the account must be made in a separate document, even if a member chooses to deliver the disclosures as part of or within the margin agreement or other opening account documentation. However, with respect to the annual disclosure requirement, members would be permitted to provide the disclosures within other documentation, such as the customer account statement.

      Publication Of Proposed Rule

      The SEC will publish the proposed rules in the Federal Register, indicating a time period during which members and other interested parties may comment. When SEC publication has taken place, NASD Regulation will notify members of the comment period in the NASD Regulation executive representative weekly e-mail broadcast. Those interested in commenting on the proposed rule change should submit comments directly to the SEC prior to the close of the comment period indicated in the Federal Register release. Among other issues, members and other interested parties may wish to comment on the following, which were raised by NASD Regulation standing and District committees: (1) the permissible methods of delivery of the disclosure statement for both the initial and the annual disclosure requirements; (2) whether providing only the "bulleted" information in the margin disclosure statement would be appropriate for fulfilling the annual disclosure requirement; and (3) whether 180 days from the effective date is an appropriate amount of time for the first delivery of the disclosure statement to all existing margin customers.

      Before becoming effective, the proposed rule change must be approved by the SEC. Members, however, should consider providing the margin disclosure statement described in this Notice to customers on a voluntary basis prior to SEC action on the proposed requirements.


      Endnotes

      1 See On-Line Trading, Better Investor Protection Information Needed, Report to Congressional Requesters, GAO, General Government Division, 00-43 (May 2000) (GAO Report). According to the GAO Report, between January 1998 and June 1999, 140 margin-related complaints concerning online trading firms were submitted to the SEC.

      2 These firms represented less than 10 percent of the total estimated number of firms that offer online trading. However, they accounted for about 90 percent of the online trading volume during early 1999.

      3 Rule 10b-16 of the Securities Exchange Act of 1934 (SEC Rule 10b-16) requires that broker/dealers that extend credit to customers to finance securities transactions furnish, in writing, specified information regarding the terms of the loan. These disclosures must be made on both an initial and periodic basis. For instance, at the time a customer opens a margin account, a broker/dealer must provide the customer with a written statement disclosing, among other things, the annual rate of interest, the method of computing interest, and what other credit charges may be imposed.

      4 Those firms that provided clear indications of the type of account to be opened offered their customers the option on the Web site to choose either a cash or margin account, or both. However, those firms that automatically opened margin accounts only offered new customers a choice with respect to account ownership, such as joint or individual account.

      5 The term "non-institutional customer" would mean a customer who does not qualify as an "institutional account" under NASD Rule 3110(c)(4). Rule 3110(c)(4) defines "institutional account" to mean the account of: (1) a bank, savings and loan association, insurance company, or registered investment company; (2) an investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or agency or office performing similar functions); or (3) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

      6 Members would be required to deliver the disclosure statement to each customer individually. For example, a member firm posting the disclosure statement on its Web site would not fulfill the proposed delivery requirements, although such supplemental disclosure would be beneficial to investors.


      Attachment A — Sample Margin Disclosure Statement

      Your brokerage firm is furnishing this document to you to provide some basic facts about purchasing securities on margin, and to alert you to the risks involved with trading securities in a margin account. Before trading stocks in a margin account, you should carefully review the margin agreement provided by your firm. Consult your firm regarding any questions or concerns you may have with your margin accounts.

      When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from your brokerage firm. If you choose to borrow funds from your firm, you will open a margin account with the firm. The securities purchased are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities in your account, in order to maintain the required equity in the account.

      It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:

      You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities in your account.

      The firm can force the sale of securities in your account. If the equity in your account falls below the maintenance margin requirements under the law, or the firm's higher "house" requirements, the firm can sell the securities in your account to cover the margin deficiency. You also will be responsible for any shortfall in the account after such a sale.

      The firm can sell your securities without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. However, even if a firm has contacted a customer and provided a specific date by which the customer can meet a margin call, the firm can still take necessary steps to protect its financial interests, including immediately selling the securities without notice to the customer.

      You are not entitled to choose which security in your margin account is liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, the firm has the right to decide which security to sell in order to protect its interests.

      The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account.

      You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.

    • 00-60 Nominees For District Committees And District Nominating Committees

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      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management

      District Elections



      Executive Summary

      The purpose of this Special Notice to Members is to announce the nominees for the District Committees and the District Nominating Committees. The individuals identified in this Special Notice to Members (see Attachment A) have been nominated for three-year terms on the District Committees and for one-year terms on the District Nominating Committees starting in January 2001. These nominees will be considered duly elected on October 2, 2000, unless an election is contested in accordance with the procedures summarized below.

      We appreciate the interest shown by many of you in participating in the District Committees and thank everyone for their continuing support of the self-regulatory process. We look forward to your participation in the matters of the Districts during the coming year, as well as hope that those who were not selected this year will revisit this process next year.

      Contested Election Procedures

      If an officer, director, or employee of a National Association of Securities Dealers, Inc. (NASD®) member is interested in being considered as an additional candidate, he/she must indicate his/her interest to the District Director by September 15, 2000. If an additional candidate does not come forward by that date, the election of committee members is final.

      If, however, an additional candidate(s) does come forward by that date, the candidate has until October 2, 2000 to submit a petition to the District Nominating Committee with signatures from at least 10 percent of Executive Representatives of members eligible to vote in the District.

      If no additional candidates submit petitions by October 2, 2000, then the candidates nominated by the District Nominating Committee shall be considered elected, and the District Committee shall certify the election to the Board of Directors of NASD Regulation.

      Additional information pertaining to the District Election Procedures can be found in Article VIII of the By-Laws of NASD Regulation.

      Questions/Further Information

      Questions concerning this Special Notice may be directed to the District Director noted in Attachment A or to Joan Conley, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8381 or via e-mail at: joan.conley@nasd.com.


      Attachment A

      District Committee And District Nominating Committee Nominees

      District 1

      Elisabeth P. Owens, District Director
      525 Market Street, Suite 300
      San Francisco, CA 94105
      (415) 882-1200
      Northern California (the counties of Monterey, San Benito, Fresno, and Inyo, and the remainder of the state north or west of such counties), northern Nevada (the counties of Esmeralda and Nye, and the remainder of the state north or west of such counties), and Hawaii
      2000 District Nominating Committee Chairperson
      John E. Schmidt
      Credit Suisse First Boston Corporation
      San Francisco, CA
      District Committee Nominees District Nominating Committee Nominees
      Carol Van Bruggen
      Securities Service Network, Inc.
      Sacramento, CA
      Steven R. Aaron
      Hambrecht & Quist LLC
      San Francisco, CA