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  • 1999

    • 99-106 NASD 2000 Holiday Schedule

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      INFORMATIONAL

      SUGGESTED ROUTING

      KEY TOPICS

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

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      The National Association of Securities Dealers, Inc. (NASD®) will observe the following holiday schedule for 2000:

      January 17 Martin Luther King Jr. Day (Observed)
      February 21 Presidents Day
      April 21 Good Friday
      May 29 Memorial Day
      July 4 Independence Day
      September 4 Labor Day
      November 23 Thanksgiving Day
      December 25 Christmas Day

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

    • 99-107 Fixed Income Pricing System Additions, Changes, And Deletions As Of October 22, 1999

      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      As of October 22, 1999, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      ADLA.GP Adelphia Communications Corp. 9.375 11/15/09
      AROI.GA Asarco Inc. 7.375 02/01/03
      AROI.GB Asarco Inc. 7.875 04/15/13
      AROI.GC Asarco Inc. 7.000 12/01/01
      AROI.GD Asarco Inc. 8.500 05/01/25
      ARWC.GA Arch Escrow Corp. 13.750 04/15/08
      BRCG.GA Bresnan Comms Group LLC 8.000 02/01/09
      BRCG.GB Bresnan Comms Group LLC 9.250 02/01/09
      CDRD.GB CD Radio Inc. 14.500 05/15/09
      CELU.GA Centennial Cellular Oper Co. LLC 10.750 12/15/08
      CLBL.GA Classic Cable Inc. 9.875 08/01/08
      CLBL.GB Classic Cable Inc. Ser B 9.375 08/01/09
      CLCU.GA Classic Communications Inc. 13.250 08/01/09
      CODE.GB Costilla Energy Inc. 10.250 10/01/06
      COSE.GA Costilla Energy Inc. 10.250 10/01/06
      COSE.GA Costilla Energy Inc. 10.250 10/01/06
      FOMR.GC Formica Corp. Ser B 10.875 03/01/09
      FTO.GB Frontier Oil Corp. 11.750 11/15/09
      HLMS.GB Holmes Products Corp. 9.875 11/15/07
      HLYW.GB Hollywood Entertainment Corp. 10.625 08/15/04
      HRSG.GC Horseshoe Gaming Hldg LLC 8.625 05/15/09
      ITX.GB IT Group Inc. Ser B 11.250 04/01/09
      LEH.GA Lehman Bros. Holding Inc. 0.000 11/10/04
      LVGC.GA Leviathan Gas Pl/Fin Corp. Ser B 10.375 06/01/09
      MECU.GB Mediacom LLC/Captl Corp. 7.875 02/15/11
      MFNX.GB Metromedia Fiber Network Inc. 10.000 12/15/09
      MJCN.GA Majestic Star Casino LLC 10.875 07/01/06
      MUZH.GA Muzak Holdings LLC/Fin 13.000 03/14/10
      MZKL.GA Muzak LLC 9.875 03/15/09
      NS.GB National Steel Corp. 9.875 03/01/09
      OH.GA Oakwood Homes Corp. 8.000 06/01/07
      OH.GB Oakwood Homes Corp. 8.000 06/01/07
      OH.GC Oakwood Homes Corp. 8.125 03/01/09
      OH.GD Oakwood Homes Corp. 7.875 03/04/04
      OXHP.GA Oxford Health Plans Inc. 11.000 05/15/15
      PAUF.GA Port Arthur Finance Corp. 12.500 01/15/09
      POAN.GB Protection One Alarm Monitoring Inc. 7.375 08/15/05
      PRTL.GD Primus Telecommunication Group, Inc. 12.750 10/15/99
      RAD.GA Rite Aid Corp. 6.875 08/15/13
      RAD.GB Rite Aid Corp. 7.625 04/15/05
      RAD.GC Rite Aid Corp. 6.700 12/15/01
      RAD.GD Rite Aid Corp. 7.125 01/15/07
      RAD.GE Rite Aid Corp. 7.700 02/15/27
      SBSA.GC Spanish Broadcasting Sys Inc. 9.625 11/01/09
      SCDL.GA Scherer (R.P.) Corp Del 6.750 02/01/04
      SCGD.GA SCG Holding Corp. 12.000 08/01/09
      SQHM.GA Susquehanna Media Co. 8.500 05/15/09
      STBR.GC Stater Brothers Holdings Inc. 10.750 08/15/06
      SVRN.GC Sovereign Bancorp. Inc. 10.250 05/15/04
      SVRN.GD Sovereign Bancorp. Inc. 10.500 11/15/06
      TNUS.GA Trinet Corp. Realty Trust Inc. 7.300 05/15/01
      TNUS.GB Trinet Corp. Realty Trust Inc. 7.950 05/15/01
      TNUS.GC Trinet Corp. Realty Trust Inc. 7.700 07/15/17
      UNDU.GA United Industries Corp. 9.875 04/01/09
      USTU.GA USA Capital Trust I Ser B 9.500 03/15/29
      VL.GA Vlasic Foods Intl Inc. Ser B 10.250 07/01/09
      WGR.GA Western Gas Resources Inc. 10.000 06/15/09
      XLG.GA Excel Legacy Corp. 10.000 11/04/04

      As of October 22, 1999, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      AZR.GB Aztar Corp. 13.750 10/01/04
      COSE.GA Costilla Energy Inc. 10.250 10/01/06
      COSE.GB Costilla Energy Inc. 10.250 10/01/06
      CSEH.GA Charter Commun So East Hldg 14.000 03/15/07
      FCY.GA Furon Co. 8.125 03/01/08
      FST.GB Forest Oil Corp. 11.250 09/01/03
      HRSG.GA Horseshoe Gaming LLC 12.750 11/01/99
      MHGN.GA Mohegan Tribal Gaming 13.50 11/15/02
      MRPO.GA Moran Transportation Co. 11.75 11/15/04
      ORX.GH Oryx Energy Co. 8.125 10/15/05
      ORX.GI Oryx Energy Co. 9.325 07/15/04
      RESL.GA Republic Engineered Steels Inc. 9.875 12/05/01
      SCAN.GA Alliance Imaging Inc. 9.625 12/15/05
      SCAN.GB Alliance Imaging Inc. 0.000 12/15/05
      SPBR.GA Spanish Broadcasting Sys Inc. 11.000 03/15/04
      SRKT.GA Star Markets Co. 13.000 11/01/04
      WELB.GB Welbilt Corp. 12.250 11/01/99
      WYMN.GA Wyman-Gordon Co. 10.750 03/15/03

      As of October 22, 1999, changes were made to the symbols of the following FIPS bonds.

      New Symbol Old Symbol Name Coupon Maturity
      AHI.GB HAUL.GA Allied Holdlings Inc. 8.625 10/01/07
      CDB.GA CBRN.GA Canandiagua Brands Inc. 8.750 12/15/03
      CDB.GB CBRN.GA Canandiagua Brands Inc. 8.750 12/15/03
      CDRD.GA CDRA.GA CD Radio Inc. 12.875 12/01/07
      CDRD.GB CDRA.GB CD Radio Inc. 14.500 05/15/09
      GTS.GA GTSG.GA Global Telesystems Group Inc. 9.875 02/15/05
      HORT.GA HORU.GA Hines Horticulture Inc. 11.750 10/15/05
      HS.GA CHSE.GA CHS Electronics Inc. 9.875 04/15/05
      HWK.GA HWCO.GA Hawk Corp. 10.250 12/01/03
      IRM.GA IMTN.GA Iron Mountain Inc. Del. 10.125 10/01/06
      IRM.GB IMTN.GB Iron Mountain Inc. Del. 8.750 09/30/09
      IRM.GC IMTN.GC Iron Mountain Inc. Del. 8.250 07/01/11
      NCS.GA NCIB.GA NCI Building Systems 9.250 05/01/09
      QHGI.GA QRUM.GA Quorum Health Grp. Inc. 11.875 12/15/02
      QHGI.GB QRUM.GB Quorum Health Grp Inc. 8.750 11/01/05
      SBSA.GB SPBR.GB Spanish Broadcasting Sys Inc. 12.500 06/15/02
      WYG.GB WYMN.GB Wyamn-Gordon Co. 8.000 12/15/07

      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.

    • 99-105 Trade Date—Settlement Date Schedule For 2000

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      INFORMATIONAL

      Trade Date—Settlement Date

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making
      Trade Date-Settlement Date Schedule

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

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

      The Nasdaq Stock Market® and the securities exchanges will be closed on Monday, January 17, 2000, 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. 11 Jan. 14 Jan. 19
      12 18 20
      13 19 21
      14 20 24
      17 Markets Closed
      18 21 25

      Presidents Day: Trade Date—Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 21, 2000, 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. 15 Feb. 18 Feb. 23
      16 22 24
      17 23 25
      18 24 28
      21 Markets Closed
      22 25 29

      Good Friday: Trade Date—Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, April 21, 2000. "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 17 April 20 April 25
      18 24 26
      19 25 27
      20 26 28
      21 Markets Closed
      24 27 May 1

      Memorial Day: Trade Date—Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 29, 2000, 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 23 May 26 May 31
      24 30 June 1
      25 31 2
      26 June 1 5
      29 Markets Closed
      30 2 6

      Independence Day: Trade Date—Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Tuesday, July 4, 2000, 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 7
      30 6 10
      July 3 7 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 4, 2000, 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. 29 Sept. 1 Sept. 6
      30 5 7
      31 6 8
      Sept. 1 7 11
      4 Markets Closed
      5 8 12

      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.

      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

      Christmas Day And New Years 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 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. 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

      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."

    • 99-104 Maximum SOES Order Sizes Set To Change January 10, 2000

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      ACTION REQUIRED

      SOES Order Sizes

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Systems
      Trading
      SOES Maximum Order Sizes

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      Effective January 10, 2000, the maximum Small Order Execution SystemSM (SOESSM) order sizes for 534 Nasdaq National Market® (NNM) securities will be revised in accordance with National Association of Securities Dealers, Inc. (NASD®) Rule 4710(g).

      In previous quarters, Nasdaq® has implemented the reclassification on the first trading day of the quarter; because Nasdaq Market Operations is planning to suspend the processing of data changes from December 27, 1999, through January 3, 2000—as part of the transition to the Year 2000 (Y2K)—Nasdaq is implementing the instant reclassification on January 10, 2000, instead of January 3, 2000.

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

      Description

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

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

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

      In accordance with Rule 4710, Nasdaq periodically reviews the maximum SOES order size applicable to each NNM security to determine if the trading characteristics of the issue have changed so as to warrant an adjustment. Such a review was conducted using data as of October 31, 1999, pursuant to the aforementioned standards. The maximum SOES order-size changes called for by this review are being implemented with three exceptions.

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


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


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

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

      Thus, IPOs listed on Nasdaq within the 45 days prior to October 31, 1999, were not subject to SOES order-size reranking procedures.

      Following is a listing of the 534 NNM issues that will have the maximum SOES order size changed on January 10, 2000.

      Maximum SOES Order Size Changes in NNM Securities
      All Issues In Alphabetical Order By Security Name
      (Effective January 10, 2000)
      Symbol Security Name Old Level New Level
      A
      ABANP ABI CAP TRUST PFD 500 200
      ABBKP ABINGTON TR PFD 500 200
      ABDR ABACUS DIRECT CP 1000 500
      ABFSP ARKANSAS BEST 1000 500
      ABTL AUTOBYTEL.COM INC 500 1000
      ACDO ACCREDO HEALTH INC 500 1000
      ACRU ACCRUE SOFTWARE INC 200 500
      ADBL AUDIBLE INC 200 500
      ADECY ADECCO SA ADR 500 1000
      ADFC ADFORCE INC 500 1000
      AFCO APPLIED FILMS CORP 1000 500
      AIII AUTOLOGIC INFO INT 500 200
      AIRO AIRONET WIRELESS 200 500
      ALNC ALLIANCE FINL CP 500 1000
      ALOT ASTRO MED INC 1000 500
      ALOY ALLOY ONLINE INC 500 1000
      AMBCP AMER BNCP CAP TR 500 200
      AMNB AMER NATL BANKSHS 500 1000
      AMTD AMERITRADE HLDG A 500 1000
      ANBC A N B CP 500 1000
      ANDR ANDERSEN GROUP INC 1000 500
      ANTV ANTENNA TV SA ADR 500 1000
      APGRW ARCH COMMUN GRP WTS 200 500
      APLN ATPLAN INC 200 500
      APNT APPNET SYSTEMS 200 500
      ARBA ARIBA INC 200 500
      ARDNA ARDEN GROUP CL A 500 200
      AREM AREMISSOFT CORP 500 1000
      ARGY ARGOSY ED GRP CL A 500 1000
      ARTG ART TECH GROUP 200 500
      ASKJ ASK JEEVES INC 200 500
      ASWX ACTIVE SOFTWARE INC 200 500
      ATHY APPLIEDTHEORY CP SR 500 1000
      ATLPP ATLANTIC PFD CAP CP 1000 500
      AUDC AUDIOCODES LTD 200 500
      AVIIZ AVI BIOPHARMA WTS 200 500
      AWEB AUTOWEB.COM INC 500 1000
      B
      BANF BANCFIRST CP 1000 500
      BBDC BRANTLEY CAP CORP 500 1000
      BBSI BARRETT BUSINESS 1000 500
      BCIS BANCINSURANCE CP 500 1000
      BEOS BE INCORPORATED 200 500
      BESI B E SEMICON ORD 500 200
      BGST BIGSTAR ENTERTNMENT 200 500
      BIDS BID.COM INTL INC 500 1000
      BIGE BIG ENTERTAIN INC 500 1000
      BIGT PINNACLE HLDGS INC 500 1000
      BIORY BIORA AB ADR 500 1000
      BIZZ BIZNESSONLINE.COM 500 1000
      BKCT BANCORP CONN INC 1000 500
      BKUNZ BANKUNITED CAP II 1000 500
      BLCA BOREL BK & TR (CA) 200 500
      BMCCP BANDO MCGLOC PFD A 200 500
      BMRN BIOMARIN PHARMACEUT 200 500
      BNBN BARNESANDNOBLE.COM 200 500
      BNCC BNCCORP INC 1000 500
      BNHNA BENIHANA INC A 500 1000
      BOUT ABOUT.COM INC 500 1000
      BPAO BALDWIN PIANO ORGA 500 1000
      BPUR BIOPURE CORP CL A 200 500
      BRID BRIDGFORD FOODS CP 1000 500
      BRNC BRAUN CONSULTING SE 200 500
      BSRR BANK OF THE SIERRA 200 500
      BTEK BALTEK CP 1000 500
      BUCA BUCA INC 500 1000
      BUCK BUCKHEAD AMERICA 500 200
      BVSN BROADVISION INC 1000 500
      BWEB BACKWEB TECH LTD 200 500
      BWFC BANK WEST FIN CORP 1000 500
      BWINA BALDWIN LYONS CL A 200 500
      C
      CAII CAPITAL ASSOC 500 1000
      CAIS CAIS INTERNET INC 200 500
      CAND CANDIES INC 1000 500
      CARI CAREINSITE INC 200 500
      CAVB CAVALRY BANCORP 1000 500
      CBDR CAREERBUILDER INC 500 1000
      CBLT COBALT GROUP INC 200 500
      CBSAO COASTAL BCP PFD A 500 200
      CCBG CAPITAL CITY BANK 500 1000
      CCBP COMM BANCORP INC 500 200
      CCHE CLINICHEM A 500 1000
      CCRT COMPUCREDIT CORP 500 1000
      CDCY COMPUDYNE CORP 200 500
      CDOT COMPS.COM INC 500 1000
      CEBK CENTRAL CO OP BANK 500 1000
      CEDC CENTRAL EURO DIS 500 1000
      CENI CONESTOGA ENTRPR I 500 1000
      CERI CAPITAL ENVIR RES 200 500
      CFBC COMMUNITY FIRST BN 1000 500
      CFBI CAROLINA FIRST BNCSH 500 1000
      CFCI C F C INTL INC 500 1000
      CFFI C&F FINANCIAL CP 200 500
      CFFN CAPITOL FEDERAL FINL 500 1000
      CFNC CAROLINA FINCORP 1000 500
      CHINA CHINA.COM CORP CL A 200 500
      CHLN CHALONE WINE GP LT 1000 500
      CIBN CALIFORNIA IND BNC 200 500
      CINS CIRCLE INCOME SHAR 1000 500
      CLBK COMMERCIAL BANKSHR 500 200
      CLGYW CELLEGY PHARM INC WT 500 1000
      CLRN CLARENT CORP 200 500
      CMBC COMMUNITY BANKCORP 500 1000
      CMDX CHEMDEX CORP 200 500
      CMETS CONTL MORTGAGE EQUIT 500 1000
      CMRC COMMERCE ONE INC 200 500
      CMTN COPPER MOUNTN NTWKS 500 1000
      CNBKP CENTURY BCP CAP TR 1000 500
      CNRM CINRAM INTL INC 500 200
      CNSW CONTINUUS SOFTWR 200 500
      CONV CONVERGENT COMMS INC 200 500
      COVB COVEST BANCSHARES 1000 500
      CPIH CHINA PROSP ADR 1000 500
      CPTH CRITICAL PATH INC 500 1000
      CREO CREO PRODUCTS 200 500
      CRGO MOTOR CARGO INDS 1000 500
      CRNS CRONOS GROUP THE 500 1000
      CRRC COURIER CP 1000 500
      CRSB CRUSADER HLDG CORP 500 1000
      CSYI CIRCUIT SYSTEMS IN 1000 500
      CTCH COMMTOUCH SOFTWR LTD 200 500
      CTIX CHEAP TICKETS INC 500 1000
      CYBA CYBEAR INC 200 500
      CYBS CYBERSOURCE CORP 200 500
      D
      DABR DAVID'S BRIDAL INC 200 500
      DCLK DOUBLECLICK INC 1000 500
      DECC D & E COMMUNICATIO 1000 500
      DELT DELTA GALIL INDS ADS 500 1000
      DEST DESTIA COMMUNICATNS 500 1000
      DEVC DEVCON INTL CP 1000 500
      DFXI DIRECT FOCUS INC 500 1000
      DGAS DELTA NATURAL GAS 500 1000
      DIGX DIGEX, INC CL A 200 500
      DITC DITECH COMM CORP 200 500
      DOCD DOCDATA NV 1000 500
      DOMZ DOMINGUEZ SVCS CP 1000 500
      DRRAP DURA AUTO CAP TR 1000 500
      DSCM DRUGSTORE.COM INC 200 500
      DTLK DATALINK CORP 200 500
      DXCPP DYNEX CAPITAL PFD A 500 1000
      E
      ECCO EARTHCARE CO 200 500
      EDCO EDISON CONTROL CP 200 500
      EDGR EDGAR ONLINE INC 200 500
      EELN E-LOAN INC 200 500
      EFNT EFFICIENT NETWORKS 200 500
      EGLO EGLOBE INC 200 500
      EGOV NATL INFO CONSORTIUM 200 500
      EGPT EAGLE POINT SFTWR 1000 500
      ELBI ELDORADO BANCSHARES 500 1000
      EMCC EUROPEAN MICRO HLD 500 1000
      EMCO ENGINEERING MEASUR 1000 500
      EMLX EMULEX CP 500 1000
      EMUS EMUSIC.COM INC 200 500
      ENGA ENGAGE TECH INC 200 500
      EQSB EQUITABLE FED SAV 1000 500
      ESBF ESB FINANCIAL 500 1000
      ESBFP PENNFIRST PFD 500 200
      ESPS ESPS INC 200 500
      ETHCY ETHICAL HLDGS 1000 500
      ETYS ETOYS INC 200 500
      EXBD CORP EXEC BOARD CO 500 1000
      EXDS EXODUS COMMUN 500 1000
      EXNT IXNET INC 200 500
      EXTR EXTREME NETWORKS 500 1000
      F
      FASH FASHIONMALL.COM 200 500
      FBEI FIRST BNCP OF IND 500 1000
      FBNW FIRSTBANK CORP 1000 500
      FCFCO FIRSTCITY SPCL PFD 500 1000
      FCFN FIRST COMM FIN CP 200 500
      FCOM FOCAL COMMUNICATIONS 200 500
      FCST FLYCAST COMMUN CP 500 1000
      FFBK FLORIDAFIRST BNCP 500 1000
      FFES FIRST FED S L E.HT 500 1000
      FFFLP FIDELITY CAP TR I 1000 500
      FFIV F5 NETWORKS INC 200 500
      FFLC FFLC BNCP INC 1000 500
      FFSX FIRST FED BKSHS 500 1000
      FISI FINANCIAL INSTITUTNS 200 500
      FKAN FIRST KANSAS FIN 1000 500
      FLAS FLASHNET COMMUNICATN 500 1000
      FLCHF FLETCHER'S FINE FOOD 200 500
      FLGSP FLAGSTAR CAP PFD A 1000 500
      FLWS 1-800-FLOWERS.COM 200 500
      FMARP MARINER CAP TR PFD 500 200
      FMCO F M S FINANCIAL CP 1000 500
      FMFC FIRST M & F CORP 200 500
      FNBP FNB CORP 500 200
      FNLC FIRST NAT LINCOLN CP 200 500
      FREE FREESERVE ADS 200 500
      FRPP F R P PROPERTIES I 1000 500
      FSBC 1ST STATE BNCP INC 500 1000
      FSTH FIRST SO BCSHS INC 200 500
      FTFN FIRST FIN CP (RI) 500 200
      FTNB FULTON BANCORP INC 1000 500
      G
      GAFC GREATER ATL FINCL CP 200 500
      GBCOB GREIF BROS CP CL B 200 500
      GBNK GASTON FED BANCP 1000 500
      GENBB GENESEE CP B 500 1000
      GENI GENESISINTERMEDIA.CO 200 500
      GFLS GREATER COMMUNITY 500 1000
      GLDBP GBCI CAP TR PFD 500 200
      GMAI GREG MANNING AUCTI 500 1000
      GNCNF GORAN CAPITAL INC 500 1000
      GOSB GSB FINANCIAL CORP 1000 500
      GOTO GOTO.COM INC 200 500
      GSPN GLOBESPAN INC 200 500
      GZEA G Z A GEOENVIRON 500 1000
      GZSP GENZYME SURGICAL 200 500
      H
      HARL HARLEYSVILLE SAV B 500 200
      HAVA HARVARD IND NEW 500 1000
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    • 99-103 SEC Approves Rule Change Relating To Sales Charges For Investment Companies And Variable Contracts

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      INFORMATIONAL

      Investment Companies And Variable Contracts

      Effective Date: April 1, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Mutual Fund
      Registered Representatives
      Senior Management
      Training
      Variable Contracts
      Investment Companies
      Mutual Funds
      NASD Rules 2820 and 2830
      Variable Contracts

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      On October 20, 1999, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD®) Rules 2820 (Variable Contracts Rule) and 2830 (Investment Company Rule) that regulate the sales charges imposed by investment companies and variable annuity contracts sold by NASD members. 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 duplicative 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. The amendments are effective on April 1, 2000. The text of the amendments is included in Attachment A.

      Questions/Further Information

      Questions concerning this Notice may be directed to Thomas M. Selman, Vice President, Investment Companies/Corporate Financing, NASD Regulation, Inc. (NASD RegulationSM) at (240) 386-4533; or Joseph P. Savage, Counsel, Advertising/Investment Companies Regulation, NASD Regulation, at (202) 728-8233.

      Amendments To The Investment Company Rule

      Funds Of Funds

      The National Securities Markets Improvement Act of 1996 (NSMIA) amended the Investment Company Act of 1940 (1940 Act) to, among other things, expand the ability of mutual fund sponsors to create "fund of funds"1 structures. At the time NSMIA was enacted, the Investment Company Rule did not specifically address two-tier fund of fund structures in which both the acquiring fund and the underlying fund impose sales charges. We have amended the Investment Company Rule to ensure that, if both levels of funds in a fund of funds structure impose sales charges, the combined sales charges do not exceed the maximum percentage limits currently contained in the rule.

      The amendments permit the acquiring fund, the underlying fund, or both, to impose asset-based sales charges that in the aggregate do not exceed 0.75 percent of average net assets, and service fees that in the aggregate do not exceed 0.25 percent. Aggregate front-end and deferred sales charges in any transaction are limited to 7.25 percent of the amount invested, or 6.25 percent if either the acquiring fund or the underlying fund pays a service fee.

      The amendments impose the rule's restrictions on the use of the terms "no load" or "no sales charge" on the acquiring fund, the underlying fund, and those funds in combination. The amendments require funds in a fund of funds structure that impose asset-based sales charges to make their remaining amount calculations on an individual basis. The amendments do not, however, require funds of funds to make this calculation on an aggregate basis.

      Deferred Sales Loads

      In 1996, the SEC amended Rule 6c-10 under the 1940 Act to allow certain types of deferred sales charges, such as back-end and installment loads. The amendments conform the definition of "deferred sales charge" in the Investment Company Rule to the definition of "deferred sales load" in Rule 6c-10.2 Thus, "deferred sales charge" is now defined as "any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption." This amendment makes clear that members may offer funds that impose deferred sales charges permitted under Rule 6c-10, subject to the sales charge limits imposed by the Investment Company Rule.

      Loads On Reinvested Dividends

      The amendments to the Investment Company Rule generally prohibit members from offering or selling the shares of an investment company if it has a front-end or deferred sales charge imposed on shares purchased through the reinvestment of dividends. The prohibition of sales loads on reinvested dividends will not apply to any investment company whose registration statement under the Securities Act of 1933 (1933 Act) was or will be declared effective prior to April 1, 2000. This exception effectively "grandfathers" all existing mutual funds and unit investment trusts (UITs), as well as those mutual funds and UITs whose 1933 Act registration statements become effective prior to April 1, 2000.3 New mutual funds and UITs that are declared effective under the 1933 Act (including new funds or UITs created pursuant to a post-effective amendment to an existing registration statement under the Investment Company Act of 1940) on or after April 1, 2000, are subject to the prohibition.

      CDSL Calculations

      The amendments to the Investment Company Rule reinstate redemption order requirements for shares subject to CDSLs that were eliminated by the SEC's 1996 amendments to its Rule 6c-10. As amended, the Investment Company Rule prohibits members from offering or selling the shares of an investment company subject to a CDSL unless the CDSL is calculated so that shares not subject to the CDSL are redeemed first, and other shares are then redeemed in the order purchased. This first-in-first-out (FIFO) redemption order requirement generally ensures that shareholder transactions are subject to the lowest applicable CDSL. The amendments do allow a redemption order other than FIFO, however, if it would result in the redeeming shareholder paying a lower CDSL.

      Prospectus Disclosure

      Prior to these amendments, the Investment Company Rule prohibited a member from offering or selling shares of an investment company with an asset-based sales charge unless its prospectus disclosed that long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted in the rule. In March 1998, the SEC adopted significant revisions to mutual fund prospectus disclosure requirements, one of which was a disclosure requirement related to asset-based sales charges. In light of this SEC requirement, NASD Regulation is eliminating this disclosure requirement in the Investment Company Rule.

      Amendments To The Variable Contracts Rule

      In 1996, NSMIA fundamentally changed the way the SEC regulates sales charges for variable insurance contracts by eliminating specific limits on fees and imposing a reasonableness standard on aggregate fees. This reasonableness standard is to be administered by the SEC.

      In light of these amendments, NASD Regulation is eliminating the maximum sales charge limitations in the Variable Contracts Rule. The amendments also make a conforming change to eliminate the requirement to file the details of any changes in a variable annuity's sales charges with the Advertising/Investment Companies Regulation Department.

      Effective Date Of Amendments

      The amendments to the Variable Contracts Rule and Investment Company Rule are effective on April 1, 2000.


      Endnotes

      1 "Fund of funds" is defined as an investment company whose investments in other registered investment companies exceed the limits permitted under Section 12(d)(1)(A) of the 1940 Act. Section 12(d)(1)(A) of the 1940 Act permits an investment company to invest in up to three percent of the outstanding voting shares of another investment company, provided that the value of such shares represents less than five percent of the acquiring fund's total assets, and the acquiring fund's investments in all other funds represent less than 10 percent of the acquiring fund's total assets.

      2 See 17 C.F.R. § 270.6c-10(b)(3).

      3 To the extent that footnote 7 of the SEC's order approving the amendments suggests that they do not "grandfather" existing investment companies, that inference is incorrect.


      ATTACHMENT A

      Text Of Amendments To Rules 2820 And 2830

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

      Rule 2820 Variable Contracts of an Insurance Company

      (a) - (b) No change
      [(c) Sales Charges]
      [No member shall participate in the offering or in the sale of variable annuity contracts if the purchase payment includes a sales charge which is excessive:]
      [(1) Under contracts providing for multiple payments a sales charge shall not be deemed to be excessive if the sales charge stated in the prospectus does not exceed 8.5% of the total payments to be made thereon as of a date not later than the end of the twelfth year of such payments, provided that if a contract be issued for any stipulated shorter payment period, the sales charge under such contract shall not exceed 8.5% of the total payments thereunder for such period.]
      [(2) Under contracts providing for single payments a sales charge shall not be deemed to be excessive if the prospectus sets forth a scale of reducing sales charges related to the amount of the purchase payment which is not greater than the following schedule:

      First $25,000 - 8.5% of purchase payment

      Next $25,000 - 7.5% of purchase payment
      Over $50,000 - 6.5% of purchase payment]
      [(3) Under contracts where sales charges and other deductions for purchase payments are not stated separately in the prospectus the total deductions from purchase payments (excluding those for insurance premiums and premium taxes) shall be treated as a sales charge for purposes of this rule and shall not be deemed to be excessive if they do not exceed the percentages for multiple and single payment contracts described in paragraphs (1) and (2) above.]
      [(4) Every member who is an underwriter and/or issuer of variable annuities shall file with Advertising/Investment Companies Regulation Department, prior to implementation, the details of any changes or proposed changes in the sales charges of such variable annuities, if the changes or proposed changes would increase the effective sales charge on any transaction. Such filings should be clearly identified as an "Amendment to Variable Annuity Sales Charges." ]
      [(d)] (c) Receipt of Payment
      No member shall participate in the offering or in the sale of a variable contract on any basis other than at a value to be determined following receipt of payment therefor in accordance with the provisions of the contract, and, if applicable, the prospectus, the Investment Company Act of 1940 and applicable rules thereunder. Payments need not be considered as received until the contract application has been accepted by the insurance company, except that by mutual agreement [it] they may be considered to have been received for the risk of the purchaser when actually received.
      [(e)] (d) Transmittal Every member who receives applications and/or purchase payments for variable contracts shall transmit promptly to the issuer all such applications and at least that portion of the purchase payment required to be credited to the contract.
      [(f)] (e) Selling Agreement No member who is a principal underwriter as defined in the Investment Company Act of 1940 may sell variable contracts through another broker/dealer unless (1) such broker/dealer is a member, and (2) there is a sales agreement in effect between the parties. Such sales agreement must provide that the sales commission be returned to the issuing insurance company if the variable contract is tendered for redemption within seven business days after acceptance of the contract application.
      [(g)] (f) Redemption
      No member shall participate in the offering or in the sale of a variable contract unless the insurance company, upon receipt of a request in proper form for partial or total redemption in accordance with the provisions of the contract undertakes to make prompt payment of the amounts requested and payable under the contract in accordance with the terms thereof, and, if applicable, the prospectus, the Investment Company Act of 1940 and applicable rule thereunder.
      [(h)] (g) Member Compensation
      In connection with the sale and distribution of variable contracts:
      (1) Except as described below, no associated person of a member shall accept any compensation from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements where a nonmember company pays compensation directly to associated persons of the member, provided that:
      (A) the arrangement is agreed to by the member;
      (B) the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "no-action" letter issued by the Securities and Exchange Commission that applies to the specific fact situation of the arrangement;
      (C) the receipt by associated persons of such compensation is treated as compensation received by the member for purposes of NASD rules; and
      (D) the recordkeeping requirement in subparagraph [(h)](g)(3) is satisfied.
      (2) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.
      (3) Except for items as described in subparagraphs [(h)](g)(4)(A) and (B), a member shall maintain records of all compensation received by the member or its associated persons from offerors.

      The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received.
      (4) No member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Notwithstanding the provisions of subparagraph [(h)](g)(1), the following non-cash compensation arrangements are permitted:
      (A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors* and are not preconditioned on achievement of a sales target.
      (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
      (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (i) the recordkeeping requirement in subparagraph [(h)](g)(3) is satisfied;
      (ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by subparagraph [(h)](g)(4)(D);
      (iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;
      (iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
      (v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by subparagraph [(h)](g)(4)(D).
      (D) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that:
      (i) the member's or non-member's non-cash compensation arrangement, if it includes variable contracts, is based on the total production of associated persons with respect to all variable contracts distributed by the member;
      (ii) the non-cash compensation arrangement requires that the credit received for each variable contract is equally weighted;
      (iii) no unaffiliated nonmember company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and
      (iv) the recordkeeping requirement in subparagraph [(h)](g)(3) is satisfied.
      (E) Contributions by a nonmember company or other member to a non-cash compensation arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that the arrangement meets the criteria in subparagraph [(h)](g)(4)(D).

      Rule 2830 Investment Company Securities

      (a) Application
      This Rule shall apply exclusively to the activities of members in connection with the securities of companies registered under the Investment Company Act of 1940 ("the 1940 Act"); provided, however, that Rule 2820 shall apply, in lieu of this Rule, to members' activities in connection with "variable contracts" as defined therein.
      (b) Definitions
      (1) The terms "affiliated member," "compensation," "cash compensation," "non-cash compensation" and "offeror" as used in paragraph (l) of this section shall have the following meanings:

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

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

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

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

      "Offeror" shall mean an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the [Investment Company Act of 1940] 1940 Act) of such entities.
      (2) "Brokerage commissions," as used in paragraph (k), shall not be limited to commissions on agency transactions but shall include underwriting discounts or concessions and fees to members in connection with tender offers.
      (3) "Covered account," as used in paragraph (k), shall mean (A) any other investment company or other account managed by the investment adviser of such investment company, or (B) any other account from which brokerage commissions are received or expected as a result of the request or direction of any principal underwriter of such investment company or of any affiliated person (as defined in the [Investment Company Act of 1940] 1940 Act) of such investment company or of such underwriter, or of any affiliated person of an affiliated person of such investment company.
      (4) "Person" shall mean "person" as defined in the [Investment Company Act of 1940] 1940 Act.
      (5) "Prime rate," as used in paragraph (d), shall mean the most preferential interest rate on corporate loans at large U.S. money center commercial banks.
      (6) "Public offering price" shall mean a public offering price as set forth in the prospectus of the issuing company.
      (7) "Rights of accumulation," as used in paragraph (d), shall mean a scale of reducing sales charges in which the sales charge applicable to the securities being purchased is based upon the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased.

      The quantity of securities owned shall be based upon:
      (A) The current value of such securities (measured by either net asset value or maximum offering price); or
      (B) Total purchases of such securities at actual offering prices; or
      (C) The higher of the current value or the total purchases of such securities.
      The quantity of securities owned may also include redeemable securities of other registered investment companies having the same principal underwriter.
      (8) "Sales Charge" and "sales charges," as used in paragraph (d), shall mean all charges or fees that are paid to finance sales or sales promotion expenses, including front-end deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees. For purposes of this Rule, members may rely on the sales-related fees and charges disclosed in the prospectus of an investment company.
      (A) An "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company and does not include a service fee.
      (B) A "deferred sales charge" is [a sales charge that is deducted from the proceeds of the redemption of shares by an investor, excluding any such charges that are (i) nominal and are for services in connection with a redemption or (ii) discourage short-term trading, that are not used to finance sales-related expenses, and that are credited to the net assets of the investment company] any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption.
      (C) A "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.
      (9) "Service fees," as used in paragraph (d), shall mean payments by an investment company for personal service and/or the maintenance of shareholder accounts.
      (10) The terms "underwriter," "principal underwriter," "redeemable security," "periodic payment plan," "open-end management investment company," and "unit investment trust," shall have the same definitions used in the [Investment Company Act of 1940] 1940 Act.
      (11) A "fund of funds" is an investment company that acquires securities issued by any other investment company registered under the 1940 Act in excess of the amounts permitted under paragraph (A) of Section 12(d)(1) of the 1940 Act. An "acquiring company" in a fund of funds is the investment company that purchases or otherwise acquires the securities of another investment company, and an "acquired company" is the investment company whose securities are acquired.
      (12) "Investment companies in a single complex" are any two or more companies that hold themselves out to investors as related companies for purposes of investment and investor services.
      (c) Conditions of Discounts to Dealers
      No member who is an underwriter of the securities of an investment company shall sell any such security to any dealer or broker at any price other than a public offering price unless such sale is in conformance with Rule 2420 and, if the security is issued by an open-end management company or by a unit investment trust which invests primarily in securities issued by other investment companies, unless a sales agreement shall set forth the concessions to be received by the dealer or broker.
      (d) Sales Charge
      No member shall offer or sell the shares of any open-end investment company or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the [Investment Company Act of 1940] 1940 Act if the sales charges described in the prospectus are excessive. Aggregate sales charges shall be deemed excessive if they do not conform to the following provisions:
      (1) Investment Companies Without an Asset-Based Sales Charge
      (A) Aggregate front-end and[/or] deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge shall not exceed 8.5% of the offering price.
      [(B)
      (i) Dividend reinvestment may be made available at net asset value per share to any person who requests such reinvestment.
      (ii) If dividend reinvestment is not made available as specified in subparagraph (B)(i) above, the maximum aggregate sales charge shall not exceed 7.25% of offering price.]
      [(C)](B)
      (i) Rights of accumulation (cumulative quantity discounts) may be made available to any person in accordance with one of the alternative quantity discount schedules provided in subparagraph [(D)](C)(i) below, as in effect on the date the right is exercised.
      (ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph (C)(i) the maximum aggregate sales charge shall not exceed[:]
      [(a)] 8.0% of offering price. [if the provisions of subparagraph (B)(i) are met; or
      (b) 6.75% of offering price if the provisions of subparagraph (B)(i) are not met.]
      [(D)](C)
      (i) Quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of the following two alternatives:
      a. A maximum aggregate sales charge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more, or
      b. A maximum aggregate sales charge of 7.50% on purchases of $15,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more.
      (ii) If quantity discounts are not made available on terms at least as favorable as those specified in subparagraph [(D)](C)(i) the maximum aggregate sales charge shall not exceed:
      a. 7.75% of offering price if the provisions of subparagraph[s (B)(i) and (C)(i)] (B) are met.
      b. 7.25% of offering price if [the provisions of subparagraph (B)(i) are met but] the provisions of subparagraph [(C)(i)](B) are not met.
      [c. 6.50% of offering price if the provisions of subparagraph (C) (i) are met but the provision of subparagraph (B)(i) are not met.]
      [d. 6.25% of offering price if the provisions of subparagraphs (B)(i) and (C)(i) are not met.]
      [(E)] (D) If an investment company without an assetbased sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering price.
      [(F) If an investment company without an asset-based sales charge reinvests dividends at offering price, it shall not offer or pay a service fee unless it offers quantity discounts and rights of accumulation and the maximum aggregate sales charge does not exceed 6.25% of the offering price.]
      (2) Investment Companies With an Asset-Based Sales Charge
      (A) Except as provided in subparagraphs (C) and (D), the aggregate asset-based, front-end and deferred sales charges described in the prospectus which may be imposed by an investment company with an asset-based sales charge, if theinvestment company has adopted a plan under which service fees are paid, shall not exceed 6.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes [of shares] of an investment company with multiple classes of shares or between series [shares] of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 6.25% of the amount invested.
      (B) Except as provided in subparagraphs (C) and (D), if an investment company with an asset-based sales charge does not pay a service fee, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 7.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes [of shares] of an investment company with multiple classes of shares or between series [shares] of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 7.25% of the amount invested.
      (C) The maximum aggregate sales charge on total new gross sales set forth in subparagraphs (A) and (B) may be increased by an amount calculated by applying the appropriate percentages of 6.25% or 7.25% of total new gross sales which occurred after an investment company first adopted an asset-based sales charge until July 7, 1993, plus interest charges on such amount equal to the prime rate plus one percent per annum less any front-end, asset-based or deferred sales charges on such sales or net assets resulting from such sales.
      (D) The maximum aggregate sales charges of an investment company in a single complex, a class or share issued by an investment company with multiple classes of shares or a separate series of a series investment company, may be increased to include sales of exchanged shares provided that such increase is deducted from the maximum aggregate sales charges of the investment company, class or series which redeemed the shares for the purpose of such exchanges.
      (E) No member shall offer or sell the shares of an investment company with an asset-based sales charge if:
      (i) The amount of the asset-based sales charge exceeds .75 of 1% per annum of the average annual net assets of the investment company; or
      (ii) Any deferred sales charges deducted from the proceeds of a redemption after the maximum cap, described in subparagraphs (A), (B), (C) and (D) hereof, has been attained are not credited to the investment company.
      (3) Fund of Funds

      (A) If neither an acquiring company nor an acquired company in a fund of funds structure has an asset-based sales charge, the maximum aggregate front-end and deferred sales charges that may be imposed by the acquiring company, the acquired company and those companies in combination, shall not exceed the rates provided in paragraph (d)(1).
      (B) Any acquiring company or acquired company in a fund of funds structure that has an asset-based sales charge shall individually comply with the requirements of paragraph (d)(2), provided:
      (i) If the acquiring and acquired companies are in a single complex and the acquired fund has an assetbased sales charge, sales made to the acquiring fund shall be excluded from total gross new sales for purposes of acquired fund's calculations under subparagraphs (d)(2)(A) through (d)(2)(D); and
      (ii) If both the acquiring and acquired companies have an asset-based sales charge: (a) the maximum aggregate asset-based sales charge imposed by the acquiring company, the acquired company and those companies in combination, shall not exceed the rate provided in subparagraph (d)(2)(E)(i); and (b) the maximum aggregate front-end or deferred sales charges shall not exceed 7.25% of the amount invested, or 6.25% if either company pays a service fee.
      (C) The rates described in subparagraphs (d)(4) and (d)(5) shall apply to the acquiring company, the acquired company and those companies in combination. The limitations of subparagraph (d)(6) shall apply to the acquiring company and the acquired company individually.
      [(3)](4) No member or person associated with a member shall, either orally or in writing, describe an investment as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or [whose] its total charges against net assets to provide for sales related expenses and/or service fees exceed .25 of 1% of average net asset per annum.
      [(4) No member or person associated with a member shall offer or sell the securities of an investment company with an asset-based sales charge unless its prospectus discloses that long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this Rule. Such disclosure shall be adjacent to the fee table in the front section of a prospectus. This subparagraph shall not apply to money market mutual funds which have asset-based sales charges equal to or less than .25 of 1% of average net assets per annum.]
      (5) No member or person associated with a member shall offer or sell the securities of an investment company if the service fees paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets or if a service fee paid by the investment company, as disclosed in the prospectus, to any person who sells its shares exceeds .25 of 1% of the average annual net asset value of such shares.
      (6) No member or person associated with a member shall offer or sell the securities of an investment company if:
      (A) The investment company has a deferred sales charge paid upon redemption that declines over the period of a shareholder's investment ("contingent deferred sales load"), unless the contingent deferred sales load is calculated as if the shares or amounts representing shares not subject to the load are redeemed first, and other shares or amounts representing shares are then redeemed in the order purchased, provided that another order of redemption may be used if such order would result in the redeeming shareholder paying a lower contingent deferred sales load; or
      (B) The investment company has a front-end or deferred sales charge imposed on shares, or amounts representing shares, that are purchased through the reinvestment of dividends, unless the registration statement registering the investment company's securities under the Securities Act of 1933 became effective prior to April 1, 2000.
      (e) - (l) No change.

    • 99-102 NASD Announces Changes To Regulation T And SEC Rule 15c3-3 Extension Request Reason Codes

      View PDF File

      INFORMATIONAL

      Reg T And SEC Rule 15c3-3 Reason Codes

      Effective Date: February 7, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Regulation T
      SEC Rule 15c3-3

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) is making several changes to its Extension Request Reason Codes regarding Federal Reserve Board Regulation T and Securities and Exchange Commission (SEC) Rule 15c3-3. The changes include adding codes and aligning some NASD codes with New York Stock Exchange (NYSE) codes; the changes will take effect on February 7, 2000.

      The charts in Attachment A outline the reason codes and the changes.

      Questions/Further Information

      Questions regarding this Notice to Members may be directed to Susan DeMando, Regional Compliance Supervisor, Member Regulation, NASD Regulation, Inc. (NASD RegulationSM) at (202) 728-8411.

      Background

      The Federal Reserve Board's Regulation T and SEC Rule 15c3-3 provide for the possibility of extensions where investors have not promptly met their obligations relative to a securities transaction.

      Regulation T pertains to an investor's obligation when a security is purchased. Specifically, an investor is given a maximum of five business days to pay for securities purchased in a cash or margin account. If payment due exceeds $1,000 and is not received by the end of this time period, the broker/dealer must either liquidate the position or apply for and receive an extension from its designated examining authority.

      SEC Rule 15c3-3 pertains to a customer's obligation when securities are sold, other than short sales. SEC Rule 15c3-3 requires that if a security sold long has not been delivered within 10 business days after the settlement date, the broker/dealer must either buy the customer in or apply for and receive an extension from its designated examining authority.

      Clearing firms are reminded of their obligations under the Net Capital Rule relative to Regulation T and outstanding deposits and/or margin as described in SEC Rule 15c3-1 (c)(2)(iv)(B). In addition, should a customer fail to meet his/her responsibilities to deliver a security and that failure results in a clearing firm fail-to-deliver, the Net Capital Rule requires charges under certain conditions. These charges are outlined in SEC Rule 15c3-1 (c)(2)(ix).

      Key Features

      Following are key features of the current reason codes and some changes:

      • Under Regulation T, we are adding reason code 001 ("contacting customer"). This reason code is available one time only for a given trade date and is available for a maximum of seven calendar days. If a customer needs an additional extension related to that trade date, the firm will have to select a new reason code. The reason code can be used starting February 7, 2000.


      • Regulation T reason code 021 ("other") may only be assigned by NASD staff. A member firm may not input "other" as a valid reason code. A firm needing a Regulation T extension for reasons other than those provided for in reason codes 001-009, 012, 014, 0151, 017-020 will need to request and receive NASD approval and input of the code "other". To facilitate such a request, a firm must contact their District Office. The use of reason code 021 will be allowed only in extreme and unavoidable circumstances.


      • Rule 15c3-3 reason code 050 ("other") may only be assigned by NASD staff. A member firm may not input "other" as a valid reason code. A firm needing a Rule 15c3-3 extension for reasons other than those provided for in reason codes 040-045, 047-049 and 0522 will need to request and receive NASD approval and input of the code "other". To facilitate such a request, a firm must contact their District Office. The use of reason code 050 will be allowed only in extreme and unavoidable circumstances.


      • For Regulation T extensions, a customer will still be limited to a maximum of five request dates per rolling 12-month period for certain reason codes. For Rule 15c3-3 extensions, a customer will be permitted nine (increased from the current five) request dates per rolling 12-month period.


      Endnotes

      1 Regulation T reason code 016 ("Acts of God") may also only be used by NASD. However, it is not a reason code that can be applied on an individual customer basis. Acts of God are limited to regional difficulties like earthquake, flood, etc.; when granted, this reason code applies to affected customers in a geographic area, not to individual customers.

      2 SEC Rule 15c3-3 reason codes 046 ("Strike or Christmas") and 051 ("Acts of God") are only assigned by NASD and can not be requested on behalf of an individual customer.


      Attachment A

      Regulation T Extension Request Reason Codes
      Reason Code Reason Text Days Permitted Limit of 5 per Customer Limit per Reason Code Final Reason Code NASD Only Business Or Calendar Days
      001 Contacting Customer 7 Y 1 N N C
      002 Check Is In The Mail 7 Y 1 Y N C
      003 Authorization To Transfer Funds 7 Y 1 Y N C
      004 Awaiting Collateral 7 Y 1 Y N C
      005 Rcpt Of Sec Sold Offset Purchase 7 Y 1 Y N C
      006 Legal Documents 7 Y 2 Y N C
      007 Unacceptable Check 7 Y 1 Y N C
      008 Foreign Sec. Settle. 7 Y 1 Y N B
      009 Customer Ill 7 Y 2 Y N C
      012 COD-DK-Outside U.S. 7 N 1 Y N C
      014 COD-DK-In U.S. 2 N 1 Y N B
      015 COD-Fail-35 Days 14 N 2 Y N C
      016 Acts Of God 14 N 0 N Y C
      017 Coming From Another Broker 14 N 2 Y N C
      018 Death In Family 14 Y 1 Y N C
      019 Awaiting Appt Of Executor 14 Y 2 Y N C
      020 Transfer cash to another a/c 0 N 1 N N C
      021 Other 14 N 1 N Y C

      SEC Rule 15c3-3 Extension Request Reason Codes
      Reason Code Reason Text Days Permitted Limit of 9 per Customer Limit per Reason Code Final Reason Code NASD Only Business Or Calendar Days
      040 Security In Transit 14 N 2 Y N C
      041 Death Of Seller 14 Y 2 Y N C
      042 Can't Buy In, Sec Short Supply 14 N 5 Y N C
      043 Dividend Sold Before Payable Date 14 Y 2 Y N C
      044 Still In Foreign Deposit 14 Y 2 Y N C
      045 Sec Exchange Or Merger 14 Y 2 Y N C
      046 Strike or Xmas 14 N 0 N Y C
      047 Coming From Another Broker 14 N 2 Y N C
      048 Customer III Or Hospitalized 14 Y 2 Y N C
      049 Lost Certificate 30 N 5 N N C
      050 Other 14 N 0 N Y C
      051 Acts Of God 14 N 0 N Y C
      052 Foreign Settlements 10 N 2 Y N C

      These Regulation T and SEC Rule 15c3-3 reason codes have been changed.
      NASD Code Old Description
      Reg-T Codes
      New Description
      Reg-T Codes
      021 Confirm sent to wrong address Other
        15c3-3 Codes 15c3-3 Codes
      050 Lost Certificate: Customer
      (Combined into 049 Lost Certificate)
      Other
      052 Other Foreign Settlements

      These Regulation T and SEC Rule 15c3-3 reason codes have been added.
      NASD Code Description
      Reg-T Codes
      008 Foreign Security Settlement
      020 Transfer Cash to Another Account
        15c3-3 Codes
      046 Strike or Christmas

      These Regulation T reason codes have been deleted.
      NASD Code Description
      022 Corrected Confirm Requested
      023 Duplicate Confirm Requested
      024 Cust Out Of Town-No Return Dt
      025 Cust Out Of Town-Return Dt
      026 Bank In Receivership
      027 Cust Away On Business-Ret Dt
      028 Confirm Sent To Wrong Address

    • 99-101 NASD Regulation To Launch Additional Form Filing Regulatory Applications

      View PDF File

      INFORMATIONAL

      Web-Based Regulatory Applications

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management
      Systems
      Forms/Electronic Filing

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) will deploy the following four additional Web-Based Form Filing Regulatory Applications to National Association of Securities Dealers, Inc. (NASD®) members during the first quarter of 2000.

      • Bluesheets (NASD Procedural Rules 8210, 8211, and 8213);


      • Customer Complaints (NASD Conduct Rule 3070);


      • Reg T/15c3-3 Extension Requests; and


      • Shorts Interest Reporting (NASD Conduct Rule 3360).

      These regulatory applications will allow firms to use the same entitlement user account and password used to access Web-Based FOCUS—the first of the form filing applications launched a few months ago. Like Web-Based FOCUS, firms will no longer need to load software or file via Sprint Telenet or the Securities Industry Automation Corporation (SIAC), but instead can access all of the form filing applications with one Internet address: regulationformfling.nasdr.com.

      Firms must use these new Web-Based applications beginning first quarter of 2000. The old filing methods will no longer be available.

      Questions/Further Information

      For further information or if you have questions about the new Web-Based form filing applications, call (800) 321-NASD, or send an e-mail to: nasdregformfiling@nasd.com.

      Questions And Answers About The New Web-Based Applications

      Who would be required to file using these form filing applications?

      If your firm is designated to NASD Regulation for regulatory oversight, then your firm is required to file Customer Complaints, RegT/15c3-3 Extension Requests, and Shorts Interest Reporting to the NASD utilizing these applications. The Bluesheets application can be used by all NASD members that receive Bluesheet requests from the NASD pursuant to NASD Procedural Rules 8210, 8211, and 8213.

      How do I prepare for the new form filing regulatory applications?

      Your firm must be entitled to use any of the new form filing regulatory applications. Contact your firm's Web-Based FOCUS Account Administrator to request the additional entitlements. The Account Administrator—that would have been identified through the Web-Based FOCUS entitlement process—can request additional user entitlements online via the Entitlement Administration Tool of the Web-Based FOCUS application.

      What if I am a Web-Based FOCUS Account Administrator and will also be the Account Administrator for the other new form filing regulatory applications?

      The firm must submit a Regulation Applications Administrator Entitlement Form for each Account Administrator that is requesting additional entitlement privileges.

      What if my firm would like to have a separate Account Administrator for each form filing application?

      The member firm has the option to appoint separate Account Administrators for each application. It is recommended that each Account Administrator have a backup or alternate. For new Account Administrators, firms must submit a Regulation Applications User Accounts Acknowledgment Form (UAAF) and Regulation Applications Administrator Entitlement Form. Firms should have received copies of these forms from NASD Regulation during the Web-Based FOCUS entitlement process. If you need another copy of these forms, call (800) 321-NASD, or send an e-mail to nasdregformfiling@nasd.com.

      Are the system requirements for these new applications different than for Web-Based FOCUS?

      The system requirements for form filing regulatory applications are the same as Web-Based FOCUS.

      See below for system requirements.

      System Requirement
      Minimum Client Required Recommended Client
      Hardware: Pentium x90MHz 16MB Hardware: Pentium x133MHz 32MB
      Operating System: Windows 95
      Windows NT 4.0
      Operating System: Windows 95 / 98
      Windows NT 4.0
      Modem: 28.8KB Modem: 56KB
      Web Browser: Internet Explorer 4.01 SP2 Netscape 4.05 Web Browser: Internet Explorer 4.01 SP2 Netscape 4.05
      Web Browser
      Specifics:
      Javascript enabled (this is usually the default setting)* Web Browser
      Specifics:
      Javascript enabled (this is usually the default setting)*
      Screen Resolution: 800 x 600 Screen Resolution: 1024 x 768
      * The system will not function without Javascript enabled.

    • 99-100 SEC Approves Creation Of Dispute Resolution Subsidiary And Related By-Laws And Rule Changes

      View PDF File

      View Fed. Reg. Notice

      INFORMATIONAL

      Dispute Resolution Subsidiary

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Arbitration
      Dispute Resolution
      Mediation

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved creation of a subsidiary of the National Association of Securities Dealers, Inc. (NASD®) to handle the dispute resolution program that is currently part of NASD Regulation, Inc. (NASD RegulationSM). The subsidiary is expected to become operational in the spring of 2000.

      Questions/Further Information

      Questions regarding this Notice may be directed to Linda D. Fienberg, Executive Vice President, Office of Dispute Resolution, NASD Regulation, at (202) 728-8407; George H. Friedman, Senior Vice President and Director, Office of Dispute Resolution, NASD Regulation, at (212) 858-4488; or Jean I. Feeney, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6959.

      Discussion

      On September 30, 1999, the SEC approved creation of a dispute resolution subsidiary, to be known as NASD Dispute Resolution, Inc. (NASD Dispute Resolution), to take over the dispute resolution functions that are now performed by the Office of Dispute Resolution within NASD Regulation.1 Specifically, the SEC approved new By-Laws for the subsidiary, and related amendments to the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries, the NASD Regulation By-Laws, and the Rules of the Association. A copy of the SEC Approval Order, which contains a description of the amendments, is attached. The changes will not take effect until NASD Dispute Resolution becomes operational.

      The NASD believes that creation of the new subsidiary will recognize the importance of its dispute resolution program and further strengthen the independence and credibility of the arbitration and mediation functions. The subsidiary will be subject to the same SEC oversight as the NASD, NASD Regulation, and The Nasdaq-Amex Market GroupSM.

      NASD Dispute Resolution must now qualify to do business in all jurisdictions in which it will operate. Therefore, it is not expected to begin operation as a separate subsidiary until the spring of 2000. Until that time, the Office of Dispute Resolution will remain part of NASD Regulation.


      Endnote

      1 Exchange Act Release No. 41971 (File No. SR-NASD-99-21) (September 30, 1999), 64 Federal Register 55793 (October 14, 1999).

      compliance consultants, as appropriate, to conduct periodic reviews and evaluations of the compliance policies and procedures, as well as the operation of the compliance program as a whole. The Compliance Manuals will be promptly updated to reflect anynecessary changes resulting from these reviews.

      c. Compliance Documentation. SI is in the process of adopting procedures to document, on an ongoing basis, the procedures to be followed by Compliance Department personnel in performing particular functions; the actions to be taken by Compliance Department personnel as a result of following the procedures; and the actions to be taken by Legal and Compliance Department personnel and management to enforce the compliance policies and procedures. These policies will require compliance documentation to be prepared in a manner to facilities regulatory review of the factual background of the transactions or matters at issue, as well as the actions taken by SI's personnel.
      d. Compliance Training. SI has commenced, and will continue to conduct, training on a firm-wide and departmental basis to ensure that its employees understand the purposes and functions of the compliance policies and procedures.
      e. Professional Conduct Program. SI has developed, and is in the process of adopting, a professional conduct code and supporting infrastructure, including the assignment of senior managementand Legal Department personnel to design, implement and oversee SI's professional conduct program ("Professional Conduct Program"). Under the Professional Conduct Program, SI will conduct comprehensive yearly professional conduct training. SI is in the process of implementing employee assistance procedures, that will be administered by third-party vendors and senior Legal Department personnel, to answer employee questions and address grievances. Once the Professional Conduct Program is adopted, SI will conduct periodic review and evaluation of the program with a view to enhancing and strengthening it.

      Applicant's Conditions

      Applicants agree that the following conditions may be imposed in any order granting the requested relief:

      1. Mr. Stephens will not be involved in SI's business of providing services to register investment companies. Applicants will develop procedures designed reasonably to assure compliance with this condition.
      2. For each to the three fiscal years beginning with the fiscal year ending December 31, 1999, SI's general counsel will certify annually that, after reasonable inquiry, he believes that SI has complied with its compliance procedures and policies in all material respects (and that any known material deviations from these policies and procedures, and any series of like deviations that in the aggregate are material, have been documented in SI's records), and that the procedures and policies continue to be reasonably designed to ensure SI's compliance with the federal securities laws. The certification will be delivered to the Commission to be attention of theAssistant Director, Office of InvestmentCompany Regulation, Division of Investment Management, within 60 days of the end of SI's fiscal year. A copy of the certification will be maintained as part of the permanent records of SI and a copy of each certification will be delivered to the board of directors of each fund for which SI serves as distributor, underwriter, administrator or investment adviser.

      By the Commission.

      Margaret H. McFarland,

      Deputy Secretary.

      [FR Doc. 99-26792 Filed 10-13-99; 8:45 am]

      BILLING CODE 8010-01-M

      SECURITIES AND EXCHANGE COMMISSION

      [Release No. 34-41971; File No. SR-NASD- 99-21]

      Self-Regulatory Organizations; Order Approving a Proposed Rule Change by the National Association of Securities Dealers, Inc. To Create a Dispute Resolution Subsidiary

      September 30, 1999.

      On April 26, 1999, the National Association of Securities Dealers, Inc. ("NASD" or "Association"), through its wholly owned regulatory subsidiary, NASD Regulation, Inc. ("NASD Regulation"), submitted to the Securities and Exchange Commission ("Commission"), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 ("Act") 1 and Rule 19b-4 thereunder,2 a proposed rule change to create a dispute resolution subsidiary. The proposed rule change was published for comment in the Federal Register on June 17, 1999.3 The Commission received one comment letter on the proposal from the Securities Industry Association ("SIA").4 This order approves the proposal.

      1 15 U.S.C. 78s(b)(1).

      2 17 CFR 240.19b-4.

      3 See Securities Exchange Act Release No. 41510 (June 10, 1999), 64 FR 32575.

      4 Letter from Stephen G. Sneeringer, Chairman of the Arbitration Committee, SIA, to Jonathan G. Katz, Secretary, Commission, dated July 8, 1999 ("SIA Letter").

      5 Report of the NASD Select Committee on Structure and Governance to the NASD Board of Governors (September 1995) ("Rudman Report").

      6 Report of the Arbitration Policy Task force to the Board of Governors National Association of Securities Dealers, Inc. (January 1996) ("Ruder Report").

      I. Description of the Proposal

      The Association is proposing (i) to create a dispute resolution subsidiary, NASD Dispute Resolution, Inc. ("NASD Dispute Resolution"), to handle dispute resolution programs; (ii) to adopt bylaws for the subsidiary; and (iii) to make conforming amendments to the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries ("Delegation Plan"), the NASD Regulation By-Laws, and the Rules of the Association.

      A. Background

      The Association's arbitration and mediation programs were operated by the NASD Arbitration Department until 1996, when those functions were moved to NASD Regulation following a corporate reorganization. This reorganization in part grew out of recommendations of a Select Committee formed by the NASD and made up of individuals with significant experience in the securities industry and NASD governance ("the Rudman Committee").5 The Rudman Committee reviewed the Association's arbitration and mediation programs from December 1994 through August 1995. The Rudman Report was issued in September 1995.

      In September 1994, the NASD established the Arbitration Policy Task Force, headed by David S. Ruder, former Chairman of the SEC ("the Ruder Task Force"), to study NAD arbitration and recommend improvements. The Ruder Task Force, composed of eight persons with various backgrounds in the area of securities arbitration, met from the Fall of 1994 to January 1996, when its Report was issued.6

      Both the Rudman Committee and the Ruder Task Force made recommendations that affected the arbitration program. The Rudman Committee recommended that the NASD reorganize as a parent corporation with two relativelyautonomous and strong operating subsidiaries, independent of one another. The resulting enterprise would consist of NASD, Inc., as parent, The Nasdaq Stock Market, Inc. ("Nasdaq") as one subsidiary to operate Nasdaq, and a new subsidiary, NASD Regulation, Inc., to regulate the broker-dealer members of the NASD.7 The Ruder Report recommended that the dispute resolution program be housed either in the parent or in NASD Regulation.8 TheArbitration Department was placed in NASD Regulation in early 1996 based on the recommendation of the Rudman Committee,9 and the name of the department was changed to the Office of Dispute Resolution ("ODR") shortly thereafter, to reflect the full range of dispute resolution mechanisms.

      The NASD believes that ODR has established credibility as a neutral forum that is fair to all parties and has gained acceptance by investor groups. However, because there are significant differences between the disciplinary role of NASD Regulation and the sponsorship of a neutral forum for the resolution of dispute between members, associated persons, and customers, the NASD believes that creation of a separate dispute resolution entity will further strengthen the independence and credibility of its arbitration and mediation functions. A new dispute resolution subsidiary should benefit from the perception that it is separate and distinct from other NASD entities. The new subsidiary will be subject to the same SEC oversight as other parts of the NASD enterprise, which includes regular inspections by the Commission and the need to file all by-laws and rule changes with the SEC. In addition, the new subsidiary will remain subject to inspections by the General Accounting Office ("GAO"), which performs audits at the request of Congress.

      The NASD proposes to call the new subsidiary NASD Dispute Resolution, Inc. Together with NASD Regulation, the two subsidiaries will form the NASD Regulatory and Dispute Resolution Group. Both the NASD directly, and NASD Regulation, indirectly, will be responsible for the actions of NASD Dispute Resolution. Because NASD Dispute Resolution performs its functions through authority delegated by the NASD, the NASD is responsible for proper performance of such functions. Indirectly, NASD Regulation will be responsible for enforcing compliance with decisions rendered by NASD Dispute Resolution concerning NASD members.10

      Staffing for NASD Dispute Resolution will be the same as ODR, except for the creation of a President position. Certain additional executive positions, if necessary, may be created as well. Many functions of the new subsidiary, such as human resources, legal, finance, communications, administrative services, and technology will be shared with the NASD and other subsidiaries to avoid duplication. The new subsidiary will be charged for the cost of those functions as it presently is.

      Funding for the new subsidiary will be handled in much the same way as presently handled for ODR, which is not self supporting. Fees received from parties who use the arbitration and mediation programs are not sufficient to fund the Office's regular actitivies. Rather, as a part of NASD Regulation, ODR shares in the revenue stream of the NASD and its affiliated entities, which includes revenue derived from member assessments, various fees and charges, disciplinary fines, and other sources of income. In return, ODR is charged for services that it receives from the other corporations in the enterprise as described above. Apart from accounting changes to reflect the new subsidiary's status, the funding process for the new subsidiary will be the same as that for ODR. ODR employees will continue in the same positions in the newsubsidiary, and the physical offices willnot move.

      The NASD proposes a five-person Board for NASD Dispute Resolution, consisting of three non-industry and two industry directors, as those terms are defined in Article I of the proposed By-Laws. The Chief Executive Officer of the NASD will be an ex-officio nonvoting member of the Board. The nonindustry directors would include at least two persons who also are members of the NASD Board of Governors ("NASD Board"), and an additional person knowledgeable in the dispute resolution field. At least one of the nonindustry directors also will qualify as a public director, as defined in the By- Laws. One industry director would be a member of the NASD Board; the other would be the President of the new subsidiary. The NASD Board would elect the directors, as is done for the boards of the other subsidiaries.

      The procedures currently in place for disciplining members and associated persons for noncompliance with arbitration awards will be largely the same. The Code of Arbitration Procedure ("Code"), in IM-10100,provides that the failure of a member or associated person to comply with an arbitration award obtained inconnection with an arbitration submitted for disposition pursuant to the procedures specified by the NASD, other self-regulatory organizations, or the American Arbitration/Association 11 may be deemed conduct inconsistent with just and equitable principles of trade and a violation of NASD Rule 2110. This language presently applies to awards obtained in the NASD Regulation forum, because that forum applies rules and procedures that are ultimately approved by the NASD. This will also be the case for NASD Dispute Resolution. Enforcement of the Code will continue to be handled by NASD Regulation.

      As is the case with actions by NASD Regulation, actions by the NASD Dispute Resolution Board may be referred by that board to the NASD Board, or reviewed by the NASD Board, as provided in the proposed amendments to the Delegation Plan.12 Thus, the rules of NASD Dispute Resolution will be the rules of the Association, just as rules approved currently by the other subsidiaries and subject to NASD Board review are deemed to be NASD rules. NASD Regulation has formed a working group with representatives from various departments to ensure a smooth transition.
      B. Description of Proposed Amendments

      The Association proposes to amend the Delegation Plan to add references to the new subsidiary and to move the arbitration and mediation functions from NASD Regulation to NASD Dispute Resolution. Therefore, references to the delegations of authority to the subsidiaries and the rulemaking decisions of the subsidiaries have been amended to include references to NASD Dispute Resolution. As is the case for NASD Regulation and Nasdaq, actions of the new subsidiary Board will be subject to review by the NASD Board, and rule filings will bemade by the new subsidiary on behalf of the NASD.

      The description of the National Arbitration and Mediation Committee ("NAMC") in the Delegation Plan has been moved from the section delegating authority to NASD Regulation to a new NASD Dispute Resolution section. A change has been made in the NAMC member balancing requirement to provide more flexibility while maintaining at least 50% non-industry membership. The Delegation Plan currently provides that NAMC membership shall be equally balanced between industry and non-industry members. It may be desirable, however, to have an odd number of members on the NAMC to avoid tie votes. Therefore, the provision has been amended to state that the NAMC shall have at least 50% non-industry members. This provides additional flexibility while maintaining a minimum of half non-industry members, in accordance with the spirit of the Delegation Plan.

      The Association proposes to amend the NASD Regulation By-Laws to add references to NASD Dispute Resolution in the definitions sections.13

      Rule 0120(b) will be amended to clarify that the term "Association" collectively means the NASD and its subsidiaries that are considered part of the self-regulatory organization: that is, the NASD, NASD Regulation, Nasdaq, and NASD Dispute Resolution.

      Rule 10102(a) of the Code of Arbitration procedure will be amended to clarify that the new NASD Dispute Resolution Board will appoint members of the NAMC and name its chair. In addition, Rule 10102(a) will be amended to replace the phrase "a pool of arbitrators" with the more accurate phrase "rosters of neutrals," since the current rosters include both arbitratorsand mediators (collectively referred toas "neutrals").

      Rule 10102(b) will be amended to conform to current practice, in which the NAMC recommend to the Board certain rules and procedures to govern the conduct of arbitration and mediation matters, and does not unilaterally make such changes. The rule currently authorizes the NAMC to establish these rules and procedures. In addition, the phrase "NASD Dispute Resolution" has been added before "Board" clarify that recommendations will be made tothat Board. As noted above, actions ofthe new subsidiary board will be subjectto review by the NASD Board.

      Rule 10401 will be amended to replace the phrase "by the Association" with regard to designation of the Director of Mediation and replace it with "by the NASD Dispute Resolution Board," and to delete "Association's" as a modifier of "National Arbitration and Mediation Committee." Although theNASD and its subsidiaries are collectively referred to as the Association for self-regulatory purposes,the use of "Association" in this Rule may cause confusion in light of the newcorporate structure and serves no useful purpose in the Rule. The term "of Arbitration" will be added after one instance of the word "Director" todistinguish it from the Director ofMediation. In addition, the reference tothe "Board of Governors" has been changed to "NASD Dispute ResolutionBoard" to reflect the new structure.

      Rule 10404 will be amended to change the term "NASD" to "Association" to be more inclusive in this instance because, as described above, the term "Association" refers to the entire self-regulatory organization including subsidiaries.

      The proposed NASD Dispute Resolution By-Laws are modeled after those of NASD Regulation, with certain modifications, described below, appropriate to the particular functions of NASD Dispute Resolution. For example, NASD Dispute Resolution will not require that a committee other than the NAMC review all rulemakingproposals. Standard provisions allowing for the appointment of an Executive Committee and a Finance committee have been included for flexibility, although it is not immediately expectedthat such committees will be needed.

      Proposed Article IV, Section 4.2 sets the number of Board members at five to eight although, as stated above, the intention initially is to have only five Board members. In addition, the Chief Executive Officer of the NASD will be an ex-officio non-voting member of the Board. Proposed Section 4.3(a) provides that the number of non-industry directors shall equal or exceed the number of industry directors plus the President. This means that the President is treated as an industry director for this purpose. The other industry director and at least two of the non-industry directors also will be sitting members of the NASD Board. This overlapping membership provides stability and uniformity among the corporations. At least one of the non-industry directors also will qualify as a public director. The proposed By-Laws define "Public Director" as a director who has no material business relationship with abroker or dealer or the NASD, NASDRegulation, Nasdaq, or NASD DisputeResolution. The By-Laws define "Non-Industry Director" as a director(excluding the President) who is (1) a public director or public committeemember; (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 or industry committee member.

      A minor modification was made to the standard terminology in Section 4.13(h) to clarify that the Board may appoint a non-director to a committee, because this power is implied but not specifically stated in the preceding paragraphs of Section 4.13.

      7 Rudman Report at R-8.

      8 Ruder Report at 151-52.

      9 Rudman Report at R-8.

      10 See Section A.1.f. of the Delegation Plan.

      11 The NASD Regulation Board of Directors recently approved an amendment to this Interpretive Material that would add, "or other dispute resolution forum selected by the parties." See Securities Exchange Act Release No. 41339 (April 28, 1999), 64 FR 23887 (May 4, 1999). This proposal was filed as a non-controversial filing. The NASD designated May 17, 1999 as the effective dateof the proposal.

      12 the Delegation Plan was amended in 1997, together with related By-Laws changes designed to allow the NASD Board to take action on its own initiative rather than waiting for a subsidiary to act on the matter. See Securities Exchange Act Release No. 39326 (Nov. 14, 1997), 62 FR 62385 (Nov. 21, 1997).

      13 The NASD also intends to review the NASD and Nasdaq By-Laws and other corporate governance documents to identify other appropriate amendments recognizing the formation of NASD Dispute Resolution.

      II. Comments

      The Commission received one comment letter from the SIA,14 which opposed the proposed rule change. The SIA disagreed with (i) the proposed composition of the NASD Dispute Resolution Board; (ii) the proposed composition of the NAMC; and (iii) the manner in which fees will be imposed by NASD Dispute Resolution.

      The SIA had three concerns about the composition of the NASD Dispute Resolution Board. First the SIA stated that industry and non-industry representation should be equal. Second, the SIA noted that it is inappropriate to consider the president of NASD DisputeResolution as an industry representative. Third, the SIA stated that the proposed compositional breakdown might permit the NASD Dispute Resolution Board to be dominated by claimants' lawyers. The SIA recommended that the Commission exclude from the definition of Non-Industry "anyone who provides professional legal services to investor-claimants and whose revenues in that regard constitute more than 20% of his or her gross annual revenue." 15

      Similarly, the SIA expressed concern about the proposed composition of the NAMC. It stated its position that industry and non-industry representation on the NAMC should be equal rather than at least 50 percent non-industry. The SIA stated that the "amorphous concern that they may be a tie vote * * * does not outweigh the more paramount concern that the representation on the NAMC be truly balanced between Industry and Non- Industry representatives." 16

      In addition to the composition of the NAMC and the NASD Dispute Resolution Board, the SIA commented on the manner in which fees will be imposed under the proposed rule change. The SIA objected to the dichotomy between fees affecting members and those affecting nonmembers. Under the proposed rule change, the NASD Board must ratify any rule change adopted by the NASD Dispute Resolution Board that imposes fees or other charges on person or entities other than NASD members. Rule changes that impose fees on NASD members do not require NASD Board ratification. The SIA stated that industry participants "should have the opportunity to participate in critical decisions that will impact their business and their bottom line—such as fee increases related to the arbitration system." 17

      NASD Regulation responded to the SIA's concerns about the proposed composition of the NASD Dispute Resolution Board, the proposed composition of the NAMC, and the manner in which fees will be imposed by NASD Dispute Resolution.18 First, with respect to the composition of the NASD Dispute Resolution Board, NASD Regulation noted that this proposal is consistent with NASD Regulation's bylaws, which require a majority of nonindustry members on its Board and its President and Nasdaq's President are also counted as industry participants for compositional and quorum requirements.19 Second, with respect to the composition of the NAMC, NASD Regulation noted that the NAMC's recommendations are only advisory and that rule changes and major policy changes must be presented to the NASD Dispute Resolution Board for final approval.20 Third, with respect to NASD Dispute Resolution's authority to impose fees on NASD members without prior review and ratification by the NASD Board, NASD Regulation noted that fee proposals must be submitted for Commission review and that the NASD may, on its own initiative, review any action of its subsidiaries.21

      14 See supra, note 4.

      15 SIA Letter at 4.

      16 SIA Letter at 4-5.

      17 SIA Letter at 5.

      18 Letter from Jean I. Feeney, Assistant General Counsel, NASD Regulation, to Richard C. Strasser, Assistant Director, Commission, dated August 11, 1999.

      19 Id. at 2.

      20 Id. at 4.

      21 Id.

      III. Discussion

      The Commission finds that the proposed rule change is consistent with section 15A(b) of the Act 22 in general and furthers the objectives of section 15A(b)(6) 23 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest.24 Specifically, the Commission believes that separating the dispute resolution role from the disciplinary role of NASD Regulation will result in a more neutral and independent forum for the resolution of disputes between members, associated persons, and customers. The Commission also expects the NASD to ensure that NASD Dispute Resolution is adequately funded and able to fulfill its responsibilities.

      In its comment letter, the SIA stated that industry and non-industry representation on the NASD Dispute Resolution Board and the NAMC should be equal and that the President of NASD Dispute Resolution should not be considered an industry representative. The Commission notes that NASD Dispute Resolution's Board structure is modeled after NASD Regulation's structure. Nasdaq also requires a majority of non-industry directors on its Board. Moreover, the Presidents of both NASD Regulation and Nasdaq are counted as industry participants for board composition and quorum requirements. The Commission believes that it is reasonable to extend this structure to NASD Dispute Resolution.

      The SIA also stated that the NASD Dispute Resolution Board may include too many claimants' lawyers, thus permitting domination by a single NASD Dispute Resolution constituency. The Commission disagrees, noting that at least two of the non-industry directors will come from the NASD Board. As characterized by the SIA in its comment letter, the current nonindustry members of the NASD Board are senior executives from major corporations with no particular affiliation with the securities industry. Moreover, if NASD Dispute Resolution has a five member Board, only one nonindustrydirector may be chosen from outside the NASD Board. While that director should be knowledgeable in the dispute resolution field, the universe of potential candidates is not limited to claimants' lawyers. Indeed, it is likely that the remaining non-industry position would be filled by a practicing arbitrator, a mediator, or an academic. Accordingly, the Commission does not believe that there is an undue risk that the NASD Dispute Resolution Board will be dominated by an single constituency of the new subsidiary.

      The SIA also stated that the NASD Board should be required to ratify rule changes adopted by the NASD Dispute Resolution Board if the rule change imposes fees or other charges on NASD members as well as those affecting nonmembers. The Commission notes that rule changes by the NASD Regulation and Nasdaq Boards imposing fees or other charges on NASD members do not require ratification by the NASD Board. The Commission also notes that fee proposals must be submitted for Commission review under Rule 19b-4 under the Act. In addition, any member of the NASD Board may call an action of a subsidiary for review at the next NASD Board meeting following the subsidiary's action. The Commission believes these measures provide an adequate safeguard against unreasonable fees being levied against NASD members.

      Finally, the Association represents that funding for the new subsidiary will be handled in much the same way as funding for ODR was accomplished. The new subsidiary will share in the revenue stream of the NASD and its affiliated entities, which includes revenue derived from member assessments, various fees and charges, disciplinary fines, and other sources of income. As the new subsidiary is implemented, we expect the NASD to commit to ensuring that NASD Dispute Resolution continues to be properly funded to carry out all its responsibilities.

      22 15 U.S.C. 78o-3(b).

      23 15 U.S.C. 78o-3(b)(6).

      24 In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

      IV. Conclusion

      It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act,25 that the proposed rule change (SR-NASD-99- 21) is approved.

      For the Commission, by the Division of Market Regulation, pursuant to delegated authority.26

      Margaret H. McFarland,

      Deputy Secretary.

      [FR Doc. 99-26793 Filed 10-13-99; 8:45 am]

      BILLING CODE 8010-01-M

      25 15 U.S.C. 78s(b)(2).

      26 17 CFR 200.30-3(a)(12).

      SMALL BUSINESS ADMINISTRATION

      [Declaration of Disaster #3220]

      State of Florida; Amendment #1

      The above-numbered declaration is hereby amended to include Marion County, Florida as a contiguous county as a result of damages caused by Hurricane Floyd that occurred September 13-15, 1999.

      All other information remains the same, i.e., the deadline for filing applications for physical damage is November 26, 1999 and for economic injury the deadline is June 27, 2000.

      (Catalog of Federal Domestic Assistance Program Nos. 59002 and 59008)

    • 99-99 NASD Reiterates Obligations To Display Customer Limit Orders Pursuant To SEC Rule 11Ac1-4

      View PDF File

      INFORMATIONAL

      Displaying Customer Limit Orders

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Systems
      Trading & Market Making
      Limit Orders
      Order Handling Rules
      SEC Rule 11Ac1-4 (Display Rule)

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®), after consultation with the staff of the Securities and Exchange Commission (SEC or Commission), 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.

      Questions/Further Information

      Questions concerning this Notice may be directed to Bob Aber, Senior Vice President and General Counsel, The Nasdaq Stock Market, Inc., at (202) 728-8290; or the Market Regulation Department Legal Section, NASD Regulation, Inc. (NASD RegulationSM), at (301) 590-6410.

      Discussion

      In August 1996, the SEC adopted its Order Handling Rules, which included the Display Rule governing the display of customer limit orders. The Display Rule requires Market Makers to display the full price and size of qualifying limit orders in their quotes, subject to certain enumerated exceptions. Once a customer limit order is obligated to be publicly displayed in accordance with the Display Rule, the Display Rule requires that such a customer limit order be displayed "immediately," unless a specific exception to the rule applies. The SEC has indicated that a Market Maker "must display the order as soon as is practicable after receipt which, under normal market conditions, would require display no later than 30 seconds after receipt".1

      Firms are afforded a brief opportunity, pursuant to the exceptions contained in the Display Rule2, to determine whether to display, execute, or route a customer limit order, but under no circumstances can a firm intentionally delay—or rely on an automated system that is programmed to delay—the display of limit orders as a matter of course. As to the specific time parameter in which a Market Maker must act to display, execute, or route a customer limit order, firms should take such action as soon as possible, but no later than 30 seconds after receipt. The 30-second period is an outer limit and under normal market conditions, Market Makers should take such action well before the termination of the 30-second period for most of their customer limit orders.

      In determining under what circumstances Market Makers have violated the Display Rule, notwithstanding the fact that a Market Maker has displayed the customer limit orders within 30 seconds after receipt, a number of factors will be evaluated. The following factors should be taken into consideration when evaluating the immediacy with which a customer limit order was displayed:

      • the volume of customer limit orders in a particular issue;


      • the amount of contemporaneous transactions in the issue by the Market Maker; and


      • the volatility of the issue.

      To the extent that a firm has determined as a matter of business practice always to display customer limit orders (or otherwise automated the handling of its limit orders such that no human action is required or involved in the handling of the order), the firm should take action immediately without delay (i.e., within a matter of seconds depending upon the capacity of the firm's system or limit order queues) and any systematic delay in the handling of the orders, regardless of how long, would constitute a violation of the Display Rule. Given the operational differences among firms and the different market attributes of particular securities, however, there is no "bright line, absolute" standard governing the number of seconds a Market Maker has to complete its choice of displaying, executing, or routing a customer limit order. Accordingly, a firm may operate an automated system that defaults to display customer limit orders within 30 seconds of receipt, so long as the firm makes every effort to display the limit orders as soon as possible manually or otherwise.


      Endnotes

      1 Order Execution Obligations, 61 Fed. Reg. 48290 (1996) at 48304.

      2 The requirements of the Display Rule do not apply to any customer limit order that:

      • is executed upon receipt of the order;


      • a customer expressly requests not be displayed;


      • is an odd-lot order;


      • is a block size order, unless the customer requests that the order be displayed;


      • is delivered immediately upon receipt to a qualifying system or ECN;


      • is delivered immediately upon receipt to another Market Maker that will display the order or otherwise comply with the rule; or


      • is an 'all or none' order.

    • 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

      View PDF File

      INFORMATIONAL

      Short Sales

      SUGGESTED ROUTING

      KEY TOPICS

      Individual Investor
      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Technology
      Trading & Market Making
      Affirmative Determination
      Internet Trading
      NASD Conduct Rules 3350 and 3370
      Short Sales

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The purpose of this Notice is to reiterate the long-standing position of NASD Regulation, Inc. (NASD Regulation SM) and Nasdaq® that member firms 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.

      Questions/Further Information

      Questions concerning National Association of Securities Dealers, Inc. (NASD®) Rule 3350 (Bid Test Rule) should be directed to the Office of General Counsel, The Nasdaq Stock Market, Inc. (The Nasdaq Stock Market®), at (202) 728-8294; or the Legal Section, Market Regulation, NASD Regulation, at (301) 590-6410. Questions concerning NASD Rule 3370 (Affirmative Determination Rule) should be directed to the Office of General Counsel, NASD Regulation, at (202) 728-8071; or the Legal Section, Market Regulation, NASD Regulation, at (301) 590-6410.

      Discussion

      Many members receive short sale orders electronically through proprietary electronic order routing systems and through the Internet from customers with online accounts. With this Notice, NASD Regulation and Nasdaq reiterate the longstanding position that, absent an exemption, firms must comply with the short sale rules when effecting customer short sale orders, regardless of whether the order is received by telephone or electronically through a proprietary electronic order routing system, the Internet, or otherwise. Failure to do so will result in a violation of the short sale rules and possible disciplinary action.

      As a result of the significant increase in online trading, member firms and customers have sought guidance from the NASD concerning the application of the short sale rules to certain specific situations referred to as "double selling," "over selling," and "mistaken sale not long." (Hereinafter collectively referred to as "inadvertent short sales.") Specifically, these situations include, among others:

      (1) a customer placing an online sell order to sell a long position in his/her account and, when the order is not immediately executed, entering a second sell order for the same shares resulting in the execution of both orders;
      (2) a customer canceling a limit order to sell and replacing it with a market order before confirmation of cancellation of the first order, with both orders eventually being executed because of delays in processing the order cancellation; or
      (3) a customer accidentally entering two sell orders for the same shares or entering a sell order for shares when he/she intendedto enter buy orders.

      All of these scenarios result in the customer causing the member to effect a short sale for the customer even though the customer apparently did not intend to sell short.

      Notwithstanding the fact that the customer may not intend to sell short, a member that offers online trading services to its customers must program such systems to ensure that the member is complying with all trading and market-making rules, including the short sale rules. In other words, when the above referenced situations occur, members' systems should consider the stock positions in customer accounts and the number and status of all orders and cancellation instructions. Member firm automated systems should execute such short sales in compliance with the short sale rules, and NASDRSM and Nasdaq recommend that firms design their systems to provide customers with notice when they may have placed an "inadvertent" short sale. In sum, the means of receipt of a short sale and the "inadvertent" nature of a short sale in no way eliminate or reduce the obligations of member firms to comply with the short sale rules.

      Application Of Short Sale Rules To Orders Placed Over The Internet

      The Bid Test Rule provides that, absent an exemption, no member shall effect a short sale for the account of a customer or for its own account in a Nasdaq National Market ® security at or below the current best (inside) bid when the current best (inside) bid as displayed by The Nasdaq Stock Market is below the preceding best (inside) bid in the security. When a customer short sale order is received electronically or through the Internet, the member must effect such orders in compliance with the Bid Test Rule. Moreover, firms must effect short sales in compliance with the Bid Test Rule regardless of whether the short sale is an "inadvertent" short sale from the customer's perspective.1

      Similarly, pursuant to NASD Rule 6130(d)(6), a transaction report entered into ACT that reports the execution of such an order must include a symbol that identifies the transaction as a short sale. As stated above, firms must comply with this rule regardless of the manner in which customer short sales are received and whether the short sales are inadvertent from the customer's perspective.

      NASD Conduct Rule 3370 regulates both customer and proprietary short sales. As to customer short sales, NASD Conduct Rule 3370(b)(2)(A) states, in relevant part, that "[n]o member or person associated with a member shall accept a 'short' sale order for any customer in any security unless the member or person associated with a member makes an affirmative determination that the member will receive delivery of the security from the customer or that the member can borrow the security on behalf of the customer for delivery by settlement date." Under this provision, the affirmative determination is a prerequisite for accepting a customer's short sale order. Thus, firms must make the required affirmative determination before the customer's short sale order can be accepted and executed. A member firm must conduct the requisite affirmative determination regardless of whether the order is received electronically or through the Internet or whether the order was placed "inadvertently" by the customer.2

      NASDR also notes that the obligation for making an affirmative determination and complying with the Bid Test Rule rests with member firms and may not be shifted to customers. For instance, members may not satisfy the Affirmative Determination Rule for short sales by merely giving warnings to customers that they are required to make good delivery of the securities or that they will be financially responsible for any losses incurred from covering short sales.

      NASD Regulation Reiterates Operation Of The Affirmative Determination Rule

      NASD Regulation also reiterates that, absent an exemption, an affirmative determination must be made before executing a proprietary short sale for each and every short sale. A member can not implement procedures whereby it only conducts an affirmative determination for proprietary short sales if the firm maintains a short position overnight (that is, if the firm is flat in a certain security by the end of the trading day it will not conduct an affirmative determination). Such a procedure conflicts with the Rule's requirement that a firm make an affirmative determination before executing a proprietary short sale and would circumvent the objectives of the Affirmative Determination Rule that are designed to help prevent situations where there is a shortage of deliverable stock or a failure to deliver. Accordingly, firms are required to ensure that securities are available to cover a proprietary short position before executing the short sale. To make an affirmative determination only if a short position will be maintained overnight would be a direct violation of the Affirmative Determination Rule.3


      Endnotes

      1 NASDR and Nasdaq also reiterate that firms must effect short rules in exchange-listed securities received electronically, via the Internet, or otherwise in compliance with the Securities Exchange Act Rule 10a-1.

      2 NASD Rule 3370(b)(4) provides that there is no mandated method by which firms must comply with the affirmative determination rule. Accordingly, members may design automated systems that obtain and record the information required by Rule 3370 for short sales. Alternatively, members may direct customers who attempt to place short sale orders electronically or through the Internet to speak with a registered representative by telephone in order to make the affirmative determination.

      3 Likewise, firms may not wait until the end of the day to determine whether an affirmative determination is required for customer short sales. Firms are required to receive assurances that securities are available to cover a customer's potential short position before effecting the customer's short sale order.

    • 99-97 NASD Office Of The Ombudsman Clarifies Its Role

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      INFORMATIONAL

      Ombudsman

      SUGGESTED ROUTING

      KEY TOPICS

      Advertising/Investment Companies
      Corporate Finance
      Legal & Compliance
      Registration
      Senior Management
      Trading & Market Making
      Ombudsman

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) Office of the Ombudsman staff has helped resolve many issues and concerns raised by members and their associated persons, issuers and their associated persons, and investors. With a staff of four full-time Ombudspersons, the Office has been able to better serve the steady growth in the number of concerns that are brought to its attention.

      The NASD would like to remind members that the Ombudsman's role does not displace the NASD's existing procedures for handling customer complaints, members disciplinary grievances, arbitration matters, or issuer concerns. The Ombudsman staff reviews concerns in an objective and confidential manner to resolve matters that fall outside established forums and to ensure that existing structural operations are functioning equitably.

      Questions/Further Information

      Questions regarding this Notice should be directed to the Office of the Ombudsman, at (301) 212- 2515, or toll free at (888) 700-0028.

      Background

      In mid-1996, the NASD created the Office of the Ombudsman (the Office) for the NASD and its subsidiaries, NASD Regulation, Inc. (NASD RegulationSM) and The Nasdaq Stock Market, Inc. (Nasdaq®).

      The NASD created the Office in response to recommendations made by the NASD Select Committee on Structure and Governance (see Notices to Members 95-84, 95-101, 95-102, and 96-35) that an independent office be established to receive and address "concerns and complaints, whether anonymous or not, from any source (within or outside of the NASD) concerning the operations, enforcement, or other activities of the NASD, NASD Regulation, or Nasdaq, or any staff members."

      The Office's purview was expanded to include the American Stock Exchange® (Amex®), including member firms and their employees, upon completion of the NASD/Amex merger.

      Description

      When an established complaint or appellate process does not exist, Ombudsman staff can serve a dispute resolution function by suggesting actions or policies that are intended to be equitable to all parties. One of the major functions of the Office is to provide confidential assistance to parties inside and outside the NASD regarding a complaint or a concern. The Ombudsman staff will help all parties identify and evaluate options for appropriate actions and remainneutral in doing so. Where an established complaint or appellate process exists, the Ombudsman staff will identify the process, explain it in general terms, anddirect the caller to the appropriate office.

      In all situations, the Ombudsman's role is to remain neutral. It represents neither the party expressing a concern nor the part of the organization responsible for the process or procedure that causes concern.

      Matters That May Be Reviewed

      Inconsistent Decisions By NASD Staff

      Complaints regarding decisions made or actions taken by NASD staff that may be inconsistent, biased, or result in disparate treatment may be directed to the Office. These complaints may be based on discretionary acts by NASD staff for which an established appellate channel does not exist. The Ombudsman staff will process each complaint received, review or conduct an informal investigation of the allegations, and recommend appropriate action, if warranted.

      For issues in which an established complaint or appellate process exists, at its conclusion, concerns about the process may be reviewed and, when necessary, informally investigated.

      Weak Procedures

      The Office will review complaints of weaknesses in NASD controls, practices, or procedures submitted by persons who, for whatever reason, do not want to, or believe they cannot, report such weaknesses to NASD management or who wish to remain anonymous. This could include, for example, continued failure of an NASD manager to respond to public customers, member firms, or issuers' needs; or the failure of an NASD department to address matters for which it is responsible, or has not carried out a procedure, rule, or regulation correctly.

      Matters That Will Not Be Reviewed

      Complaints will be directed to the appropriate office in those cases where established procedures currently exist regarding application of rules, policies, procedures, or interpretations. These complaints may deal with various topics and allegations, e.g., Committee or Hearing Panel action, applicability of a rule or a procedure, how an interpretation is applied, etc.

      Complaints from member firms and/or their associated persons regarding disciplinary rulings, from issuers regarding listing proceedings, and from member firms regarding application of existing rules by market operations staff, prosecutorial bias, bias by a Hearing Panel, or a conflict of interest by a Hearing Panel member are subject to review by the existing NASD appellate procedures and processes. However, after the appellate process has been exhausted, the Ombudsman will review any systemic issue brought to its attention.

      Where a structured dispute resolution and/or appellate process currently exists, that process should continue to be used by parties seeking a redress. Accordingly, in such cases the Ombudsman's role will be limited to informing persons of the existence of the appropriate process for resolution and monitoring the outcome. However, in such cases, Ombudsman staff is authorized to conduct independent reviews of complaints involving particular NASD staff, departments, processes, or procedures.

      Arbitration And Mediation

      Complaints from parties in arbitration or mediation dealing with arbitrators' rulings, conduct, or awards will not be the focus of the Office. The arbitration staff currently investigates and responds to complaints regarding the arbitration and mediation processes. The Ombudsman staff will only be available for reviewing complaints regarding allegations of NASD staff misconduct, separate from the merits of the arbitration claim. The Ombudsman staff does not have the authority to change an arbitration ruling.

      Complaints Regarding Conduct Of Members Or Their Associated Persons

      The Office will advise persons who claim to have suffered monetary injury as a result of the conduct of member firms or their associated persons to pursue the matter through arbitration. When a complaint alleges possible violations of rules that the NASD is responsible for enforcing, the Office will also recommend that the complaining party report the matter to the appropriate NASD Regulation District Office for investigation and possible disciplinary action.

      Complaints that are within the jurisdiction of another department or organization will be referred by the Office to those areas that have the jurisdiction and expertise to handle them. If the complainant is referred internally to another NASD department, Ombudsman staff will follow up to ensure the appropriate department responds in a timely manner.

      Board Rulemaking And Policy Decisions

      Because avenues exist for interested persons to express their views on proposed rules under consideration by the NASD Board of Governors or the Directors of NASD Regulation or Nasdaq, the Office does not handle concerns or complaints relating to this area. Persons who wish to participate in the policy formulation process are strongly encouraged to submit comments when proposed rules are published for comment by the NASD and/or the Securities and Exchange Commission.

      How To Contact The Office

      If members, associated persons, investors, issuers, or others have a complaint or comment regarding an action by the NASD as described in this Notice, they can contact the Office of the Ombudsman, at (301) 212-2515, or (888) 700-0028;

      e-mail: ombuds@nasd.com;
      or write to:

      NASD
      Office of the Ombudsman
      P.O. Box 9492
      Gaithersburg, MD 20898-9492

      The inquiries may be anonymous and will be treated confidentially.

    • 99-96 SEC Approves New Arbitration Disclosure Rule And Procedures For Employment Arbitration

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      INFORMATIONAL

      Employment Arbitration Rules

      Effective Date: January 18, 2000

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Arbitration
      Discrimination
      Employment

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      On October 27, 1999, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD®) rules that create a new Rule 10210 Series, containing special rules applicable to the arbitration of employment discrimination claims; add a new Rule 3080, which contains a model disclosure statement to be given to persons who are signing the Form U-4 to apply for registration; and make conforming changes to Rules 10201 and 10202.1 These rule changes, which will become effective on January 18, 2000, will enhance the dispute resolution process for the handling of employment discrimination claims and expand disclosure to employees concerning the arbitration of disputes.

      Included with this Notice is Attachment A, the text of the amendments that will become effective on January 18, 2000.

      Questions/Further Information

      Questions regarding this Notice may be directed to Linda D. Fienberg, Executive Vice President, Office of Dispute Resolution, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-8407; George H. Friedman, Senior Vice President and Director, Office of Dispute Resolution, NASD Regulation, at (212) 858-4488; or Jean I. Feeney, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6959.

      Background

      Effective on January 1, 1999, the NASD removed from the Code of Arbitration Procedure (Code) the requirement for registered persons to arbitrate claims of statutory employment discrimination.2 In approving that change to Rule 10201, the NASD Board of Governors and the NASD Regulation Board of Directors (the Boards) recommended certain enhancements to the arbitration process for discrimination claims. With the assistance of a working group that included attorneys representing employees, member firm general counsels, and arbitrators with expertise in employment matters to advise on issues relating to the arbitration of employment discrimination claims, NASD Regulation developed a series of rules applicable to the arbitration of statutory employment discrimination claims, and related changes to other NASD rules. These rules, as adopted by the Boards and approved by the SEC, deal with the qualifications of arbitrators hearing claims of employment discrimination; the number of arbitrators to hear such claims; special rules for discovery, awards, and attorneys' fees; coordination of claims filed in court and arbitration; and disclosure to associated persons of the effects of the arbitration clause found in the Form U-4. The new rules are described in detail below.

      Description Of Amendments

      Disclosure Statement

      NASD Regulation has adopted a model disclosure statement to be given to persons who are signing the Form U-4 to apply for registration. This disclosure statement explains the nature and effect of the arbitration clause contained in the Form U-4. It does not address any private arbitration agreement that the applicant might enter into with the member firm. Rather, the member is responsible for either making proper disclosure to its employees about its private arbitration agreement, or risking an adverse decision in later litigation concerning any inadequacy in the disclosure. New Rule 3080, entitled "Disclosure to Associated Persons When Signing a Form U-4," is modeled on the disclosure given to customers when signing predispute arbitration agreements with member firms, as contained in current Rule 3110(f) and proposed amendments thereto that are awaiting SEC approval.3 Because the rule relates to associated persons, it has been located with other conduct rules that deal with the responsibilities of members relating to associated persons, employees, and other employees. The introductory language of the rule requires members to provide each associated person, whenever the associated person is asked to sign a new or amended Form U-4, with certain specified disclosure language. This means that the disclosure may be given by the same member to the same associated person on more than one occasion during that person's employment, if the associated person has reason to re-sign the Form U-4. The specified disclosure language explains that the Form U-4 contains a predispute arbitration clause, and indicates in which item of the Form U-4 the clause is located.4 The disclosure language then advises the associated person to read the predispute arbitration clause.

      Subparagraph (1) of new Rule 3080 paraphrases the arbitration clause in the Form U-4 and then provides disclosure that the associated person is giving up the right to sue in court except as provided by the rules of the arbitration forum in which a claim may be filed. Subparagraph (2) incorporates the language of Rule 10201 regarding an exception to the arbitration requirement for claims of statutory employment discrimination. Subparagraph (2) also indicates that the rules of other arbitration forums may be different. Subparagraphs (3) through (7) track the language of proposed amendments to Rule 3110(f)(1), which sets forth similar disclosures to customers. Those subparagraphs inform the associated person that arbitration awards are generally final and binding, that discovery is generally more limited in arbitration than in court, that arbitrators do not have to explain the reasons for their awards, that the panel of arbitrators may include either public or industry (non-public) arbitrators, and that the rules of some arbitration forums may impose time limits for bringing a claim in arbitration.

      New Rule 10210 Series

      The new Rule 10210 Series contains special rules applicable to statutory employment discrimination claims. These rules supplement and, in some instances, supersede the provisions of the Code that currently apply to the arbitration of employment disputes. The special rules do not attempt to set forth all procedures applicable to the arbitration of statutory employment discrimination claims, but only those procedures that relate specifically to such claims and may be different from procedures that apply to other intraindustry claims.

      Qualifications For Neutrals Who Hear Employment Discrimination Cases

      NASD Regulation has on its arbitration roster many arbitrators who have indicated that they have experience or training in employment law, and NASD Regulation currently offers arbitrators training in employment law that is conducted by attorneys experienced in the field of employment law. In addition, NASD Regulation has been preparing a more specialized roster of available arbitrators for intra-industry cases in which statutory discrimination is alleged. As of November 1999, over 200 arbitrators have been placed on this specialized roster.

      New Rule 10211(a) provides that only arbitrators classified as public (non-industry) arbitrators will be selected to consider disputes involving a claim of employment discrimination, including a sexual harassment claim, in violation of a statute. New Rule 10211(a) incorporates by reference the definition of "public arbitrator" in the list selection rule, Rule 10308, which applies both to customer disputes and to intra-industry disputes except where superseded by more specific industry arbitration rules. The definition of "public arbitrator" in Rule 10308 excludes not only securities industry employees and their immediate family members, but also attorneys, accountants, and other professionals who have devoted 20 percent or more of their professional work in the last two years to clients who are engaged in the securities business (as described in Rule 10308). Use of the same definition of public arbitrators throughout the Code provides for more efficient administration of the list selection system.

      For chairpersons and single arbitrators, there are additional qualifications in new Rule 10211(b). These qualifications include:

      • a law degree;


      • membership in the Bar of any jurisdiction;


      • substantial familiarity with employment law; and


      • ten or more years of legal experience that include at least five years of one of the following:


        • law practice;


        • law school teaching;


        • government enforcement of equal employment opportunity (EEO) statutes;


        • experience as a judge, arbitrator, or mediator; or


        • experience as an EEO officer or in-house counsel of a corporation.

      In addition, the chair or single arbitrator may not have represented primarily the views of employees or employers within the past five years. For this purpose, "primarily" is defined to mean 50 percent or more of the arbitrator's business or professional activities within the last five years.

      Rule 10211(c) provides that parties may agree, after a dispute arises, to waive any of the special qualifications contained in either paragraph (a) or paragraph (b). Such a waiver is not valid if it is contained in a predispute arbitration agreement.

      Composition Of Panels

      Until the present rule change, the current arbitration panel composition for statutory discrimination claims and certain other employment claims has been identical to the panel used for customer disputes and consists of either one public (non-industry) arbitrator for single arbitrator cases, or two public arbitrators and one non-public (industry) arbitrator for three arbitrator cases. An all-industry panel is used solely for employment disputes that relate exclusively to claims involving employment contracts, promissory notes, or receipt of commissions.

      Under new Rule 10212(a), for cases involving claims of employment discrimination (whether or not other issues are also involved), all arbitrators must be classified as public. Rule 10212 provides, however, that parties may agree to a different panel composition in a particular case.

      New Rule 10212(b) provides a higher maximum dollar limit for single arbitrator cases than is found elsewhere in the Code: a single arbitrator will hear claims of $100,000 or less. This higher amount reduces the hearing costs for the parties and results in more efficient allocation of qualified employment arbitrators. New Rule 10212(c) provides that claims for more than $100,000 will be assigned to a three-person panel unless the parties agree to have their case determined by a single arbitrator. A conforming amendment is being made to Rule 10202, the general intra-industry panel composition rule, to include a reference to the above special panel composition rule.

      Discovery

      New Rule 10213 provides that, in considering the need for depositions, arbitrators should consider the relevancy of the information sought from the persons to be deposed and the issues of time and expense. Existing Rule 10321, which deals with pre-hearing proceedings, is cross-referenced in new Rule 10213(b) to make clear that its provisions also apply to employment discrimination disputes. Paragraphs (d) and (e) of Rule 10321 set forth procedures for deciding unresolved issues either at the pre-hearing conference or by appointment of a selected arbitrator.

      Attorneys' Fees

      Although the Code is silent with respect to attorneys' fees, such fees may be awarded under current practice.5 Normally, parties will brief the arbitrators on applicable law providing for the award of attorneys' fees in their cases. In view of provisions in the federal civil rights laws that specifically provide for the award of attorneys' fees, NASD Regulation has adopted Rule 10215, which provides that the arbitrator has authority to provide for reasonable attorneys' fee reimbursement, in whole or in part, as part of the remedy in accordance with applicable law. This accords with Title VII of the Civil Rights Act of 1964, which authorizes a court, in its discretion, to allow the prevailing party "a reasonable attorney's fee" as part of the costs.6 The intent of new Rule 10215 is to allow the award of attorneys' fees if applicable law permits such an award.

      Awards

      Rule 10330(e) presently requires certain information to be contained in an award. Under current NASD Regulation practice, parties also may request the arbitrators to provide reasons for their decision, and the arbitrators have discretion to grant or deny the request.7 New Rule 10214 has been added to supplement Rule 10330(e) for claims of employment discrimination. Rule 10214 provides that arbitrators will be empowered to award any relief that would be available in court under the law, and sets forth the information that must be contained in the arbitrator's award. Such information includes a summary of the issues, including the types of disputes, the damages or other relief requested and awarded, a statement of any other issues resolved, and a statement regarding the disposition of any statutory claims.

      Bifurcation

      NASD Regulation has added Rule 10216 to address concerns over the possible splitting or "bifurcation" of employment cases, in which the discrimination claims would proceed in court, while other employment claims that are subject to mandatory arbitration would proceed in arbitration. Such bifurcation of statutory and common law claims could result in the separation of claims that are often joined together and based on the same alleged facts, which would create a financial burden on employees and members, delay the resolution of claims, and cause scheduling and discovery disputes.

      Therefore, NASD Regulation has adopted a new rule on coordination of claims that may be filed in court and those that are normally required to be arbitrated under NASD rules. Currently, if the parties agree to resolve all related claims in court, then the matter need not be submitted to arbitration. New Rule 10216 includes a pre-filing procedure in which the claimant may certify to the Director of Arbitration that he or she communicated with the potential respondent about the possibility of filing all claims in court initially, in order to save the expense of arbitration fees and attorney fees to draft arbitration claim papers. If the potential respondent does not agree to consolidate all claims in court, and an arbitration claim is then filed, Rule 10216 provides several methods for coordinating claims filed in court and in arbitration. Similarly, if a discrimination claim is filed in court and related claims subject to mandatory arbitration are filed in arbitration, a respondent in the arbitration proceeding has the option to move to combine all claims in court. The rule provides several other opportunities for a party to move to compel that a claim be consolidated with other claims in court. Any claims not accepted by the court under any of these methods, however, would continue to be arbitrable.

      In conjunction with the new bifurcation rule, a change has been made to Rule 10201 to add a reference to Rule 10216. This exception is necessary because, under Rule 10216, some claims that might otherwise be required to be arbitrated may be brought in court, at the respondent's option.

      Endnotes

      1 Exchange Act Rel. No. 42061 (Oct. 27, 1999) (File No. SR-NASD-99-08), 64 Fed. Reg. 59815 (Nov. 3, 1999).

      2 That rule change did not affect private arbitration agreements that might exist between employees and member firms.

      3 File No. SR-NASD-98-74.

      4 The member will be responsible for updating this item number on new disclosure statements if it changes in later versions of the Form U-4.

      5 A guide for arbitrators drafted by the Securities Industry Conference on Arbitration (SICA) provides as follows: "Generally, parties to an arbitration are responsible for their personal costs associated with bringing or defending an arbitration action. Exceptions to the rule do exist. Parties should be prepared to argue the statutory or contractual basis that permits an award of attorneys' fees. The arbitrators should consider referring to the authority relied upon if attorneys' fees are awarded." The Arbitrator's Manual (October 1996). SICA is a group composed of representatives of the self-regulatory organizations (SROs) that provide arbitration forums; public investors; and the securities industry.

      6 42 U.S.C. Section 2000e-5(k) (1998).

      7 A booklet prepared by SICA and provided to all claimants explains this industry-wide practice as follows: "Arbitrators are not required to write opinions or provide reasons for the award. A party, however, may request an opinion. This request should be made no later than the hearing date." Arbitration Procedures (October 1996) (also available via the Internet under the title, Arbitration Procedures for Investors, on the NASD Regulation Arbitration/Mediation page at www.nasdr.com). In a 1989 Order approving arbitration rule changes by several SROs, the SEC decided not to require written opinions in awards but expressed the view that arbitrators could voluntarily prepare written opinions. Exchange Act Rel. No. 26805, Part III. H. (May 10, 1989) (File Nos. SR-NYSE-88-29, SR-NYSE-88-8, SRNASD- 88-29, SR-NASD-88-51, SR-NASD- 89-19; and SR-AMEX-88-29), 54 Fed. Reg. 21144, 21151-52 (May 16, 1989).


      ATTACHMENT A

      Text Of Amendments

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

      3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS, EMPLOYEES, AND OTHERS' EMPLOYEES

      3080. Disclosure to Associated Persons When Signing Form U-4

      A member shall provide an associated person with the following written statement whenever the associated person is asked to sign a new or amended Form U-4.

      The Form U-4 contains a predispute arbitration clause. It is in item 5 on page 4 of the Form U-4. You should read that clause now. Before signing the Form U-4, you should understand the following:

      (1) You are agreeing to arbitrate any dispute, claim or controversy that may arise between you and your firm, or a customer, or any other person, that is required to be arbitrated under the rules of the self-regulatory organizations with which you are registering. This means you are giving up the right to sue a member, customer, or another associated person in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
      (2) A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated under NASD rules. Such a claim may be arbitrated at the NASD only if the parties have agreed to arbitrate it, either before or after the dispute arose. The rules of other arbitration forums may be different.
      (3) Arbitration awards are generally final and binding; a party's ability to have a court reverse or modify an arbitration award is very limited.
      (4) The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
      (5) The arbitrators do not have to explain the reason(s) for their award.
      (6) The panel of arbitrators may include arbitrators who were or are affiliated with the securities industry, or public arbitrators, as provided by the rules of the arbitration forum in which a claim is filed.
      (7) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.

      10000. CODE OF ARBITRATION PROCEDURE

      10200. INDUSTRY AND CLEARING CONTROVERSIES

      10201. Required Submission

      (a) Except as provided in paragraph
      (b) or Rule 10216, a dispute, claim, or controversy eligible for submission under the Rule 10100 Series between or among members and/or associated persons, and/or certain others, arising in connection with the business of such member(s) or in connection with the activities of such associated person(s), or arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of:
      (1) a member against another member;
      (2) a member against a person associated with a member or a person associated with a member against a member; and
      (3) a person associated with a member against a person associated with a member.

      10202. Composition of Panels

      (a) In disputes subject to arbitration that arise out of the employment or termination of employment of an associated person, and that relate exclusively to disputes involving employment contracts, promissory notes or receipt of commissions, the panel of arbitrators shall be appointed as provided by paragraph (b)(1) or (2) or Rule 10203, whichever is applicable. In all other disputes arising out of the employment or termination of employment of an associated person, the panel of arbitrators shall be appointed as provided by Rule 10212, 10302 or [Rule] 10308, whichever is applicable.

      10210. Statutory Employment Discrimination Claims

      The Rule 10210 Series shall apply only to disputes that include a claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute. The Rule 10210 Series shall supersede any inconsistent Rules contained in this Code.

      10211. Special Arbitrator Qualifi- cations for Employment Discrimination Disputes

      (a) Minimum Qualifications for All Arbitrators

      Only arbitrators classified as public arbitrators as provided in Rule 10308 shall be selected to consider disputes involving a claim of employment discrimination, including a sexual harassment claim, in violation of a statute.
      (b) Single Arbitrators or Chairs of Three-Person Panels
      (1) Arbitrators who are selected to serve as single arbitrators or as chairs of three-person panels should have the following additional qualifications:
      (A) law degree (Juris Doctor or equivalent);
      (B) membership in the Bar of any jurisdiction;
      (C) substantial familiarity with employment law; and
      (D) ten or more years of legal experience, of which at least five years must be in either:
      (i) law practice;
      (ii) law school teaching;
      (iii) government enforcement of equal employment opportunity statutes;
      (iv) experience as a judge, arbitrator, or mediator; or
      (v) experience as an equal employment opportunity offi- cer or in-house counsel of a corporation.
      (2) In addition, a chair or single arbitrator with the above experience may not have represented primarily the views of employers or of employees within the last five years. For purposes of this Rule, the term "primarily" shall be interpreted to mean 50% or more of the arbitrator's business or professional activities within the last five years.
      (c) Waiver of Special Qualifications

      If all parties agree, after a dispute arises, they may waive any of the qualifications set forth in paragraph (a) or (b) above.

      10212. Composition of Panels

      For disputes involving a claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute:

      (a) Each panel shall consist of either a single public arbitrator or three public arbitrators qualified under Rule 10211, unless the parties agree to a different panel composition.
      (b) A single arbitrator shall be appointed to hear claims for $100,000 or less.
      (c) A panel of three arbitrators shall be appointed to hear claims for more than $100,000, unless the parties agree to have their case determined by a single arbitrator.

      10213. Discovery

      (a) Necessary pre-hearing depositions consistent with the expedited nature of arbitration shall be available.
      (b) The provisions of Rule 10321 shall apply to proceedings under this Rule 10210 Series.

      10214. Awards

      The arbitrator(s) shall be empowered to award any relief that would be available in court under the law. The arbitrator(s) shall issue an award setting forth a summary of the issues, including the type(s) of dispute(s), the damages or other relief requested and awarded, a statement of any other issues resolved, and a statement regarding the disposition of any statutory claim(s).

      10215. Attorneys' Fees

      The arbitrator(s) shall have the authority to provide for reasonable attorneys' fee reimbursement, in whole or in part, as part of the remedy in accordance with applicable law.

      10216. Coordination of Claims Filed in Court and in Arbitration

      (a) Option to Combine Related Claims in Court
      (1)
      (A) If a current or former associated person of a member files a statutory discrimination claim in court against a member or its associated persons, and asserts related claims in arbitration at the Association against some or all of the same parties, a respondent who is named in both proceedings shall have the option to move to compel the claimant to bring the related arbitration claims in the same court proceeding in which the statutory discrimination claim is pending, to the full extent to which the court will accept jurisdiction over the related claims.
      (B) The respondent shall notify the claimant in writing, before the time to answer under Rule 10314 has expired, that it is exercising this option and shall file a copy of such notification with the Director. If the respondent files an answer without having exercised this option, it shall have waived its right to move to compel the claimant to assert related claims in court, except as provided in paragraph (b).
      (2)
      (A) If a member or current or former associated person of a member ("party") has a pending claim in arbitration against a current or former associated person of a member and the current or former associated person thereafter asserts a related statutory employment discrimination claim in court against the party, the party shall have the option to assert its pending arbitration claims and any counterclaims in court.
      (B) The party shall notify the current or former associated person in writing, before filing an answer to the complaint in court, that it is exercising this option and shall file a copy of such notification with the Director. If the party files an answer in court without having exercised this option, it shall have waived its right to assert the pending arbitration claim in court.
      (C) The party may not exercise this option after the first hearing has begun on the arbitration claim.
      (b) Option Extended When Claim is Amended
      (1) If the claimant files an amended Statement of Claim adding new claims not asserted in the original Statement of Claim, a respondent named in the amended Statement of Claim shall have the right to move to compel the claimant to assert all related claims in the same court proceeding in which the statutory discrimination claim is pending, to the full extent that the court will accept jurisdiction over the related claims, even if those related claims were asserted in the original Statement of Claim.
      (2) The respondent shall notify the claimant in writing, before the time to answer the amended Statement of Claim under Rule 10314 has expired, that it is exercising this option and shall file a copy of such notification with the Director. If the respondent files an answer to the amended Statement of Claim without having exercised this option, it shall have waived its right to move to compel the claimant to assert related claims in court.
      (c) Requirement to Combine All Related Claims

      If a party elects to require a current or former associated person to assert all related claims in court, the party shall assert in the same court proceeding all related claims that it has against the associated person to the full extent to which the court will accept jurisdiction over the related claims.
      (d) Right of Respondent to Remain in Arbitration
      (1) If there are multiple respondents and a respondent has exercised an option under paragraph (a) or (b), but another respondent wishes to have the claims against it remain in arbitration, then any remaining party may apply for a stay of the arbitration proceeding.
      (2) The arbitration shall be stayed unless the arbitration panel determines that the stay will result in substantial prejudice to one or more of the parties. If a panel has not been appointed, the Director shall appoint a single arbitrator to consider the application for a stay. Such single arbitrator shall be selected using the Neutral List Selection System (as defined in Rule 10308) and is not required to have the special employment arbitrator qualifications described in Rule 10211.
      (e) Pre-Filing Certification
      (1) Prior to or concurrently with filing a Statement of Claim, a claimant may file with the Director a certification that it had communicated unsuccessfully with the respondent concerning the consolidation of all claims in court prior to filing a Statement of Claim, in an effort to save the expense of arbitration fees. A copy of such certification shall be sent to the respondent at the same time and in the same manner as the filing with the Director.
      (2) If, after a certification has been filed, all the respondents later exercise the option to consolidate all claims in court, the Director will return the claimant's filing fee and any hearing session deposits for hearings that have not been held, but will retain the member surcharge and any accrued member process fees. If there are any remaining respondents, the filing fee and any hearing deposits will be adjusted to correspond to the claims against the remaining respondents.
      (f) Motion to Compel Arbitration

      If a member or a current or former associated person of a member files in court a claim against a member or a current or former associated person of a member that includes matters that are subject to mandatory arbitration, either by the rules of the Association or by private agreement, the defending party may move to compel arbitration of the claims that are subject to mandatory arbitration.
      (g) Definitions

      For purposes of this Rule:
      (1) The term "related claim" shall mean any claim that arises out of the employment or termination of employment of an associated person.
      (2) The term "statutory discrimination claim" means a claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute.

    • For Your Information (December)

      View PDF File

      Electronic Refiling And Payment Reminders

      Form BD Refile- Deadline: Dec. 15, 1999

      The Securities and Exchange Commission (SEC) has required all broker/dealers to electronically file new information elicited by the revised Form BD and any information that NASD Regulation was unable to convert to the new Web CRDSM format. (NASD Regulation was able to convert some, but not all, of the broker/dealer information previously reported to the Legacy CRD system.) All member firms must electronically refile the unconverted information and the new information into Web CRD no later than December 15, 1999. Failure to refile the new Form BD by December 15, 1999, may result in regulatory and/or disciplinary action.

      Please note that there are no fees associated with the Form BD refile.

      Year 2000 License And Registration Renewals Payment - Deadline: Dec. 10, 1999

      The Year 2000 License and Registration Renewal Process for members and their associated persons began November 1, 1999. Unlike previous years, Renewal Statements and Rosters will not be mailed in hard copy to member firms. Instead, the Renewal Process will be conducted electronically with member firms viewing their Renewal Statements and Rosters online through Web CRD. Therefore, member firms need Web CRD entitlement to review and renew their selfregulatory organization and state registrations and those registrations applicable to their associated persons. Similarly, member firms need access to electronically submit termination filings, (i.e., Forms U-5, Forms BDW, or Schedules E, for an associated person, the member firm, or branch office, respectively). The deadline for submitting your year 2000 renewal payment is December 10, 1999.

      Any questions regarding the BD Refile, Renewals, or Web CRD should be directed to the Gateway Call Center at (301) 869-6699.

      Year-End Customer And PAIB Reserve Formula Computation

      National Association of Securities Dealers, Inc. (NASD®) members may elect to compute their reserve formula and proprietary account of an introducing broker/dealer (PAIB) computations as of the close of business on Wednesday, December 29, 1999, rather that at year end, according to an SEC interpretation. If this option is elected, the broker/dealer's reserve deposits, if any, would be made on Friday, December 31, 1999. The SEC has also stated that if this option is chosen, the next reserve formula computations would be required as of the close of business the following Friday (January 7, 2000) for weekly computers and as of month-end January (January 31, 2000) for monthly computers.

      If you choose this option, you may use the total customer debits from the reserve formula computation as of December 29th in your calculation of December 31, 1999, net capital, provided your net capital is computed pursuant to SEC Rule 15c3-1 (a) (1) (ii). Additionally, the filing of the December 31, 1999 FOCUS report would include a balance sheet as of December 31 and a 15c3-3 Reserve Formula Computation as of December 29, 1999. The filing due date will not change from the current 17th business day after the "as of" date.

      If you elect this option, you must contact your local District Office verbally with follow-up written notification. Any questions regarding this announcement should be directed to your local District Office.

    • Year 2000 Update (December)

      December 1999

      SEC—Year 2000 Recordkeeping Rule

      Effective August 31, 1999, the Securities and Exchange Commission (SEC) adopted SEC Rule 17a-9T (the Rule) relative to Year 2000. The Rule, which was originally proposed in March 1999, is intended to assist broker/dealers, the SEC, self-regulatory organizations (SROs), and the Securities Investor Protection Corporation (SIPC) in identifying all securities positions carried by a broker/dealer and the location of the securities in the event that a broker/dealer experiences Year 2000 problems.

      Following are the key components of the Rule:

      • It applies to all registered broker/dealers that carry customer accounts and that have a minimum net capital requirement of $250,000.


      • The Rule requires that before January 1, 2000, all subject broker/dealers must make certain records for the three-day period from Wednesday, December 29, 1999, through Friday, December 31, 1999, as follows:


      • 1) separate blotters as required by SEC Rule 17a-3(a)(1); and
        2) separate copies of the securities record or ledger as required by SEC Rule 17a-3(a)(5).
      • The records generated pursuant to the Rule must be maintained for not less than one year and can be maintained in any medium acceptable under SEC Rule 17a-4(f).

      The importance of these records is paramount in the event of Year 2000 problems. All potentially subject firms should review the Rule immediately and take any internal steps necessary to make sure that the recordkeeping requirements of the Rule can be complied with in the time allotted.

      To The Members: Thank You
      The National Association of Securities Dealers, Inc. (NASD®) Year 2000 Program Office, and the NASD and its subsidiaries, would like to convey to the entire membership our thanks for your efforts and hard work in meeting the requirements administered by the SEC, NASD, and other SROs. In every aspect, you have done an outstanding job. We particularly feel that your work in preparing for the Year 2000 transition has been critical to the industry's readiness efforts. Again thank you for your efforts and participation. We wish you a wonderful holiday season and successful new year.

      NASD Regulation To Require Certain Firms To File FOCUS Reports And Reg T Extension Requests Manually In The Event Of Year 2000 Problems

      NASD RegulationSM and its broker/dealer members have separately developed comprehensive Year 2000 Business Continuity Plans designed to provide, among other things, alternative ways for NASD Regulation and members to perform critical business functions in the event that normal methods have been disabled by Year 2000-induced disruptions or events. As part of this effort, the Member Regulation Department of NASD Regulation has developed plans to accept manually filed December 1999 FOCUS Reports (due to be filed on or before January 26, 2000) from specifically designated firms. The designated firms and the manual process are described below. In addition, all members should be prepared to file Reg T extension requests manually if Year 2000 problems prevent electronic transmission. Details on both of these contingencies follow.

      December FOCUS Reports

      The SEC is requiring that certain broker/dealers submit completed Millennium Transition Questionnaires (MTQ) to their designated examining authority. Approximately 220 NASD member firms will be required to submit MTQs to the NASD during the period of December 29, 1999 through January 7, 2000. The information provided on MTQs will be reported to the SEC and used by NASD Regulation to supplement normal regulatory information for the purpose of identifying and assisting firms that may encounter financial or operational problems resulting from Year 2000-related events and to most effectively protect the investing public.

      The FOCUS report is an essential part of Member Regulation's financial monitoring program. As such, it is important to ensure that Member Regulation receive these reports even in the event that Year 2000 problems prevent electronic transmission. Accordingly, Member Regulation will require all member firms subject to MTQ reporting to manually file the December 1999 FOCUS Report if: a) the firm encounters system or operational problems that prevent it from making a timely electronic filing; or b) the NASD notifies the firm or makes a general announcement (via the NASD or NASD Regulation Web Sites or otherwise) that Year 2000-related problems have impacted the NASD's ability to receive and process this data electronically. The manual filing, if required, will be due under the normal time frames specified in SEC Rule 17a-5. Any required manual FOCUS filing will be submitted to the local District Office and Member Regulation's Systems Support, Attention: Eleanor Sabalbaro, 1399 Piccard Drive, 3rd floor, Rockville, Maryland 20850.

      Reg T Extension Requests

      Regulation T of the Federal Reserve Board allows, with certain limitations, a broker/dealer to request an extension of time for payment to enable a customer to meet his/her obligation in either a cash or margin account.

      Member Regulation will require all member firms that need to file for an extension of time under Regulation T of the Federal Reserve Board to file manually with the local District Office in the event that: a) the firm encounters system or operational problems that prevent it from making a timely electronic filing; or b) the NASD notifies the firm or makes a general announcement (via the NASD or NASD Regulation Web Sites or otherwise) that Year 2000-related problems have impacted the NASD's ability to receive and process these requests electronically.

      If not already included in Year 2000 contingency plans, member firms are encouraged to take steps now to ensure that they are able to comply with any manual filing requirements that may be necessary. Among other precautions, we suggest that members print paper versions of both the FOCUS report and the Regulation T extension request form from the NASD Regulation Web Site.

      Any questions regarding FOCUS or Regulation T filings may be directed to Sam Luque (202-728-8472) or Susan DeMando (202-728-8411) in the Member Regulation Department.

      Testing And Continuing Education

      NASD Regulation has taken exceptional steps to ensure the Year 2000 integrity of its processes, software, and systems. One area that is recognized as critically important is the certification of registered persons. NASD Regulation is confident that all appropriate steps have been taken to ensure, to the greatest extent possible, that the NASD Regulation PROCTOR® System, which is responsible for the administration of testing and continuing education to the securities industry, will not be adversely impacted by Year 2000 disruptions.

      To prepare for unexpected Year 2000-related events, NASD Regulation has developed contingency plans to handle matters outside of its control. It is possible that isolated problems may occur in some delivery locations. We cannot rule out more extensive Year 2000 disruptions to the infrastructure. To prepare for such possibilities, however remote, NASD Regulation has conferredwith Sylvan Prometric, its test delivery contractor, to review alternatives.

      If, as the result of Year 2000-related problems experienced by NASD Regulation or Sylvan, a candidate is not able to schedule or take a qualifications examination or continuing education session, the candidate's expiration date will be automatically extended. The candidate will need to contact Sylvan Prometric to reschedule his/her session after January 15th and complete that session within 60 days of his/her initial expiration date. Paper and pencil versions of a limited subset of certification tests will be pre-staged by NASD Regulation. In the event of a critical need, these will be distributed to selected Sylvan Testing Centers for delivery.

      Please direct any questions concerning qualifications examinations to Lee Hays (301-590-6003) and continuing education inquires to John Linnehan (301-208- 2932) in the Member Regulation Department.

      Advertising Regulation

      Members that are unable to file their advertisements and sale literature with the NASD Advertising Regulation Department or that are unable to perform their compliance activities as a result of Year 2000-related problems, are required to communicate their situation to the Department. The Department staff will work with members in seeking alternative ways to review sales materialinternally and submit required filings.

      If members have any questions they should contact Thomas A. Pappas, Director, Advertising/Investment Companies Regulation Department at (202) 728-8330.

      More Information/Questions

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

      or visit the Year 2000 Web Pages:
      www.nasd.com
      www.nasdr.com

    • 99-95 NASD Announces Changes To The By-Laws Associated Person Definition

      View PDF File

      INFORMATIONAL

      NASD By-Laws Amendments

      Effective Date: December 1, 1999

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Associated Person Definition

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      Effective December 1, 1999, the definition of "person associated with a member" contained in the By-Laws of National Association of Securities Dealers, Inc. (NASD®), NASD Regulation, Inc. (NASD RegulationSM) and The Nasdaq Stock Market, Inc. (collectively, the "By-Laws") will be amended to expand the current definition to encompass those who hold a five percent or greater interest in the member firm and to include explicitly a person who has applied for registration on Form U-4. The amendments are included in Exhibit I.

      Questions/Further Information

      Questions concerning this Notice to Members may be directed to Mary Dunbar, Associate General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8252.

      Description Of Rule Change

      The first amendment expands the definition of "person associated with a member" specifically for the purposes of NASD Rule 8210. This Rule authorizes the NASD to require a member or associated person to provide information or testimony with respect to an investigation, complaint, examination, or proceeding by the NASD. The current definition of "person associated with a member" includes only owners who are natural persons engaged in the member's investment banking or securities business and who have a direct or indirect control relationship with the member. The amendment to the definition gives the staff the authority to require information and testimony under Rule 8210 from any person - including a natural person or corporate or other entity - who holds a five percent or greater interest in a member firm, regardless of whether they "control" the member firm or are actively engaged in its securities or investment banking business.

      The second amendment clarifies that any person who signs and submits a Form U-4 is an associated person. This is consistent with Form U-4, which provides that by signing the Form, a person is subject to the jurisdiction of the NASD.

      Finally, the amendments insert the word "other" into subsection 2 of the definition of "person associated with a member" to clarify that the subsection describes only natural persons.

      Exhibit I

      Text Of Amendments

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

      By-Laws Of The NASD, Article 1

      (a) - (dd) No Change
      (ee) "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; [or] (2) a sole proprietor, partner, officer, director, or branch manager of a member, or [a] 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) - (mm) No Change

      Conforming changes will also be made to Article I(y) of the NASD Regulation By-Laws and Article I(r) of the Nasdaq® By-Laws, respectively.

    • 99-94 Christmas Day: Trade Date—Settlement Date Schedule

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      INFORMATIONAL

      Trade Date—Settlement Date

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making
      Holiday Trade Date— Settlement Date Schedule

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Christmas Day: Trade Date—Settlement Date Schedule

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

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

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

      *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."

    • 99-93 Fixed Income Pricing System Additions, Changes, And Deletions As Of September 22, 1999

      View PDF File

      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      As of September 22, 1999, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      ACF.GC Americredit Corp. 9.875 04/15/06
      AVI.GA Avis Rent A Car Inc. 11.000 05/01/09
      AZR.GA Aztar Corp. 8.875 05/15/07
      BLUI.GB Blount Intl Inc. 13.000 08/01/09
      CDIG.GJ CSC Holdings Inc. Series B 8.125 07/15/09
      CDMS.GA Cadmus Comm Corp. 9.750 06/01/09
      CHCG.GA Charter Communication Hldgs Cap Corp. 8.250 04/01/07
      CHCG.GB Charter Communication Hldgs Cap Corp. 8.625 04/01/09
      CHCG.GC Charter Communication Hldgs Cap Corp. 9.920 04/01/11
      CMS.II CMS Energy Corp. 8.000 07/01/01
      CMS.IJ CMS Energy Corp. 8.375 07/01/03
      CRK.GA Comstock Resources Inc. 11.250 05/01/07
      CTUO.GA Centennial Cellulalr Oper Co. LLC 10.750 12/15/08
      DGX.GB Quest Diagnostics Inc. 9.875 07/01/09
      DUOC.GA Dura Operating Corp. Series B 9.000 05/01/09
      ENQ.GC American Media Operation Inc. 10.250 05/01/09
      EOTT.GA EOTT Energy Partners LP 11.000 10/01/09
      ESRX.GA Express Scripts Inc. 9.625 06/15/09
      FCNP.GA Falcon Products Inc. Series B 11.375 06/15/09
      FEDD.GB Fedders No. America Inc. 9.375 08/15/07
      FMO.GH Federal-Mogul Co. 7.375 01/15/06
      FMO.GI Federal-Mogul Co. 7.500 01/15/09
      GISX.GA Global Imaging System Inc. 10.750 02/15/07
      GNRP.GA Generac Portable Products LLC/GPPW 11.250 07/01/06
      HMRL.GA Host Marriot LP Series E 8.375 02/15/06
      HWCC.GB Hollywood Casino Corp. 11.250 05/01/07
      KOGC.GD Kelly Oil & Gas Corp. 14.000 04/15/03
      LYO.GC Lyondell Chemical Co. 9.875 05/01/07
      MCUM.GA Michael Petroleum Corp. 11.500 04/01/05
      MNP.GB Mariner Post-Acute Network Inc. 9.500 11/01/07
      MNRH.GA Mariner Post-Acute Network Inc. 9.500 04/01/06
      MTLM.GB Metal Management Inc. 12.750 06/15/04
      MVL.GB Marvel Enterprises Inc. 12.000 06/15/09
      NWPS.GA New World Pasta Co. 9.250 02/15/09
      NXPS.GA Nextel Partners Inc. 14.000 02/01/09
      OCMC.GA Onepoint Comm Corp. Series B 14.500 06/01/08
      OMPT.GC Omnipoint Corp. 11.500 09/15/09
      PBCU.GA Pebo Capital Trust I Series B 8.620 05/01/09
      PCSA.GA Airgate PCS Inc. 13.500 10/01/09
      PKCA.GA Packaging Corp. Amer 9.625 04/01/09
      PKOH.GB Park-Ohio Industries Inc. 9.250 12/01/07
      PWCM.GA Pac-West Telecomm Inc. 13.500 02/01/09
      RUST.GA Russell-Stanley Holding Inc. 10.875 02/15/09
      SIMC.GA Simmons Co. Series B 10.250 03/15/09
      SITE.GA Spectrasite Holdings Inc. 12.000 07/15/08
      SITE.GB Spectrasite Holdings Inc. 11.250 04/15/09
      SK.GA Safety-Kleen Corp. 9.250 05/15/09
      SNT.GA Sonat Inc. 6.875 06/01/05
      VYTL.GC Viatel Inc. 11.500 03/15/09
      WGWI.GA Weight Watchers Intl. Inc. 13.000 10/01/09
      WLGP.GA Williams Comm Group Inc. 10.700 10/01/07
      WLGP.GB Williams Comm Group 10.875 10/01/09

      As of September 22, 1999, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      ATEL.GA American Telecastings Inc. 14.500 06/15/04
      ATEL.GB American Telecastings Inc. 14.500 08/15/05
      BDKB.GA Benedek Broadcasting Corp. 11.875 03/01/05
      CFTR.GA Conseco Finl Trust III 8.796 04/01/27
      CNC.GA Conseco Inc. 8.125 02/15/03
      CNC.GB Conseco Inc. 10.500 12/15/04
      COSE.GA Costillla Energy Inc. 10.250 10/01/06
      COSE.GB Costilla Energy Inc. 10.250 10/01/06
      COT.CD Coltec Industries Inc. 10.250 04/01/00
      COT.GA Coltec Industries Inc. 9.750 04/01/00
      COT.GC Coltec Industries Inc. 9.750 11/01/99
      COT.GE Coltec Industries Inc. 7.500 04/05/08
      CTUO.GA Centennial Cellular Oper Co. LLC 10.750 12/15/08
      DSIO.GA Decisionone Corp. 9.750 08/01/07
      FGGI.GA Figgie Intl Inc. Del 9.875 10/01/99
      FTL.GB Fruit/Loom Inc. 7.875 10/15/99
      IHK.GA Imperial Holly Corp. 8.375 10/15/99
      MCAB.GB Marcus Cable Oper Co./Corp. II 13.500 08/01/04
      MCUM.GA Michael Petroleum Corp. Ser B 11.500 04/01/05
      MNRH.GA Mariner Health Group Inc. 9.500 04/01/06
      MPN.GB Mariner Post-Acute Network Inc. 9.500 11/01/06
      PAMI.GA Pamida Inc. Del 11.750 03/15/03
      PCTV.GA Peoples Choice TV Corp. 13.125 06/01/04
      PFT.GA Proffits Inc. 8.125 05/15/04
      PTRY.GA Pantry, Inc. 12.00 11/15/00
      RADL.GA Randall's Food Market Inc. 9.375 07/01/07
      RICE.GA American Rice Inc. 13.000 07/31/02
      SNT.GA Sonat Inc. 6.875 06/01/05
      SQA.GB Sequa Corp. 9.625 10/15/99
      WS.GA Werton Steel Corp. 10.875 10/15/99

      As of September 22, 1999, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      AAM.GA AAMS.GA AAMES Financial Corp. 10.500 02/01/02
      AAM.GB AAMS.GB AAMES Financial Corp. 9.125 11/01/03
      DOCI.GA DOC.GA Decisionone Holdings Corp. 11.500 08/01/08
      FED.GA FFCL.GA First Federal Financial Corp. 11.750 10/01/04
      HWD.GA HWCC.GA Hollywood Casino Corp. 12.750 11/01/03
      HWD.GB HWCC.GB Hollywood Casino Corp. 11.250 05/01/07
      PTRY.GA PANR.GA Pantry Inc. 12.000 11/05/00
      PTRY.GB PANR.GB Pantry Inc. 10.250 10/15/07
      WCG.GA WLGP.GA Williams Comm Group Inc. 10.700 10/01/07
      WCG.GB WLGP.GB Williams Comm Group Inc. 10.875 10/01/09

      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.

    • 99-92 SEC, NASD Regulation, And NYSE Issue Joint Statement On Broker/Dealer Risk Management Practices

      View PDF File

      INFORMATIONAL

      Risk Management Practices

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Risk Management Practices

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The Securities and Exchange Commission, NASD Regulation, Inc. (NASD RegulationSM), and the New York Stock Exchange recently issued a joint statement regarding broker/dealer risk management practices. The examination staffs from these organizations formed a task force several years ago to assess such practices. The task force issued this statement (see Exhibit I) to emphasize 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.

      Questions/Further Information

      Questions regarding this Notice to Members should be directed to Samuel Luque, Jr., Associate Director, Member Regulation, NASD Regulation, at (202) 728-8472.

      Office of Compliance Inspections and Examinations
      Securities and Exchange Commission

      New York Stock Exchange

      NASD Regulation, Inc.

      Broker-Dealer Risk Management Practices Joint Statement

      July 29, 1999

      BACKGROUND

      The examination staffs of the Securities and Exchange Commission ("SEC"), the New York Stock Exchange ("NYSE") and the NASD Regulation, Inc. ("NASDR") convened a task force several years ago to assess risk management practices at registered broker-dealers. The task force was formed in response to changes in the industry and several instances where poor systems of internal controls resulted in substantial losses at certain firms. 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.

      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 elements of a comprehensive risk management system are highly dependent on the nature of the broker-dealer's business and its structure. The task force also considered important aspects of the control environment, such as senior management's involvement and oversight of the process, the internal audit function and other elements of an internal control system.

      The task force has concluded that senior management must play a significant role in the adoption and maintenance of a comprehensive system of internal controls and risk management practices. This role should include the recognition of risk management as an essential part of the business process, management's willingness to fund the necessary elements of a risk management system, including personnel and information technology costs, and recognition that risk management is a dynamic function that must be modified and improved as a firm's business changes and improved processes and procedures become available.

      Members of the task force conducted on site inspections of mid-sized and large broker-dealers, and held several meetings with industry groups to assess the adequacy of the industry's internal control and risk management systems. These inspections focused on the risk management areas noted above. The examinations revealed certain material weaknesses in the policies and practices employed by certain broker-dealers to manage risk, some of which are listed below, followed by examples of sound practices also noted during these reviews.

      WEAKNESSES IN PRACTICES

      Some firms failed to adequately monitor trading risk due to poor supervisory structures, the inconsistent use of data, and employment of inappropriate risk measurement tools. For example, one inspection noted a brokerdealer that had assigned the head of the fixed income trading desk to oversee all trading risk management functions, including the risk monitoring of fixed income trading. Several broker-dealers were found to have failed to monitor the consistency of information contained in the firm's trade processing, financial reporting and risk management systems, resulting in the omission of certain accounts and activity from the risk monitoring function. Additionally, certain broker-dealers utilized risk measures, such as notional values, that were not commensurate with the complexity of products traded.

      The inspections also identified numerous weaknesses in the manner by which broker-dealers manage credit risk. Numerous broker-dealers conducted trading with counterparties for whom no credit limit had been established, and in some cases credit reviews of approved counterparties were not completed within prescribed time frames. Further, many of these reviews were not adequately documented. Reports used to monitor credit exposure were frequently inaccurate. For instance, many of the reports failed to capture fully the entire population of trades within each category of trading activity and failed to aggregate total credit exposures across all product lines on a system wide basis. Additionally, computerized system limitations yielded credit reports identifying false violations of credit guidelines due to an inability to recognize collateral or the failure to adjust credit lines. Other credit reports calculated exposure in a contradictory manner to what was intended, such as by treating credit exposure from the overcollateralization of repurchase agreements as reduction in risk.

      The inspections also identified instances where broker-dealers maintained understaffed and inexperienced internal audit departments. Also, many of these internal audit departments failed to include key revenue producing and functional areas, such as trading risk management and credit risk management, in the internal audit plans. Occasionally, internal audit failed to follow up on its findings, which contributed to the deficiencies which were identified remaining unremedied.

      SOUND PRACTICES

      Among the practices the staff observed as appropriate elements of a risk management system were the following:1

      The inspections identified instances where a firm's Board of Directors adopted guidelines defining authorized activities, the limits of these activities and the methodology for measuring the risks of these activities. Frequently, the firm's senior management had substantial experience in the firm's major business areas and, accordingly, was cognizant of risks inherent in specific business lines. Also, at certain firms, the risk profile of a product or venture was considered in senior management's allocation of capital and measurement of performance.

      At several firms, traders and trading personnel were expected to play an active role in risk management. Many firms employed an independent (i.e., from revenue production) risk manager who was appropriately experienced and reported to a sufficiently high level of authority (e.g., Board of Directors, or Chief Executive Officer) that his challenges to a trader's pricing of a position were taken seriously and were implemented without requiring the concurrence of the revenue side of the business.

      The inspections identified several instances where pricing, P&L and adherence to position limits were monitored by an independent (i.e., from revenue production) and appropriately experienced group, such as product controllers. On a daily basis, this group compared each trading desk's P&L to possible earnings volatility at certain confidence levels (i.e., value or earnings at risk measurements), in order to assess the reasonableness of the firm's trading results.

      At many firms where data flowing into risk measurement systems was consistent with trade and financial information, the firm would periodically reconcile the categories of data input into the various informational systems. At some firms, daily reconciliations would be performed at each point of systems interface to ensure data integrity.

      Many firms maintained an independent (i.e. from revenue production) and centralized credit department which administered the establishment and documentation of credit lines and monitored the usage of these lines. Many firms have adopted a system of internal credit rating of counterparties. These ratings are updated as needed but no less often than annually. Some firms' credit monitoring systems have integrated the monitoring of credit risk over all products and operations of the firm and consider future potential exposure in monitoring credit utilization.

      The inspections identified several firms with internal audit groups performing an annual risk assessment and ascribing various levels of risk, and a related audit cycle, to all segments of the firms' operations. At one firm, internal audit maintained an automated tracking system that tracked audit findings and the resolution of these findings. Audit findings that were not resolved within established time frames were reported to senior management. In those areas where audit findings were of significance, internal audit verified that policy and procedural changes had been implemented. Another internal audit group performed special reviews in reaction to news events or reported developments in the industry (cause audits).

      1 The items discussed here are not intended to be an exhaustive list but, rather, to serve as an example of some of the appropriate risk management practices that were identified during the inspection process.

      CONCLUSION

      With the increased volume of transactions, new financial products, global marketplaces and expanding use of the internet, the nature of the securities business is constantly changing and becoming more complex. As a result, a dynamic risk management function must play an essential role in assuring investor protection and the integrity of a firm's financial condition. The task force found that broker-dealers need to devote adequate time and resources to assess risk management procedures and controls, and modify such systems to reflect today's market conditions. The extent and cost of the system needed should be determined by the size of the firm and the nature of its business activities.

      Over the years, we have seen increased recognition in the broker-dealer community of the importance of the risk management function, and the need for continued adjustments to that function to address market and regulatory changes. Most recently, the Counterparty Risk Management Policy Group joined the list of industry and regulatory groups that have evaluated risk management practices and recommended actions. All of these initiatives contribute to the potential development of improved risk management systems.

      As regulators, we want to reemphasize to management throughout the broker-dealer community the importance of maintaining an appropriate risk management system geared to a firm's business activities. In recognition of the increased importance of this function, examination staffs of the SEC, NYSE and NASDR will increase their emphasis on the review of risk management controls during regulatory examinations.

    • 99-91 NASD Revises And Replaces Notice to Members 99-59 And Issues New Censure Policy

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      INFORMATIONAL

      Imposition Of Censures

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Disciplinary Actions
      NASD Sanction Guidelines

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      In July 1999, the National Association of Securities Dealers, Inc. (NASD®) issued Notice to Members 99-59 regarding a new censure policy adopted by the National Adjudicatory Council (NAC). This Notice to Members revises and replaces Notice to Members 99-59; members should discard their copies of the Notice to Members 99-59 and refer to this Notice to Members for guidance on this issue.

      The new censure policy provides that, in general, censures will no longer be imposed for certain designated violations when total monetary sanctions are $5,000 or less, and when bars or suspensions are imposed. Censures still may be imposed, however, in litigated cases, where the policy would suggest no censure, if the adjudicator determines that extraordinary circumstances merit their imposition. Members are directed to attach this Notice to Members as an amendment to their NASD Sanction Guidelines.

      Questions/Further Information

      Questions concerning this new policy may be directed to Shannon Lane, Senior Attorney, Office of General Counsel, NASD Regulation, Inc. (NASD RegulationSM), at (202) 728-6904.

      Background

      The NASD may impose sanctions on member firms for violations of the federal securities laws, rules of the Municipal Securities Rulemaking Board (MSRB), and the Association's rules. When disciplining a member for such violations, the NASD may impose any fitting sanction including monetary sanctions (e.g., fines, disgorgement ordered payable as a fine, and orders of restitution) and non-monetary sanctions (e.g., censures, suspensions, bars, and expulsions). The NASD Sanction Guidelines recommend a range of monetary and non-monetary sanctions for particular violations.

      Although the NASD Sanction Guidelines do not specifically recommend whether or not a censure should be imposed under any of the individual sanction guidelines for particular violations, the NASD has in the past routinely imposed censures for all violations except for certain quality of market violations when fines below $5,000 were imposed. The NASD has determined to revise this practice in recognition of the fact that censures should be imposed when disciplining members for violations that particularly warrant the Association's official disapproval of a respondent's conduct.

      This Notice to Members is issued to inform the membership of a new censure policy adopted by the NAC. Under the revised censure policy, the NASD has identified certain violations for which generally it will no longer impose censures when relatively low monetary sanctions are imposed. Accordingly, the NASD generally will not impose censures in cases in which the total monetary sanction for any disciplinary action, regardless of the number of violations alleged, is $5,000 or less (fines, disgorgement ordered payable as a fine, and restitution), and when the violation(s) at issue consists solely of one or more of the following violations as set forth below.1

      Violations That Generally Will No Longer Be Subject To Censure When Monetary Sanctions Of $5,000 Or Less Are Imposed

      Quality of Markets violations

      • ACT Violations - Rule 6100 Series


      • Backing Away


      • Best Execution and Interpositioning


      • Confirmation of Transactions (SEC Rule 10b-10)


      • ECN Display Rule


      • Failure to Display Minimum Size in Nasdaq® Securities, CQS Securities, and OTC Bulletin Board® Securities


      • Fixed Income Pricing SystemSM - Trade Reporting and Participant and Quotation Obligations


      • Limit Order Display Rule


      • Limit Order Protection Rule


      • Locked/Crossed Market


      • Options Exercise and Positions Limits


      • Options Positions Reporting - Late Reporting and Failing to Report


      • Order Audit Trail System (NASD Rules 6950-6957)


      • Passive Market Making


      • SelectNetSM Text Messages


      • Short Sale Violations


      • SOESSM Rules


      • Trade or Move Rule - NASD Rule 4613(b)(2)


      • Trades Executed During a Trading Halt


      • Trade Reporting - Late Reporting; Failing to Report; Inaccurate Reporting


      • 1 % Rule - SEC Rule 11Ac1-1(c)(1)

      Qualification and Membership violations

      • Continuing Education - Firm Element


      • Continuing Education - Regulatory Element


      • Registration Violations

      Reporting/Provision of Information violations

      • FOCUS Reports - Late Filing


      • Form BD-Y2K Reports - Late Filing


      • Forms U-4/U-5 - Late Filing; Failure to File; Inaccurate Forms or Amendments


      • MSRB Rule G-36 - Untimely Filing of Offering Documents With MSRB; Late Filing; Failure to File,


      • MSRB Rule G-37/G-38 Reporting - Late Filing; Failing to File


      • Regulation M Reports - Late Filing; Failing to File


      • Request for Automated Transmission of Trading Data (Blue Sheets) - Failure to Respond in a Timely and Accurate Manner

      Financial and Operational Practices violations

      • Customer Protection Rule violations


      • Net Capital violations


      • Recordkeeping violations


      • Violations of SEC Rule 17a-11 (Notification Provisions for Broker/Dealers)

      Supervision violations

      • Supervisory Procedures - Deficient Written Supervisory Procedures2

      Censures will be imposed, however, when fines above $5,000 are reduced or eliminated due to a respondent's demonstrated inability to pay or bankruptcy.

      NASD adjudicators (Hearing Panels, the NAC, and other adjudicators) will apply this new policy in a manner consistent with the advisory nature of the NASD Sanction Guidelines.3 NASD adjudicators may therefore order the imposition of censures in certain extraordinary cases even though a censure would not be required under the new censure policy.4

      The NASD also has determined that censures should not be imposed when bars or suspensions are imposed, regardless of the nature of the violation. Although the NASD has in the past routinely imposed censures whenever bars or suspensions were imposed, the new censure policy revised this practice in recognition of the fact that bars and suspensions are severe sanctions that already signify the Association's official disapproval of a respondent's conduct. Accordingly, a censure is not an appropriate additional sanction when a respondent is barred or suspended, and the NASD will not impose censures in those cases.

      The new policy applies to all Letters of Acceptance, Waiver, and Consent and Offers of Settlement executed by respondents beginning on June 11, 1999, and to all NAC and Office of Hearing Officer decisions decided and issued on or after June 11, 1999.


      Endnotes

      1 This list largely consists of violations as found in the NASD Sanction Guidelines. The NASD Sanction Guidelines provide recommendations on sanctions for most typical securities-industry violations. When violations do not have guidelines that specifically apply to them, adjudicators may refer to guidelines for analogous violations to determine appropriate sanctions. In cases where the violations at issue are not listed in this Notice to Members, but where adjudicators refer to guidelines for analogous violations that are listed in this Notice to Members, adjudicators generally will not impose censures for those violations when monetary sanctions of $5,000 or less are imposed.

      2 In addition, censures will not be imposed for violations disposed of under the Minor Rule Violation Plan pursuant to NASD Rule 9216(b) and IM-9216.

      3 The NASD Sanction Guidelines are advisory and are intended to provide direction to NASD adjudicators in determining appropriate sanctions consistently and fairly.

      4 With respect to settled matters (e.g., Letters of Acceptance, Waiver, and Consent; Offers of Settlement; and other settlements), however, NASD staff will negotiate censures in accordance with the new policy and will not impose censures when total monetary sanctions are $5,000 or less for those violations listed in this Notice to Members. When fines are above $5,000, NASD staff will require the imposition of censures in settlements. Censures will not be imposed in any settled or adjudicated matter when a bar or suspension is imposed.

    • 99-90 NASD Regulation Announces New Discovery Guide To Be Used In Arbitration Proceedings

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      INFORMATIONAL

      Arbitration

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management
      Training
      Arbitration
      Discovery Guide

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      On September 2, 1999, the Securities and Exchange Commission (SEC) approved the use of the Discovery Guide (see Exhibit I) in National Association of Securities Dealers, Inc. (NASD®) arbitration proceedings involving customer disputes with firms and associated persons. The Discovery Guide is now available to use in NASD arbitration proceedings.

      The Discovery Guide, which includes Document Production Lists, provides guidance to parties on which documents they should exchange without arbitrator or staff intervention, and to arbitrators in determining which documents customers and member firms or associated persons are presumptively required to produce in customer arbitrations.

      Questions/Further Information

      Questions regarding this Notice to Members may be directed to Gary Tidwell, Director, Neutral Management, Office of Dispute Resolution, NASD Regulation, Inc. (NASD RegulationSM), at (212) 858- 4352; or Eric Moss, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8982.

      Discussion

      The Discovery Guide will be used as a supplement or an addendum to the guidance regarding discovery provided in The Arbitrator's Manual, published by Securities Industry Conference on Arbitration (SICA), and particularly the provisions in the section entitled, "Prehearing Conference," on pages 11 through 16. The Arbitrator's Manual is compiled by members of SICA as a guide for arbitrators, and is designed to supplement and explain the Uniform Code of Arbitration as developed by SICA. The procedures and policies described in The Arbitrator's Manual are discretionary and may be changed by the arbitrators. Further, nothing in the Discovery Guide, including the Document Production Lists, precludes the parties from voluntarily agreeing to an exchange of documents in a manner different from that set forth in the Discovery Guide.

      The Discovery Guide consists of introductory and instructional text, and 14 Document Production Lists. It is intended for use by arbitrators in customer arbitrations only. These lists include the following (parenthetical references refer to the party from whom documents are sought):

      List 1:
      Documents To Be Produced In All Customer Cases (Firm/Associated Person(s))

      List 2:
      Documents To Be Produced In All Customer Cases (Customer)

      List 3:
      Churning (Firm/Associated Person(s))

      List 4:
      Churning (Customer)

      List 5:
      Failure To Supervise (Firm/Associated Person(s))

      List 6:
      Failure To Supervise (Customer)

      List 7:
      Misrepresentation/Omissions (Firm/Associated Person(s))

      List 8:
      Misrepresentation/Omissions (Customer)

      List 9:
      Negligence/Breach Of Fiduciary Duty (Firm/Associated Person(s))

      List 10:
      Negligence/Breach Of Fiduciary Duty (Customer)

      List 11:
      Unauthorized Trading (Firm/Associated Person(s))

      List 12:
      Unauthorized Trading (Customer)

      List 13:
      Unsuitability (Firm/Associated Person(s))

      List 14:
      Unsuitability (Customer)

      The Office of Dispute Resolution (ODR) will provide the parties with the Discovery Guide including the Document Production Lists at the time ODR serves the statement of claim. The document production requirements in the first two Document Production Lists, "List 1, Documents To Be Produced In All Customer Cases: Firm/Associated Person(s)," and "List 2, Documents To Be Produced In All Customer Cases: Customer," would apply in virtually all cases involving member-customer or associated person-customer disputes, unless the arbitrator, in the exercise of discretion, determines that some or all of the documents in the relevant Document Production Lists should not be produced. For cases in which allegations of churning, failure to supervise, misrepresentation/omissions, negligence/breach of fiduciary duty, unauthorized trading, or unsuitability are stated, additional Document Production Lists (e.g., Document Production Lists 3 and 4 - Churning) provide additional guidance. If a Document Production List is applicable, the Discovery Guide is drafted to guide the arbitrator to order production, unless in the exercise of discretion, the arbitrator believes that there is good cause not to order production.

      Exhibit I

      For NASD arbitrations, the Discovery Guide supplements the section in the Securities Industry Conference on Arbitration ("SICA") publication entitled The Arbitrator's Manual, and captioned "Prehearing Conference," found on pages 11 through 16, regarding public customer cases.

      I. The Need for New Discovery Procedures

      Discovery disputes have become more numerous and time consuming. The same discovery issues repeatedly arise. To minimize discovery disruptions, the NASD Regulation Office of Dispute Resolution has developed two initiatives to standardize the discovery process: early appointment of arbitrators to conduct an initial prehearing conference and document production lists (Document Production Lists).

      No requirement under the Discovery Guide supersedes any record retention requirement of any federal or state law or regulation or any rule of a self-regulatory organization.

      The Discovery Guide and Document Production Lists are designed for customer disputes with firms and Associated Person(s).1 The Discovery Guide also discusses additional discovery requests, information requests, depositions, admissibility of evidence, and sanctions. The Discovery Guide, including the Document Production Lists, will function as a guide for the parties and the arbitrators; it is not intended to remove flexibility from arbitrators or parties in a given case. For instance, arbitrators can order the production of documents not provided for by the Document Production Lists or alter the production schedule described in the Discovery Guide. Further, nothing in the Discovery Guide precludes the parties from voluntarily agreeing to an exchange of documents in a manner different from that set forth in the Discovery Guide. In fact, the Office of Dispute Resolution encourages the parties to agree to the voluntary exchange of documents and information and to stipulate to various matters. The fact that an item appears on a Document Production List does not shift the burden of establishing or defending any aspect of a claim.
      II. Document Production Lists

      The Office of Dispute Resolution will provide the parties with Document Production Lists (attached to the Discovery Guide) at the time it serves the statement of claim in customer cases. The arbitrators and the parties should consider the documents described in Document Production Lists 1 and 2 presumptively discoverable. Absent a written objection, documents on Document Production Lists 1 and 2 shall be exchanged by the parties within the time frames set forth below.

      The arbitrators and parties also should consider the additional documents identified in Document Production Lists 3 through 14, respectively, discoverable, as indicated, for cases alleging the following causes of action: churning, failure to supervise, misrepresentation/omission, negligence/breach of fiduciary duty, unauthorized trading, and unsuitability. For the general document production and for each of these causes of action, there are separate Document Production Lists for firms/Associated Person(s) and for customers.

      NASD Rule 10321 provides that the parties shall cooperate to the fullest extent practicable in the voluntary exchange of documents and information to expedite the arbitration process. As noted, nothing in the Discovery Guide precludes parties from voluntarily agreeing to an exchange of documents in a manner different from that set forth in the Discovery Guide.
      A. Time Frames For Document Production and Objections

      The parties should produce all required documents listed in the applicable Document Production Lists not later than thirty days2 from the date the answer is due or filed, whichever is earlier. If a party redacts any portion of a document prior to production, the redacted pages (or ranges of pages) shall be labeled "redacted." A party may object to the production of any document, which would include an objection based upon an established privilege such as the attorney-client privilege. If any party objects to the production of any document listed in the relevant Document Production Lists, the party must file written objections with the Office of Dispute Resolution and serve all parties not later than thirty days following the date the answer is due or filed, whichever is earlier. Objections should set forth the reasons the party objects to producing the documents. An objection to the production of a document or a category of documents is not an acceptable reason to delay the production of any document not covered by the objection. A response to an objection should be served on all parties within 10 days from service of the written objections. Objections and responses should be filed with the Office of Dispute Resolution at the time they are served on the parties. The arbitrator(s) shall then determine whether the objecting party has overcome the presumption based upon sufficient reason(s).
      B. Confidentiality3

      If a party objects to document production on grounds of privacy or confidentiality, the arbitrator(s) or one of the parties may suggest a stipulation between the parties that the document(s) in question will not be disclosed or used in any manner outside of the arbitration of the particular case, or the arbitrator(s) may issue a confidentiality order. The arbitrator(s) shall not issue an order or use a confidentiality agreement to require parties to produce documents otherwise subject to an established privilege. Objections to the production of documents, based on an established privilege, should be raised in accordance with the time frame for objections set forth above.
      C. Affirmation In The Event That There Are No Responsive Documents or Information

      If a party responds that no responsive information or documents exist, the customer or the appropriate person in the brokerage firm who has personal knowledge (i.e., the person who has conducted a physical search), upon the request of the requesting party, must: 1) state in writing that he/she conducted a good faith search for the requested information or documents; 2) describe the extent of the search; and 3) state that, based on the search, no such information or documents exist.
      III. The Initial Prehearing Conference

      To maximize the efficient administration of a case by the arbitration panel,4 the Office of Dispute Resolution staff will schedule an initial prehearing conference in which the arbitrator(s) usually participates.5 The initial prehearing conference gives the arbitrator(s) and the parties an opportunity to organize the management of the case, set a discovery cut-off date,6 identify dispositive or other potential motions, schedule hearing dates, determine whether mediation is desirable, and resolve any other preliminary issues.7 During the initial prehearing conference, the arbitrator(s) and the parties should schedule hearing dates for the earliest available time, consistent with the parties' need to prepare adequately for the hearing.

      Prior to the initial prehearing conference, each arbitrator should become familiar with the claims and defenses asserted in the pleadings filed by the parties. At the initial prehearing conference, the arbitrator(s) should order time limits for discovery that will allow the scheduling of hearing dates within a reasonable time and address all outstanding discovery disputes. If the exchange of properly requested documents has not occurred, the arbitrator(s) should order the production of all required documents, including those outlined in the Document Production Lists (see Section II. above), within 30 days following the conference.
      IV. Additional Discovery Requests

      The parties may request documents in addition to those identified in the Document Production Lists pursuant to Rule 10321(b). Unless a longer period is allowed by the requesting party, requests should be satisfied or objected to within 30 days from the date of service of the document request. A response to an objection should be served on all parties within 10 days from service of the written objections. Requests, objections, and responses should be filed with the Office of Dispute Resolution at the time they are served on the parties.

      A party may move to compel production of documents when the adverse party (a) refuses to produce such documents or (b) offers only to produce alternative documents that are unacceptable to the requesting party. The Office of Dispute Resolution will provide the chairperson of the panel with the motion, opposition, and reply, along with the underlying discovery documents the parties have attached to their pleadings. The chairperson should determine whether to decide the matter on the papers or to convene a prehearing conference (usually via telephone). In considering motions to compel, particularly where non-production is based upon an argument asserting an established privilege, such as the attorney-client privilege, the arbitrator(s) should always give consideration to the arguments set forth by both sides, particularly as to the relevancy of the documents or information. The arbitrator(s) should carefully consider such motions, regardless of whether the item requested is on any of the Document Production Lists. If in doubt, the arbitrator(s) should ask the requesting party what specific documents it is trying to obtain and what it seeks to prove with the documents.
      V. Information Requests

      Like requests for documents, parties may serve requests for information pursuant to Rule 10321(b). Requests for information are generally limited to identification of individuals, entities, and time periods related to the dispute; such requests should be reasonable in number and not require exhaustive answers or fact finding. Standard interrogatories, as utilized in state and federal courts, are generally not permitted in arbitration.

      Unless a longer period is allowed by the requesting party, information requests should be satisfied or objected to within 30 days from the date of service of the requests. A response to an objection should be served on all parties within 10 days from service of the written objections. Requests, objections, and responses should be filed with the Office of Dispute Resolution at the time they are served on the parties.

      A party may move to compel responses to requests for information that the adverse party refuses to provide. The Office of Dispute Resolution will provide the chairperson of the panel with the motion, opposition, and reply, along with the underlying discovery documents the parties have attached to their pleadings. The chairperson should determine whether to decide the matter on the papers or to convene a prehearing conference (usually via telephone).
      VI. Depositions

      Depositions are strongly discouraged in arbitration. Upon request of a party, the arbitrator(s) may permit depositions, but only under very limited circumstances, such as: 1) to preserve the testimony of ill or dying witnesses; 2) to accommodate essential witnesses who are unable or unwilling to travel long distances for a hearing and may not otherwise be required to participate in the hearing; 3) to expedite large or complex cases; and 4) to address unusual situations where the arbitrator(s) determines that circumstances warrant departure from the general rule. Balanced against the authority of the arbitrator(s) to permit depositions, however, is the traditional reservation about the overuse of depositions in arbitration.
      VII. Admissibility

      Production of documents in discovery does NOT create a presumption that the documents are admissible at the hearing. A party may state objections to the introduction of any document as evidence at the hearing to the same extent that any other objection may be raised in arbitration.
      VIII. Sanctions

      The arbitration panel should issue sanctions if any party fails to produce documents or information required by a written order, unless the panel8 finds that there is "substantial justification" for the failure to produce the documents or information. The panel has wide discretion to address noncompliance with discovery orders. For example, the panel may make an adverse inference against a party or assess adjournment fees, forum fees, costs and expenses, and/or attorneys' fees caused by noncompliance. In extraordinary cases, the panel may initiate a disciplinary referral against a registered entity or person who is a party or witness in the proceeding or may, pursuant to Rule 10305(b), dismiss a claim, defense, or proceeding with prejudice as a sanction for intentional failure to comply with an order of the arbitrator(s) if lesser sanctions have proven ineffective.
      DOCUMENT PRODUCTION LISTS

      LIST 1

      DOCUMENTS TO BE PRODUCED IN ALL CUSTOMER CASES9

      FIRM/ASSOCIATED PERSON(S)

      1) All agreements with the customer, including, but not limited to, account opening documents, cash, margin, and option agreements, trading authorizations, powers of attorney, or discretionary authorization agreements, and new account forms.
      2) All account statements for the customer's account(s) during the time period and/or relating to the transaction(s) at issue.
      3) All confirmations for the customer's transaction(s) at issue. As an alternative, the firm/Associated Person(s) should ascertain from the claimant and produce those confirmations that are at issue and are not within claimant's possession, custody, or control.
      4) All "holding (posting) pages" for the customer's account(s) at issue or, if not available, any electronic equivalent.
      5) All correspondence between the customer and the firm/Associated Person(s) relating to the transaction(s) at issue.
      6) All notes by the firm/Associated Person(s) or on his/her behalf, including entries in any diary or calendar, relating to the customer's account(s) at issue.
      7) All recordings and notes of telephone calls or conversations about the customer's account(s) at issue that occurred between the Associated Person(s) and the customer (and any person purporting to act on behalf of the customer), and/or between the firm and the Associated Person(s).
      8) All Forms RE-3, U-4, and U-5, including all amendments, all customer complaints identified in such forms, and all customer complaints of a similar nature against the Associated Person(s) handling the account(s) at issue.
      9) All sections of the firm's Compliance Manual(s) related to the claims alleged in the statement of claim, including any separate or supplemental manuals governing the duties and responsibilities of the Associated Person(s) and supervisors, any bulletins (or similar notices) issued by the compliance department, and the entire table of contents and index to each such Manual.
      10) All analyses and reconciliations of the customer's account(s) during the time period and/or relating to the transaction(s) at issue.
      11) All records of the firm/Associated Person(s) relating to the customer's account(s) at issue, such as, but not limited to, internal reviews and exception and activity reports which reference the customer's account(s) at issue.
      12) Records of disciplinary action taken against the Associated Person(s) by any regulator or employer for all sales practices or conduct similar to the conduct alleged to be at issue.

      LIST 2

      DOCUMENTS TO BE PRODUCED IN ALL CUSTOMER CASES

      CUSTOMER

      1) All customer and customer-owned business (including partnership or corporate) federal income tax returns, limited to pages 1 and 2 of Form 1040, Schedules B, D, and E, or the equivalent for any other type of return, for the three years prior to the first transaction at issue in the statement of claim through the date the statement of claim was filed.
      2) Financial statements or similar statements of the customer's assets, liabilities and/or net worth for the period(s) covering the three years prior to the first transaction at issue in the statement of claim through the date the statement of claim was filed.
      3) Copies of all documents the customer received from the firm/Associated Person(s) and from any entities in which the customer invested through the firm/Associated Person(s), including monthly statements, opening account forms, confirmations, prospectuses, annual and periodic reports, and correspondence.
      4) Account statements and confirmations for accounts maintained at securities firms other than the respondent firm for the three years prior to the first transaction at issue in the statement of claim through the date the statement of claim was filed.
      5) All agreements, forms, information, or documents relating to the account(s) at issue signed by or provided by the customer to the firm/Associated Person(s).
      6) All account analyses and reconciliations prepared by or for the customer relating to the account(s) at issue.
      7) All notes, including entries in diaries or calendars, relating to the account(s) at issue.
      8) All recordings and notes of telephone calls or conversations about the customer's account(s) at issue that occurred between the Associated Person(s) and the customer (and any person purporting to act on behalf of the customer).
      9) All correspondence between the customer (and any person acting on behalf of the customer) and the firm/Associated Person(s) relating to the account(s) at issue.
      10) Previously prepared written statements by persons with knowledge of the facts and circumstances related to the account(s) at issue, including those by accountants, tax advisors, financial planners, other Associated Person(s), and any other third party.
      11) All prior complaints by or on behalf of the customer involving securities matters and the firm's/Associated Person(s') response(s).
      12) Complaints/Statements of Claim and Answers filed in all civil actions involving securities matters and securities arbitration proceedings in which the customer has been a party, and all final decisions and awards entered in these matters.
      13) All documents showing action taken by the customer to limit losses in the transaction(s) at issue.

      LIST 3

      CHURNING

      FIRM/ASSOCIATED PERSON(S)

      1) All commission runs relating to the customer's account(s) at issue or, in the alternative, a consolidated commission report relating to the customer's account(s) at issue.
      2) All documents reflecting compensation of any kind, including commissions, from all sources generated by the Associated Person(s) assigned to the customer's account(s) for the two months preceding through the two months following the transaction(s) at issue, or up to 12 months, whichever is longer. The firm may redact all information identifying customers who are not parties to the action, except that the firm/Associated Person(s) shall provide at least the last four digits of the non-party customer account number for each transaction.
      3) Documents sufficient to describe or set forth the basis upon which the Associated Person(s) was compensated during the years in which the transaction(s) or occurrence(s) in question occurred, including: a) any bonus or incentive program; and b) all compensation and commission schedules showing compensation received or to be received based upon volume, type of product sold, nature of trade (e.g., agency v. principal), etc.

      LIST 4

      CHURNING

      CUSTOMER

      No additional documents identified.

      LIST 5

      FAILURE TO SUPERVISE

      FIRM/ASSOCIATED PERSON(S)

      1) All commission runs and other reports showing compensation of any kind relating to the customer's account(s) at issue or, in the alternative, a consolidated commission report relating to the customer's account(s) at issue.
      2) All exception reports and supervisory activity reviews relating to the Associated Person(s) and/or the customer's account(s) that were generated not earlier than one year before or not later than one year after the transaction(s) at issue, and all other documents reflecting supervision of the Associated Person(s) and the customer's account(s) at issue.
      3) Those portions of internal audit reports at the branch in which the customer maintained his/her account(s) that: (a) focused on the Associated Person(s) or the transaction(s) at issue; and (b) were generated not earlier than one year before or not later than one year after the transaction(s) at issue and discussed alleged improper behavior in the branch against other individuals similar to the improper conduct alleged in the statement of claim.
      4) Those portions of examination reports or similar reports following an examination or an inspection conducted by a state or federal agency or a selfregulatory organization that focused on the Associated Person(s) or the transaction(s) at issue or that discussed alleged improper behavior in the branch against other individuals similar to the improper conduct alleged in the statement of claim.

      LIST 6

      FAILURE TO SUPERVISE

      CUSTOMER

      No additional documents identified.

      LIST 7

      ISREPRESENTATION/OMISSIONS

      FIRM/ASSOCIATED PERSON(S)

      Copies of all materials prepared or used by the firm/Associated Person(s) relating to the transactions or products at issue, including research reports, prospectuses, and other offering documents, including documents intended or identified as being "for internal use only," and worksheets or notes indicating the Associated Person(s) reviewed or read such documents. As an alternative, the firm/Associated Person(s) may produce a list of such documents that contains sufficient detail for the claimant to identify each document listed. Upon further request by a party, the firm/Associated Person(s) must provide any documents identified on the list.

      LIST 8

      MISREPRESENTATION/OMISSIONS

      CUSTOMER

      1) Documents sufficient to show the customer's ownership in or control over any business entity, including general and limited partnerships and closely held corporations.
      2) Copy of the customer's resume.
      3) Documents sufficient to show the customer's complete educational and employment background or, in the alternative, a description of the customer's educational and employment background if not set forth in a resume produced under item 2.

      LIST 9

      NEGLIGENCE/BREACH OF FIDUCIARY DUTY

      FIRM/ASSOCIATED PERSON(S)

      Copies of all materials prepared or used by the firm/Associated Person(s) relating to the transactions or products at issue, including research reports, prospectuses, and other offering documents, including documents intended or identified as being "for internal use only," and worksheets or notes indicating the Associated Person(s) reviewed or read such documents. As an alternative, the firm/Associated Person(s) may produce a list of such documents that contains sufficient detail for the claimant to identify each document listed. Upon further request by a party, the firm/Associated Person(s) must provide any documents identified on the list.

      LIST 10

      NEGLIGENCE/BREACH OF FIDUCIARY DUTY

      CUSTOMER

      1) Documents sufficient to show the customer's ownership in or control over any business entity, including general and limited partnerships and closely held corporations.
      2) Copy of the customer's resume.
      3) Documents sufficient to show the customer's complete educational and employment background or, in the alternative, a description of the customer's educational and employment background if not set forth in a resume produced under item 2.

      LIST 11

      UNAUTHORIZED TRADING

      FIRM/ASSOCIATED PERSON(S)

      1) Order tickets for the customer's transaction(s) at issue.
      2) Copies of all telephone records, including telephone logs, evidencing telephone contact between the customer and the firm/Associated Person(s).
      3) All documents relied upon by the firm/Associated Person(s) to establish that the customer authorized the transaction(s) at issue.

      LIST 12

      UNAUTHORIZED TRADING

      CUSTOMER

      1) Copies of all telephone records, including telephone logs, evidencing telephone contact between the customer and the firm/Associated Person(s).
      2) All documents relied upon by the customer to show that the transaction(s) at issue was made without his/her knowledge or consent.

      LIST 13

      UNSUITABILITY

      FIRM/ASSOCIATED PERSON(S)

      1) Copies of all materials prepared, used, or reviewed by the firm/Associated Person(s) related to the transactions or products at issue, including but not limited to research reports, prospectuses, other offering documents, including documents intended or identified as being "for internal use only," and worksheets or notes indicating the Associated Person(s) reviewed or read such documents. As an alternative, the firm/Associated Person(s) may produce a list of such documents. Upon further request by a party, the firm/Associated Person(s) must provide any documents identified on the list.
      2) Documents sufficient to describe or set forth the basis upon which the Associated Person(s) was compensated in any manner during the years in which the transaction(s) or occurrence(s) in question occurred, including, but not limited to: a) any bonus or incentive program; and b) all compensation and commission schedules showing compensation received or to be received based upon volume, type of product sold, nature of trade (e.g., agency v. principal), etc.

      LIST 14

      UNSUITABILITY

      CUSTOMER

      1) Documents sufficient to show the customer's ownership in or control over any business entity, including general and limited partnerships and closely held corporations.
      2) Written documents relied upon by the customer in making the investment decision(s) at issue.
      3) Copy of the customer's resume.
      4) Documents sufficient to show the customer's complete educational and employment background or, in the alternative, a description of the customer's educational and employment background if not set forth in a resume produced under item 3.

      Endnotes

      1 NASD Regulation may develop separate Document Production Lists for intra-industry disputes.

      2 All time periods referenced herein are calendar days.

      3 Section II.B. is also applicable to additional discovery requests and information requests (see Sections IV. and V.).

      4 The panel consists of three arbitrators in most cases. Claims between $25,000 and $50,000 may proceed with a single arbitrator. Claims under $25,000 are decided by a single arbitrator, generally on the pleadings.

      5 In some instances, the parties may opt out of the initial prehearing conference. To opt out, parties must supply the following information to the Office of Dispute Resolution by the specified deadline:

      • a minimum of four sets of mutually agreeable hearing dates;


      • a discovery cut-off date;


      • a list of all anticipated motions with the motion due dates, opposition due dates, and reply due dates provided;


      • a minimum of four dates and times for any proposed prehearing conferences to hear motions; and


      • a determination whether briefs will be submitted and, if so, the due date for submission.

      6 The Office of Dispute Resolution recommends that the panel set a cut-off date during the initial prehearing conference for service of discovery requests, giving due consideration to time frames that permit timely resolution of objections and disputes prior to the scheduled exchange of hearing exhibits pursuant to the NASD Code of Arbitration Procedure.

      7 The arbitrators should direct one of the parties to prepare and forward to the Office of Dispute Resolution, within 48 hours, a written order memorializing the results of the prehearing conference, approved as to form and content by the other parties. When motions are heard at the initial prehearing conference, the panel may order the parties to submit the order with a stipulation as to form and content from all parties.

      8 As with other rulings, an arbitration panel's ruling need only be by majority vote; it need not be unanimous.

      9 Only named parties must produce documents pursuant to the guidelines set forth herein. However, non-parties may be required to produce documents pursuant to a subpoena or an arbitration panel order to direct the production of documents (see Rule 10322). In addition, the arbitration chairperson may use the Document Production Lists as guidance for discovery issues involving non-parties.

    • Year 2000 Update (November)

      November 1999

      Are You Ready For The Year 2000?

      As the Year 2000 approaches, most media reports and surveys indicate that businesses are making significant progress and will be well prepared for the century date change. However, there is still work that needs to be done. Organizations should continue to focus on maintaining a high level of readiness. One important way to achieve this is through the development and execution of a well-defined and tested contingency plan—meaning having a process to recover from mission-critical Year 2000 failures. Contingency plans should be designed to continually address the changes in status of package applications, application software development and upgrades, and vendors. All of these can impact business' readiness and should be closely monitored.

      When developing your contingency plan you need to determine if your business should establish a contingency site (consider the costs involved when making this determination). For instance, if systems fail due to infrastructure-related issues, can the problem be resolved by moving the business function to another location? If the answer is yes, then you should consider establishing and testing this alternative site. The preparation of your contingency site must be continuously monitored for consistency with the primary sites to ensure ease of transition during the time of need. Broker/dealers that plan to prepare another location as a business contingency are not required to register the site as a branch office at this time. However, if the site is activated, firms are required to notify the National Association of Securities Dealers, Inc. (NASD®) with site information and may need to register the site as a branch office depending on the types of activities conducted at the site.1

      In addition, it is important that investors are kept aware of your firm's level of readiness. Effective investor communication is critical to ensuring the industry's smooth transition into 2000. To help facilitate this for members, the NASD has implemented two products on its Web Sites for investors. First, investors can review NASD Member Year 2000 Readiness Statements submitted by NASD members. Under this program, members can post a voluntary Year 2000 readiness statement to the NASD and NASD Regulation, Inc. (NASD RegulationSM) Web Sites. Although the readiness statement is optional, we are encouraging members to participate.2 Second, the jointly developed securities industry Year 2000 Investor Kit provides educational information and practical guidance about the Year 2000 issue and is available for firms to distribute to customers.3

      NASD Business Continuity Planning

      The NASD Year 2000 Program Office has developed a Year 2000 Business Continuity Planning (BCP) Information Kit for members that is now available on the NASD and NASDR Web Sites (www.nasd.com or www.nasdr.com). Due to the confidential and proprietary nature of much of the information contained in these plans, the NASD cannot disclose them in their entirety. The BCP Kit contains general information about the NASD's Business Continuity Planning Program and specific business continuity information about NASD Regulation and Nasdaq® applications. If you have any questions about the information provided in the Kit, call the Year 2000 Program Office at (888) 227-1330.

      1 Firms must notify the NASD of a change of address to a contingency site location which is a requirement of NASD By-Laws, Article IV, Section 8(b).

      2 More information about the Member Year 2000 Readiness Statement Program and a sample letter that can be customized are available by visiting www.nasdr.com or calling (888) 227-1330. The NASD will be updating its Web Site with the letters on a regular basis through the end of the year.

      3 Reprints of certain sections of the Investor Kit are available to send to customers either separately or with other mailings, such as customer statements. Refer to www.nasdr.com or www.nasd.com Y2K sections to review the Kit online, or call the Year 2000 Program Office at (888) 227-1330.

      SIA And Securities Industry Contingency Planning Information

      The SIA Contingency Planning Web Site is a central resource dedicated to the dissemination and communication of information pertinent to contingency and business continuity planning in the financial services industry. The Web Site, which is managed by the SIA Financial Services Coordination and Communication Center (FSCCC), is intended to provide financial services industry participants with timely and pertinent information that will assist them in preparing for the century date roll-over weekend. The Web Site is comprised of a public area and a private area. The public area is intended for non-registered users to access general information, documents, etc. The private area is intended for registered users to gain access to the FSCCC services. The SIA FSCCC document is available in the public area and is intended for use as a reference in understanding how the financial services industry is planning its communication strategy and how it expects to handle the flow of information during the transition to the Year 2000.

      To access all areas of the SIA's Year 2000 Contingency Planning Web Site, a firm must first register as a user of this Web Site. To register, follow these steps:

      • Go to the SIA Year 2000 Contingency Planning Web Site (www.siay2k.com/contingency).


      • Under "Registration for FSCCC", click on Information.


      • Scroll down to New Registrants, click on Registration Request.


      • Complete steps 1, 2, and 3.

      The SIA will contact firms with their registration information. For help registering, call the SIA at (888) Y2K-4SIA.

      Millennium Transition Questionnaire

      The Securities and Exchange Commission (SEC) has developed a uniform questionnaire (Millennium Transition Questionnaire) to gather specific information from selected broker/dealers during the Year 2000 transition. The Questionnaire will be implemented by self-regulatory organizations (SROs). Selected firms will be required to respond to the Questionnaire under procedures established by their designated examining authority (DEA).4

      The Questionnaire is intended to identify any problems caused by the transition, provide updates of markets and market participants to regulators, and reinforce investor confidence.

      Each DEA will collect information from its participating members once per day beginning December 29, 1999, three times per day beginning January 3, 2000, and then two times per day beginning January 5, 2000. We expect to discontinue the Questionnaire after the last report on January 7, 2000.

      It is important to contact the NASD if your firm is having issues that could affect business operations over the Year 2000 transition period. Check the NASD's Year 2000 Web Pages for information during the transition weekend. The Web Pages will also contain links to other relevant industry status reports such as the SIA Contingency Planning Web Site.

      4 This Questionnaire is required by the SEC, and implemented by the SROs. Selected clearing and market-making firms will submit responses at scheduled times throughout the transition period of December 29, 1999 - January 7, 2000.

      Year 2000 Countdown

      As 1999 winds down, Year 2000 issues will receive increased attention as companies in virtually every industry accelerate efforts to meet Year 2000 deadlines. During this critical period, the securities industry will heighten its focus on regulatory compliance, investor communication, Year 2000 testing, and contingency planning. All broker/dealers should be aware of Year 2000-related dates and events noted below. Following these specific dates and events are general guidelines to help firms complete their readiness efforts.*

      November 5, 1999: Submit your firm's Member Year 2000 Readiness Statement to be included on the NASD Web Site listing available to investors. See the NASD and NASDR Web Sites (www.nasd.com and www.nasdr.com) for more information. November 12, 1999: The Securities Industry Association (SIA) Transition Conference, the SIA's final conference of the year, will detail the industry's Year 2000 plans for communications during the weekend of December 31, 1999 - January 3, 2000. It will provide information about contingency planning as well as interaction with key communication and coordination center personnel, regulators, and the industry over the transition weekend. November 15, 1999: This is the final compliance date for the SEC Operational Capability Rule. Applicable firms should file their certification statements based on the "Guidance for Completion and Submission of Year 2000 Readiness Certification" found on the NASD Regulation Web Site (www.nasdr.com). December 29, 1999 - January 7, 2000: Millennium Transition Questionnaire (MTQ). All participating firms will complete the MTQ as required and submit it to their DEA.

      Milestone Guidelines

      In addition to the specified dates listed above, firms should follow the activity guidelines below (and refer to the following Year 2000 Education and Events schedule for more information on Virtual Workshops to be conducted by the NASD Year 2000 Program Office). These general activities should occur in the timeframe shown, and may vary depending on the size and complexity of the broker/dealer.*

      November 1999

      • Complete legal reviews of Year 2000 plans and activities, including Year 2000 warranty information in contracts.


      • Complete and fully test Year 2000 contingency plans to ensure functionality.


      • Activate freeze dates for new software or hardware as applicable to prevent Year 2000 issues with newly implemented systems.


      • Activate third-party contingency arrangements for any vendors or suppliers failing to show acceptable Year 2000 progress or readiness.


      • Communicate with investors about Year 2000 readiness efforts by submitting a voluntary Member Year 2000 Readiness Statement. See the NASD and NASDR Web Sites (www.nasd.com and www.nasdr.com) for more information.


      • For those firms identified as participants in the Millennium Transition Questionnaire, identify the key contact person.

      December 1999

      December should be reserved for event management and final Year 2000 preparations. These include:

      • Continuing focus on investor communication about the securities industry's readiness and your firm's readiness.


      • Staffing and confirming activities over the course of the transition period, including required reporting of Market Maker and clearing firms to the NASD.


      • Completing the Millennium Transition Questionnaire (selected firms only).

      January 2000

      After the new year arrives, firms should begin focusing on:

      • Millennium Transition Questionnaire.


      • Leap year considerations to ensure continued success.


      • Decimalization plans.

      *Following these guidelines by themselves will not guarantee Year 2000 compliance.

      Year 2000 Education And Events

      The NASD Year 2000 Program Office is continuing to offer Virtual Workshops—conference call-in sessions. The NASD encourages registration for these sessions by calling (888) 567-0578. After placing the call, listen to the greeting, and provide the following information when prompted: firm name, Broker/Dealer #, and workshop date. On the day of the session, call (800) 857-7323 and indicate the password and confirmation number provided for the specific workshop. See below for a list of these specific workshops organized by date of session, as well as a brief summary of the issues to be discussed.

      NOVEMBER

      November 10   Contingency Planning and Reporting Requirements

      Password: Trends

      Conf. #: 3117664

      Issues to be covered:

      • Developments in contingency planning trends


      • Step-by-step guide to completing mandatory reporting to the SROs during the transition timeframes


      • Global view

      November 17   Risk Management

      Password: Risk

      Conf. #: 3117677

      Issues to be covered:

      • Key principles in risk management


      • What the NASD is doing to manage risk


      • What clearing firms and introducing firms can do


      • Review of seven areas that can affect your business operations

      DECEMBER

      December 9   Millennium Transition Questionnaire (MTQ)

      Password: MTQ

      Conf. #: 3117691

      Issues to be covered:

      • Report submission requirements


      • Reporting details


      • Preview of MTQ Web application

      December 14   Beyond Year 2000

      Password: Beyond

      Conf. #: 3117699

      Issues to be covered:

      • The Millennium—Doing business summary


      • Resources


      • Record retention and maintenance issues

      NASD Year 2000 Event Calendar

      Topic Location Date Time
      Contingency Planning and Reporting Requirements Virtual Nov. 10 11:00 a.m., ET
      Risk Management Virtual Nov. 17 11:00 a.m., ET
      Millennium Transition Questionnaire (MTQ) Virtual Dec. 9 11:00 a.m., ET
      Beyond Year 2000 Virtual Dec. 14 11:00 a.m., ET

      More Information/Questions

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

      or visit the Year 2000
      Web Pages:

      www.nasd.com or www.nasdr.com

    • 99-89 NASD Informs Members Of Election Results For District Committees And District Nominating Committees

      View PDF File

      INFORMATIONAL

      District Committees And District Nominating Committees

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Senior Management
      District Committee Membership

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      Through this Notice, the National Association of Securities Dealers, Inc. (NASD®) announces the election results for the 2000 District Committees and the District Nominating Committees. The Committees' members are included in Exhibit I.

      Questions/Further Information

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

      EXHIBIT I

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

      District Committee Members

      To Serve Until January 2001

      Steven R. Aaron
      Hambrecht & Quist LLC, San Francisco, CA

      Janet W. Campbell
      Protected Investors of America, Walnut Creek, CA

      Douglas C. Heske
      U.S. Bancorp Piper Jaffray, San Francisco, CA

      To Serve Until January 2002

      John H. Chung
      First Security VanKasper, San Francisco, CA

      Steven D. Piper
      Volpe Brown Whelan & Co., LLC, 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

      District Nominating Committee Members

      Nicholas C. Cochran
      American Investors Company, Dublin, CA

      Deborah R. Gatzek
      Franklin/Templeton Distributors, San Mateo, CA

      John F. Luikart
      Sutro & Co Incorporated, San Francisco, CA

      John E. Schmidt
      Credit Suisse First Boston, San Francisco, CA

      William A. Svoboda
      Morgan Stanley Dean Witter, 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 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

      District Nominating Committee Members

      Jerry M. Gluck
      Jefferies and Company, Inc., Los Angeles, CA

      Carl E. Lindros
      Santa Barbara Securities, Inc., Santa Barbara, CA

      Joan B. Seidel
      Morton Seidel & Company, Inc., Beverly Hills, CA

      Robert L. Winston
      American Funds Distributors, Inc., Los Angeles, CA

      Kaye M. Woltman
      Girard Securities, Inc., San Diego, CA

      DISTRICT 3

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

      District 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 Richards
      PaineWebber, Inc., Salt Lake City, UT

      To Serve Until January 2002

      James Barnyak
      Salomon Smith Barney, Inc., Seattle, WA

      David Griswold
      Frank Russell Securities, Inc., Tacoma, WA

      James E. Stark
      Charles Schwab & Co., Phoenix, AZ

      Thomas Williams
      TIAA/CREF, Denver, CO

      To Serve Until January 2003

      J. Pamela Dawson
      WM Financial Services, Seattle, WA

      Steven M. Fishbein
      American Fronteer Financial Corp., Denver, CO

      John K. Hinfey
      United Planners' Financial Services of America, LTD.
      Scottsdale, AZ

      Bruce Kramer
      Prudential Securities, Seattle, WA

      District Nominating Committee Members

      J. Wendell Garrett
      J.W. Garrett & Company, Inc., Phoenix, AZ

      James Kerr
      Ragen MacKenzie, Inc., Seattle, WA

      Steven Larson
      Richards, Merrill & Peterson, Inc., Spokane, WA

      Anthony Petrelli
      Neidiger, Tucker, Bruner, Inc., Denver, CO

      Douglas Strand
      Strand, Atkinson, Williams & York, Inc., Portland, OR

      DISTRICT 4
      Jack Rosenfield, District Director
      120 W. 12th Street, Suite 900
      Kansas City, MO 64105
      (816) 421-5700

      District Committee Members

      To Serve Until January 2001

      Antonio J. Cecin
      Piper Jaffray Inc., Minneapolis, MN

      Cheryl Cook-Schneider
      Edward Jones, St. Louis, MO

      Robert J. Goodmanson
      Robert W. Baird & Co. Inc., St. Paul, MN

      Brent M. Weisenborn
      Security Investment Company of Kansas City
      Kansas City, MO

      To Serve Until January 2002

      Robert M. Chambers
      Chambers Martin & Co., Des Moines, IA

      John R. Lepley
      Princor Financial Services Corp., Des Moines, IA

      William M. Lyons
      American Century Investment Services, Inc.
      Kansas City, MO

      Nancy E. Varner
      Mercantile Investment Services Inc., St. Louis, MO

      To Serve Until January 2003

      E. John Moloney
      Moloney Securities Company, St. Louis, MO

      Rodger O. Riney
      Scottsdale Securities, Inc., St. Louis, MO

      Jeffrey A. Schuh
      Offerman & Company, Minneapolis, MN

      Gail Werner-Robertson
      GWR Investments, Inc., Omaha, NE

      District Nominating Committee Members

      John D. Cleland
      Security Distributors, Inc., Topeka, KS

      Colleen Curran
      American Express Financial Advisors Inc.,
      Minneapolis, MN

      Albert W. Lauth
      First St. Louis Securities, Inc., St. Louis, MO

      Todd W. Miller
      Miller, Johnson & Kuehn, Incorporated
      Minneapolis, MN

      Wayne H. Peterson
      Washington Square Securities, Inc., Minneapolis, MN

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

      District 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
      EVEREN 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
      J. C. Bradford & Co., Memphis, TN

      District Nominating Committee Members

      J. French Hill
      Delta Trust Investments, Inc., Little Rock, AR

      David S. Patrick
      Wheat, First Securities, Inc., Montgomery, AL

      William T. Patterson
      Morgan Keegan & Company, Inc., Jackson, MS

      Jerry Roberts
      Sterne, Agee & Leach, Inc., Little Rock, AR

      Miguel Uria
      Oro Financial, Inc., New Orleans, LA

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

      District Committee Members

      To Serve Until January 2001

      Daniel C. Dooley
      May Financial Corp., 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

      Fredrick W. McGinnis
      PaineWebber Inc., Houston, TX

      Sue H. Peden
      Brokers Transaction Services, Inc., Dallas, TX

      Joseph H. Storthz
      Transamerica Financial Resources, Houston, TX

      To Serve Until January 2003

      George C. Buck
      Harris Webb & Garrison, Inc., Houston, TX

      Bryan T. Forman
      First Financial Investment Securities, Inc., Austin, TX

      Richard L. Sandow
      Southlake Capital, L.L.C., Southlake, TX

      District Nominating Committee Members

      Jane Bates
      The Variable Annuity Marketing Co., Houston, TX

      William D. Connally
      Greenman Parker Connally Greenman, Inc.
      Ft. Worth, TX

      Robert G. Gunn III
      Gunn and Company, Inc., San Antonio, TX

      Paul L. Larkin
      Vista Securities, Inc., Dallas, TX

      William B. Madden
      Madden Securities Corporation, Houston, TX

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

      District 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.
      Prudential Securities Incorporated, 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

      District Nominating Committee Members

      Robert J. Brietz
      Marion Bass Securities Corp., Charlotte, NC

      Franklin C. Golden
      James M. Myers & Co., Charlotte, NC

      Stuart J. Knobel
      Edgar M. Norris & Co., Inc., Anderson, SC

      David G. Pittinos
      Dean Witter Reynolds, Inc., Tallahassee, FL

      R. Charles Shufeldt
      SunTrust Banks, Atlanta, GA

      DISTRICT 8

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

      District Committee Members

      To Serve Until January 2001

      William C. Alsover
      Centennial Securities Company, Inc.
      Grand Rapids, MI

      Wallen L. Crane
      Salomon Smith Barney, Inc., Farmington Hills, MI

      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

      Christine E. Monical
      Conseco Financial Services, Inc.
      Conseco Equity Sales, Inc., Carmel, IN

      Renee M. Rombaut
      Sage, Rutty & Co., Inc., Rochester, NY

      District Nominating Committee Members

      Leonard L. Anderson
      Anderson & Company, Inc., Grand Haven, MI

      Robert T. Clutterbuck
      McDonald Investments Inc., Cleveland, OH

      Paul E. Murin
      David A. Noyes & Company, Chicago, IL

      William H. Richardson
      Trubee, Collins & Co., Inc., Buffalo, NY

      G. Donald Steel
      Planned Investment Co., Inc., Indianapolis, IN

      DISTRICT 9

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

      District Committee Members

      To Serve Until January 2001

      Victor M. Frye
      Calvert Distributors, Inc., Bethesda, MD

      Phillip C. Graham
      Legg Mason Wood Walker, Incorporated
      Philadelphia, PA

      Jerome J. Murphy
      Janney Montgomery Scott, Inc., Philadelphia, PA

      To Serve Until January 2002

      A. Louis Denton
      Philadelphia Corporation for Investment Services
      Philadelphia, PA

      Thomas W. Neumann
      Sherwood Securities Corp., Jersey City, NJ

      Joseph S. Rizzello
      Vanguard Marketing Corporation, Malvern, 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

      District Nominating Committee Members

      Mark W. Cresap
      Cresap, Inc., Radnor, PA

      Allen S. Jacobson
      Gibraltar Securities Co., Florham Park, NJ

      James J. Malespina
      Herzog, Heine, Geduld, Inc., Jersey City, NJ

      William F. Rienhoff IV
      BT Alex. Brown Incorporated, Baltimore, MD

      Robert A. Woeber
      Arthurs, Lestrange & Company Incorporated
      Pittsburgh, PA

      DISTRICT 10
      David A. Leibowitz, District Director
      NASD Financial Center
      33 Whitehall Street
      New York, NY 10004
      (212) 858-4000

      District Committee Members

      To Serve Until January 2001

      Herbert Ackerman
      Neuberger & Berman, LLC, New York, NY

      Arthur S. Ainsberg
      Brahman Securities Inc., New York, NY

      William P. Behrens
      Ernst & Co., New York, NY

      Laurence H. Bertan
      Sanford C. Bernstein & Co. Inc.
      New York, NY

      Mark D. Madoff
      Bernard L. Madoff Investment Securities
      New York, NY

      Stuart L. Sindell
      Datek On-Line Brokerage Services Corp., Edison, NJ

      To Serve Until January 2002

      John Iachello
      ING Baring Furman Selz, New York, NY

      Philip V. Oppenheimer
      Oppenheimer & Close Inc., New York, NY

      Gary Salamone
      Schroder & Co. Inc., New York, NY

      Eugene A. Schlanger
      Nomura Securities International Inc., New York, NY

      Lawrence F. Sherman
      MONY Securities Corporation, 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

      District Nominating Committee Members

      Ralph J. Costanza
      Salomon Smith Barney Inc., New York, NY

      Joan S. Green
      BT Brokerage Corporation, New York, NY

      Vicki Z. Holleman
      Loeb Partners Corporation, New York, NY

      Norman H. Pessin
      Neuberger & Berman, New York, NY

      Stuart J. Voisin
      Stuart Coleman & Co. Inc., New York, NY

      DISTRICT 11
      Willis H. Riccio, District Director
      260 Franklin Street, 16th Floor
      Boston, MA 02110
      (617) 261-0800

      District 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
      BancBoston Robertson Stephens, Boston, MA

      James P. Rybeck
      The RYBECK
      Division of Fechtor, Detwiler & Co., Inc., Meriden, CT

      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
      Westport Resources Investment Services, Inc.
      Westport, CT

      Deborah G. Ullman
      American Skandia Marketing, Inc., Shelton, CT

      Peter T. Wheeler
      Commonwealth Equity Services, Waltham, MA

      District Nominating Committee Members

      Harry H. Branning
      Advest, Inc., Hartford, CT

      Stephanie Brown
      Linsco/Private Ledger Corp., Boston, MA

      Francis W. Murphy
      Moors & Cabot, Boston, MA

      Wilson G. Saville
      Barrett & Company, Providence, RI

      Edward L. Sherr
      Carl P. Sherr & Company, Worcester, MA

    • 99-88 Veterans Day And Thanksgiving Day: Trade Dates—Settlement Dates Schedule

      View PDF File

      INFORMATIONAL

      Trade Date— Settlement Date

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making
      Holiday Trade Date—Settlement Date Schedule

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

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

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

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

      Note: November 11, 1999, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on November 11 will be combined with transactions made on the previous business day, November 10, for settlement on November 16. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

      *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 purchaseor, pursuant to Section 220.8(d)(1), make application to extend the time period speci-fied. The date by which members must take such action is shown in the column titled "Reg. T Date."

    • 99-87 Fixed Income Pricing System Additions, Changes, And Deletions As Of August 23, 1999

      View PDF File

      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      As of August 23, 1999, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      AKS.GC AK Steel Corp. 7.875 02/15/09
      AVBH.GA Avalon Cable Holdings LLC 11.875 12/01/08
      AVBM.GA Avalon Cable Holdings LLC 9.375 12/01/08
      AVDO.GA Avado Brands Inc. 11.750 06/15/09
      AVGF.GA Advanced Glassfiber Yarn LLC 9.875 01/15/09
      AXAS.GA Abraxas Petroleum Corp. Series B 12.875 03/15/03
      BOSS.GA Building One Services 10.500 05/01/09
      BUR.GA Burlington Industries Inc. New 7.250 09/15/05
      BUR.GB Burlington Industries Inc. New 7.250 08/01/27
      BVWB.GA Bay View Bank 10.000 08/31/09
      CKE.GA Carmike Cinemas Inc. Series B 9.375 02/01/09
      FAGC.GA Fairfield Mfg Co. Inc. 9.675 10/15/08
      FLC.GG R & B Falcon Corp. 12.250 03/15/06
      FOB.GA Boyds Collection Ltd. 9.000 05/15/08
      GKYD.GA Golden Sky DBS Inc. 13.500 03/01/07
      GSNP.GC Garden State Newspaper Inc. 8.625 07/01/11
      HGRU.GA Holt Group Inc. 9.750 01/15/06
      HYPT.GC Hyperion Telecommunications Inc. 12.000 11/01/07
      IMTN.GC Iron Mountain Inc. Del 8.250 07/01/11
      LSNU.GA Louisiana Casino Cruises Series B 11.000 12/01/05
      LUII.GA Luigino's Inc. 10.000 02/01/06
      LYO.GA Lyondell Chemical Co. 10.875 05/01/09
      LYO.GB Lyondell Chemical Co. Series A 9.625 05/01/07
      MCLL.GC Metrocall Inc. 11.000 09/15/08
      MSXI.GA MSX International Inc. 11.375 01/15/08
      NTK.GF Nortek Inc. Series B 8.875 08/01/08
      NWSP.GA National Wines & Spirits 10.125 01/15/09
      OBTI.GB Orbital Imaging Corp. Series D 11.625 03/01/05
      PRTL.GC Primus Telecomm Group Inc. 11.250 01/15/09
      RWKS.GA Railworks Corp. 11.500 04/15/09
      TMPO.GA True Temper Sports Inc. Series B 10.875 12/01/08
      TVUI.GA TV Guide Inc. 8.125 03/01/09
      WAB.GB Westinghouse Air Brake Series B2 9.375 06/15/05
      WSII.GA Waste Systems Intl Series B 11.500 01/15/06

      As of August 23, 1999, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      BDGM.GA Building Materials Corp. 11.750 07/01/04
      BDI.GA Bayard Drilling Tech Inc. 11.000 06/30/05
      CE.GD Calenergy Co. 7.630 10/15/07
      DTC.GA Domtar Inc. 12.000 04/15/01
      GEOG.GA Gerrity Oil & Gas Corp. 11.750 07/15/04
      KR.GF Kroger Co. 9.875 08/01/02
      PEZL.GA Pennzoil Co. 9.625 11/15/99
      PEZL.GB Pennzoil Co. 10.625 06/01/01
      PEZL.GC Pennzoil Co. 10.125 s11/15/09
      PEZL.GD Pennzoil Co. 10.250 11/01/05
      PNM.GH Public Service Co. New Mexico 7.500 08/01/18
      PNM.GI Public Service Co. New Mexico 7.100 08/01/05
      RIGS.GB Riggs Natl Corp. Wash DC 8.500 02/01/06
      STBR.GB Stater Bros Hldgs. Inc. 9.000 07/01/04
      URCH.GA Uniroyal Chemical Inc. 9.000 09/01/00
      VHT.GA Venture Holdings Trust 9.750 04/01/04

      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 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.

    • 99-86 NASD Regulation Adopts Policy Regarding Imposition And Collection Of Monetary Sanctions

      View PDF File

      INFORMATIONAL

      Imposition And Collection Of Monetary Sanctions

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Disciplinary Actions

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The purpose of this Notice to Members is to give National Association of Securities Dealers, Inc. (NASD®) members notice of the policies adopted by the National Adjudicatory Council (NAC) at its June 1999 meeting regarding the imposition and collection of monetary sanctions imposed in disciplinary matters. This policy applies to all Letters of Acceptance, Waiver, and Consent (AWCs) and Offers of Settlement executed by respondents beginning on November 1, 1999, and to all NAC, Hearing Panel, and default decisions decided and issued on or after November 1, 1999. Members are directed to attach this Notice to Members as an amendment to the NASD Sanction Guidelines.

      Questions/Further Information

      Questions concerning this Notice to Members may be directed to Shirley H. Weiss, Associate General Counsel, Office of General Counsel, NASD Regulation, Inc., (NASD RegulationSM) at (202) 728-8844.

      Discussion

      The NAC has adopted policies regarding the imposition and collection of monetary sanctions (restitution, disgorgement of illgotten gains, and fines). As discussed in the NASD Sanction Guidelines, the overriding and ultimate purpose of any disciplinary sanction is to remedy misconduct, deter future misconduct, and protect the investing public. The policies adopted by the NAC, which apply equally to both settled1 and litigated disciplinary matters, identify the circumstances under which NASD Regulation (including staff and adjudicators) will imposeand collect monetary sanctions.

      The policies described in this Notice to Members are guided by the following principles:

      • In certain categories of cases, if an individual is barred, NASD Regulation generally will not impose a fine.


      • Where quantifiable customer harm has been demonstrated, or a respondent has been unjustly enriched, NASDRegulation generally will orderrestitution or disgorgement.


      • In sales practice cases where there has been widespread, significant, and identifiable customer harm or the respondent has retained substantial ill-gotten gains, NASD Regulation generally will require the payment of restitution and disgorgement and will also pursue the collection of any fine.


      • Where there has been no widespread customer harm, and individuals are barred or suspended, NASD Regulation may forego the imposition of a fine and require that any order of restitution or disgorgement be satisfied upon the individual's re-entry into the securities industry. This willallow NASD Regulation to actquickly to get those persons out of the securities industry.


      • As required by the Securities and Exchange Commission, NASD Regulation will considera respondent's inability to paywhen imposing monetary sanctions.

      The policies described in this Notice to Members will be applied in a manner consistent with the NASD Sanction Guidelines, that is, they are advisory and are intended to provide direction to NASD staff and adjudicators in determining appropriate sanctions consistently and fairly.

      NASD Regulation will consider the following factors in determining the imposition and collection of monetary sanctions.

      Monetary Sanctions

      In the following types of cases, if an individual is barred and there has been no customer loss, NASD Regulation generally will not impose a fine:

      • failure to respond violations under Rule 8210


      • exam cheating cases


      • private securities transactions of an associated person under Rule 3040 (in which nodisgorgement or restitution is ordered)

      In the following types of cases, if an individual is barred, NASD Regulation generally will order restitution or disgorgement of illgotten gains where appropriate, butgenerally will not otherwise impose a fine.

      • conversion


      • forgery


      • sales practice and private securities transaction cases where only one or a small number of customers are harmed

      NASD Regulation generally will require the payment of restitution and disgorgement and will also pursue the collection of any fine in sales practice cases, even if anindividual is barred, if:

      • there has been widespread, significant, and identifiable customer harm; or


      • the respondent has retained substantial ill-gotten gains

      In other sales practice cases and in cases involving violations other than those mentioned above, NASD Regulation may exercise its discretion and make a monetary sanction payable when a respondent re-enters the securities industry. NASD Regulation will consider such factors as whether:

      • the respondent is suspended or not in the industry at the timethe sanction is imposed


      • only one or a small number of customers are harmed

      In such cases, the respondent will not be eligible for association with a member firm until the monetarysanction is satisfied.

      NASD Regulation staff and adjudicators will have the discretion to impose post-judgment interest on restitution.

      Inability To Pay Monetary Sanctions

      NASD Regulation will consider a respondent's inability to pay in imposing monetary sanctions under the following circumstances:

      • Respondents will be required to document their financial status at the time the settlement is negotiated or at the Hearing Panel level if litigated. NASD Regulation staff will provide standard documents to respondents for this purpose.


      • If respondents do not raise the issue of inability to pay at the time the settlement is negotiated (or in a litigated matter during the proceedings before a Hearing Panel), they will be considered to have waived the issue, and they will not be permitted to raise the issue of inability to pay at a later time.


      • If NASD Regulation staff or adjudicators determine that a respondent has demonstrated an inability to pay part or all of a monetary sanction, they may modify the monetary sanction.


      • Settlement documents and decisions will indicate whether a monetary sanction was modified on the basis of a respondent's demonstrated financial inability to pay.

      Payment

      • A respondent who is permitted to use an installment plan will also be required to execute a promissory note that tracks the installment plan. Installment plans generally will be limited to two years. In extraordinary cases, installment plans may be extended to not more than five years. The amount and timing of installment payments will be set forth in the settlement documents.


      • Respondents may also charge monetary sanctions to a credit card.

      These policies apply to all AWCs, Minor Rule Violation plan settlements, and Offers of Settlement executed by respondents beginning on November 1, 1999, and to all NAC, Hearing Panel decisions, and default decisionsdecided and issued on or after November 1, 1999.

      Members are directed to attach this Notice to Members as an amendment to their NASD Sanction Guidelines.


      Endnote

      1 Settlements include Letters of Acceptance, Waiver, and Consent; Offers of Settlement; and settlements under the Minor Rule Violation plan.

    • 99-85 Broker/Dealer And Agent Renewals For 2000; CRD Fee Changes

      View PDF File

      ACTION REQUIRED

      Renewal fees for the year 2000 for all participating regulators are due NO LATER than December 10, 1999.

      Broker/Dealer And Agent Renewals

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registered Representatives
      Registration
      Senior Management
      Registration
      Renewals
      Web CRD

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) broker/dealer and agent registration renewal cycle for the year 2000 will begin November 1, 1999. This year, with the implementation of Web CRDSM, hard-copy Initial Renewal Statements and rosters will no longer be mailed to member firms. The Initial Renewal Statements and rosters will be available electronically for viewing and printing on the new Web CRD system.

      In addition, the NASD Board of Governors approved changes to Schedule A of the NASD By-Laws that affect the Central Registration Depository fee structure and will be reflected in the Initial Renewal Statements. The changes, which were approved by the Securities and Exchange Commission (SEC), are:

      • The $20 Form U-4 and Form U-5 amendment fee is eliminated effective January 1, 2000.


      • A $30 annual processing fee, which covers the cost of NASD registration renewal and all amendment filings for the year, is established, effective January 1, 2000, and will be assessed in the November Initial Renewal Invoices. It replaces the $15 renewal processing fee.

      This annual renewal program simplifies the registration renewal process through the payment of one amount, reflected on the member firm's Initial Renewal Statement, that will include 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 Initial Renewal Statement also includes state agent renewal fees and state broker/dealer renewal fees. Members should read this Notice and any instructions posted to the NASD Regulation Web Site, www.nasdr.com, or mailed to ensure continued eligibility to do business in the states effective January 1, 2000. Any renewal processing changes subsequent to the publishing of this Notice to Members will be provided to you in a Special Notice to Members.

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

      Initial Renewal Statements

      On November 1, 1999, Initial Renewal Statements will be available on Web CRD 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 statement no later than December 10, 1999.

      NASD personnel assessments and system processing fees for 2000 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) on or before December 31, 1999. That personnel assessment is currently $10 per person. The system processing fee, which covers the renewal of NASD registration and amendment activity for a registered person for the coming year, is $30. The NASD branch office assessment fee is $75 per branch based on the number of active branches as of December 31, 1999.

      Agent renewal fees for NYSE, Amex, CBOE, PCX, PHLX, and state affiliations are listed in the statement on Web CRD. A matrix, which includes a list of broker/dealer renewal fees for states that participate in the broker/dealer renewal program, is posted to the CRD Internet Page on the NASDR Web Site 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 registered personnel employed by the member.

      If a state does not participate in this year's broker/dealer renewal program, members registered in that state must contact the state directly to ensure compliance with renewal requirements. In addition, some participating states may require steps beyond the payment of renewal fees to complete the broker/dealer renewal process. As of October 1, 1999, California is the only state not participating. Members should contact jurisdictions directly for further information on jurisdiction renewal requirements.

      Payment of the Initial Renewal Statement should be either in the form of a check made payable to NASD Regulation, Inc. (NASD RegulationSM) or by bank wire transfer. The check should be drawn on the member firm's account, with the firm's CRD number included on the check. Submit the check, along with the first page of the online statement, and mail to:

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

      To ensure prompt processing, the Initial 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 10, 1999, deadline could cause a member to become ineligible to do business in the jurisdictions effective January 1, 2000.

      Filing Forms U-5

      Members may avoid paying unnecessary renewal fees by electronically filing Forms U-5 via Web CRD for agents terminating in one or more jurisdiction affiliations. Due to the positive feedback received by the NASD by its member firms that have used postdated Forms U-5 for renewals, the NASD will again accept post-dated agent termination notices on the Forms U-5. From November 1 to December 23, the NASD will electronically accept and process Forms U-5 (both partial and full terminations) with a post-dated termination date of December 31, 1999. Under this procedure, if the Form U-5 indicates a termination date of December 31, 1999, 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 electronically by the renewal deadline date of 8:00 p.m., Eastern Time (ET), on December 23, 1999. Also, in Web CRD, post-dated Forms U-5 can only contain a date of termination of December 31, 1999.

      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, 1999.

      Filing Forms BDW

      The CRD Phase II program, now in its 10th year, allows firms requesting terminations (either full or jurisdiction only) to electronically file their Forms BDW with the CRD to avoid the assessment of renewal fees in those jurisdictions that are designated on the Form BDW, provided that the jurisdiction is a CRD Phase II participant. Currently, there are four regulators that are not participating in Phase II. They are:

      • State of Michigan


      • American Stock Exchange


      • New York Stock Exchange


      • Pacific Exchange

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

      The deadline for electronic filing of Forms BDW for firms that want to terminate an affiliation before yearend 1999 is 8:00 p.m., ET, on December 23, 1999. This deadline also applies to the filing of Forms BDW with the jurisdictions that are not participating in Phase II. Postdated Forms BDW filed with Web CRD will be accepted and processed in the same manner as post-dated Forms U-5.

      Removing Open Registrations

      This year, the rosters, posted on Web CRD, will include firm agents whose NASD registration is either terminated or expired (please note that the expired registrations will be reflected as "purged" on the report) due to the existence of a deficient condition, but who have an approved registration with a state. This roster should aid in the reconciliation of personnel registrations prior to year's end. Firms may terminate obsolete state registrations through the submission of Forms U-5 or reinstate the NASD licenses through the filing of Page 1s of Forms U-4. The Non-NASD Registered Individuals Roster will only be available on Web CRD if a firm has agents within this category.

      Final Adjusted Statements

      On January 24, 2000, 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, 1999. Any adjustments in fees owed as a result of registration terminations or approvals subsequent to the Initial Renewal Statement will be made in this final reconciled statement on Web CRD. If a member has more agents and/or branch offices registered at year's end than it did on the Initial 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 will also need to access the Reports tab for member renewal rosters that 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.

      This year's renewal rosters, located on Web CRD, will also include two reports: 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 approximately two months in which to reconcile any discrepancies on the renewal rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final statements and rosters will appear in the January 2000 issue of Notices to Members. Firms may also refer to the renewal edition of the CRD/PD Bulletin for details concerning the renewal process.

    • 99-84 NASD To Send Only One Written Notice Before Deducting Delinquent Arbitration Fees From CRD Account

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      INFORMATIONAL

      Arbitration Fees

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Senior Management
      Arbitration
      CRD Account

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      Effective November 1, 1999, the National Association of Securities Dealers, Inc. (NASD®) will deduct delinquent arbitration fees from funds maintained in a member's Central Registration Depository (CRDSM) account 60 calendar days after the date on a single invoice informing the member that the arbitration fees are due. If the member is represented by outside counsel which is the counsel of record, the single invoice will only be sent to the outside counsel.

      Members previously were sent two invoices. The new practice of providing one invoice will streamline operations at the NASD and save staff resources, yet still give members 60 calendar days in which to remit the fees before they are deducted from the firm's CRD account.

      Questions/Further Information

      Questions regarding this Notice may be directed to Dorothy Popp, Director of Operations, Office of Dispute Resolution, NASD Regulation, Inc., (NASD RegulationSM) at (212) 858-3950, or Louise Corso, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6939.

      Background

      Once an arbitration claim has been filed, members must pay certain fees. These fees include, but are not limited to, member surcharges, process fees, and forum fees (collectively, "arbitration fees").1 Arbitration fees are due at various stages of the arbitration process. For example, member surcharges are due at the time a claim is served, while hearing process fees are due when parties are notified of the date and location of the first hearing session. Other arbitration fees are allocated by the arbitrators in the award and are due upon service of the award. The Office of Dispute Resolution bills member surcharges and processing fees during the course of the proceeding. It sends an invoice at the end of a proceeding to collect other fees, including forum fees and administrative fees.

      The NASD has had an ongoing problem with unpaid fees resulting from arbitration proceedings. Since January 1998, the NASD has used funds deposited in a member's CRD account to pay delinquent arbitration fees, in an effort to reduce the amount of unpaid fees.2 The NASD has provided members with two invoices and 60 calendar days to pay the fees before deducting funds from the firm's CRD account.

      Deduction From Member's CRD Account

      Effective for invoices issued on and after November 1, 1999, the NASD will send out only one invoice informing members that the arbitration fees are due. If the NASD does not receive payment 60 calendar days after the date on the invoice, it will deduct funds for delinquent arbitration fees from the member's CRD account.

      The NASD has covered delinquent arbitration obligations with members' on-deposit funds since January 1998. The NASD believes that sending firms one invoice gives members reasonable notice of their obligations to pay the fees.

      The NASD will continue to send to the member's compliance officer written confirmation of each deduction of funds from the CRD account to cover unpaid arbitration fees. 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 CRD-related obligations.

      Suspension/Cancellation Of Membership Or Registration

      On occasion, a member's CRD account is depleted before all delinquent fees can be collected. If the NASD does not receive payment within 60 calendar days after the date on the invoice, and there are insufficient funds on deposit to cover the unpaid fees, and the member has not made other payment arrangements, the NASD will pursue the suspension or cancellation of the member's membership pursuant to Article VI, Section 3 of the NASD By-Laws. 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 arbitration fees, unless the member acts pursuant to applicable law to file, for example, a timely motion to vacate or to modify the award which has not been denied.

      Joint And Several Responsibility For Payment Of Fees

      All parties against whom arbitration fees have been assessed jointly and severally receive an invoice for the entire obligation, with notice that there is joint and several liability. Each party is equally liable for the satisfaction of the entire obligation. Satisfaction of the outstanding fees releases all parties from the outstanding liability. However, if the balance remains unpaid 60 calendar days after the date on the invoice, the NASD will deduct funds from the CRD accounts of active member firms against which the arbitrators have assessed fees jointly and severally. When multiple active member firms are held jointly and severally liable for fees in a proceeding, the NASD will divide the remaining balance equally among the active members and deduct an equal amount from each member's respective CRD account.


      Endnotes

      1 Member surcharges are assessed against member firms when they are named in an arbitration proceeding, or when an associated person employed by the firm at the time of the events which gave rise to the claim is named in an arbitration proceeding. See Code of Arbitration Procedure, Rule 10333. Process fees are charged to members at several stages of an arbitration proceeding. Members are charged a prehearing process fee which covers activities in the case from the filing of the claim until the parties are given the names of arbitrators to select. If the matter does not settle before notification of the date of the first hearing session, the member must also pay a hearing process fee which covers activities relating to the evidentiary hearing, award, and case closing. See Rule 10333. See also Notice to Members 98-1. Forum fees are the fees assessed against parties by the arbitration panel based on the number of prehearing and hearing sessions that occurred in the arbitration proceeding. See Rules 10205 and 10332.

      2 See Notice to Members 97-71 which established the practice of deducting delinquent arbitration fees from member CRD accounts. The practice was limited to balances originating after January 1, 1998. Special Notice to Members 98-61 extended the practice to include fees originating prior to January 1, 1998 that were still unpaid.

    • Year 2000 Update (October)

      October 1999

      Contingency Planning Activities

      Although most businesses have worked, and are continuing to work, diligently to ensure that their Year 2000-related issues will be resolved in time, everyone must anticipate that some things may be overlooked, ignored, or not completed on or before December 31, 1999. In addition, businesses should consider events beyond their control that could impact various entities in 2000. One important way to be prepared is through the development and execution of a well-defined and tested contingency plan-meaning having an alternate means of recovering from mission-critical Year 2000 failures.

      Contingency plans are never final. It is important to test and revise your plan, detailing results and preparing business contingency operations throughout the remainder of 1999. Since your plan will include information not only about your firm's preparedness, but the preparedness of other entities external to your organization, your plan must continually assess for possible changes in status. For example, contingency plans should include alternatives in the event that scheduled software releases or additional product retirements are changed by your vendors.

      Many firms have requested copies of contingency plans of key business partners. In that regard, the National Association of Securities Dealers, Inc. (NASD®) is developing a contingency action matrix for all business partners. This matrix will include NASD systems, failure events, impact, and suggested actions by members. This information is expected to be completed and posted on the Year 2000 Web Pages of the NASD and NASD Regulation, Inc. (NASD RegulationSM) Web Sites (www.nasd.com and www.nasdr.com) by November 15, 1999.

      It is also important that your firm have plans in place to provide any mandated reports to the NASD (such as the Millennium Transition Questionnaire).1 Even if your firm is not mandated to complete these reports, you will want to check the NASD's Year 2000 Web Pages for information. The Web Pages will also contain links to other relevant industry status reports.

      1 This questionnaire is provided by the Securities and Exchange Commission, which the NASD and other designated examining authorities will require selected clearing and market-making firms to complete at scheduled times throughout the transition period of December 29, 1999 - January 7, 2000.

      NASD Readiness Initiative

      The NASD Year 2000 Readiness Program will allow members to display a Year 2000 readiness statement on the NASD and NASDR Web Sites (www.nasd.com and www.nasdr.com, respectively). These letters are intended to provide information that will serve to assure the investing public of their broker/dealers' ability to handle Year 2000 problems and keep their money and assets safe. Visitors to the Year 2000 Web Pages on these Web Sites will be able to search by firm name or broker/dealer number. This is a voluntary effort.

      The program guidelines and a letter template were distributed last month and are available on the NASD Year 2000 Web Pages. The NASD Year 2000 Program Office has already collected over 100 letters that will be published next month. It is not too late for your firm to submit information. While most firms have used the template provided by the NASD, many firms have included:

      • Details on the completion of major milestone dates.


      • Firm contact information to address Year 2000 inquiries.


      • Internet site addresses to view the particular firm's Year 2000 readiness efforts in more detail.

      Please send your readiness information to:
      National Association of Securities Dealers, Inc.
      15201 Diamondback Drive
      Rockville, MD 20850
      ATTN: Y2K Program Office

      If you have questions regarding any of these or other issues, please contact the NASD Year 2000 Program Office by e-mail at y2k@nasd.com or by calling our toll-free number at (888) 227-1330.

      Year 2000 Education And Events

      The NASD Year 2000 Program Office is continuing to offer Virtual Workshops—conference call-in sessions. The NASD strongly encourages registration for these sessions by calling (888) 567-0578. After placing the call, listen to the greeting, and provide the following information when prompted: firm name, Broker/Dealer #, and workshop date. On the day of the session, call (800) 857-7323 and indicate the password and confirmation number provided for the specific workshop. See below for a list of these specific workshops organized by date of session, as well as a brief summary of the issues to be discussed.

      OCTOBER

      October 19   State of the Securities Industry

      Password: Industry

      Conf. #: 3117632

      Issues to be covered:

      • Industry summary and overview


      • A look at clearing firms


      • A look at Market Makers


      • A look at introducing firms


      • In-depth look at where your firm should be in achieving Year 2000 readiness

      October 26   Legal Review for Broker/Dealers

      Password: Review

      Conf. #: 3117647

      Issues to be covered:

      • A review of legal issues for 1998 and 1999


      • Current broker/dealer trends reviewed


      • Checklist of what your firm may need to do with the little time remaining

      NOVEMBER

      November 2   Day Zero Preparations

      Password: Day Zero

      Conf #: 3117656

      Issues to be covered:

      • Day zero scenarios - the new year


      • Broker/dealer strategic scenarios


      • Helpful hints on day zero

      November 10   Contingency Planning and Reporting Requirements

      Password: Trends

      Conf. #: 3117664

      Issues to be covered:

      • Developments in contingency planning trends


      • Step-by-step guide to completing mandatory reporting to the SROs during the transition timeframes


      • Global view

      November 17   Contingency Planning and Reporting Requirements

      Password: Trends

      Conf. #: 3117677

      Issues to be covered:

      • Developments in contingency planning trends


      • Step-by-step guide to completing mandatory reporting to the SROs during the transition timeframes


      • Global view

      DECEMBER

      December 9   Day Zero Preparations

      Password: Day Zero

      Conf. #: 3117691

      Issues to be covered:

      • Day zero scenarios—the new year


      • Broker/dealer strategic scenarios


      • Helpful hints on day zero

      December 14   Beyond Year 2000

      Password: Beyond

      Conf. #: 3117699

      Issues to be covered:

      • The Millennium—Doing business summary


      • Resources


      • Record retention and maintenance issues

      NASD Year 2000 Event Calendar

      Topic Location Date Time
      State of the Securities Industry Virtual Oct. 19 11:00 a.m., ET
      Legal Review for Broker/Dealers Virtual Oct. 26 11:00 a.m., ET
      Day Zero Preparations Virtual Nov. 2 11:00 a.m., ET
      Contingency Planning and Reporting Requirements Virtual Nov. 10 11:00 a.m., ET
      Contingency Planning and Reporting Requirements Virtual Nov. 17 11:00 a.m., ET
      Day Zero Preparations Virtual Dec. 9 11:00 a.m., ET
      Beyond Year 2000 Virtual Dec. 14 11:00 a.m., ET

      Securities Industry Association Y2K Web Site

      To access all areas of the SIA's Year 2000 Contingency Planning Web Site, firms must first register as a user of this Web Site. To register, follow these steps:

      • Go to the SIA Year 2000 Contingency Planning Web Site (www.siay2k.com/contingency).


      • Under registration, click on Information.


      • Scroll down to New Registrants, click on Registration Request.


      • Complete steps 1, 2, and 3.

      The SIA will contact firms with their registration information. For help registering, call the SIA at (888) Y2K-4SIA.

      More Information/Questions

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

      or visit the...

      Year 2000 Web Pages:

      www.nasd.com

      or

      www.nasdr.com

    • 99-83 Columbus Day: Trade Date—Settlement Date Schedule

      View PDF File

      INFORMATIONAL

      Trade Date— Settlement Date

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Municipal/Government Securities
      Operations
      Trading & Market Making
      Holiday Trade Date— Settlement Date Schedule

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Columbus Day: Trade Date-Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 11, 1999. On this day, The Nasdaq Stock Market® and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

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

      Note: October 11, 1999, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 11, will be combined with transactions made on the previous business day, October 8, for settlement on October 14. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 11.

      *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."

    • 99-81 NASD Regulation Requests Comment on Proposed Salesperson Compensation Rules

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      ACTION REQUESTED BY OCTOBER 29, 1999

      Comment Period Expires October 29, 1999

      Salesperson Compensation Practices

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Mutual Funds
      Registered Representatives
      Senior Management
      Associated Persons of Members
      Compensation
      Investment Company Securities

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      NASD Regulation, Inc. (NASD Regulation®) requests comment from National Association of Securities Dealers, Inc. (NASD®) members, investors, and other interested parties on the following three rule proposals which relate to salesperson compensation: (1) a rule prohibiting the payment of higher payout ratios to salespersons for the sale of proprietary investment company products; (2) a rule prohibiting single security sales contests; and (3) a rule requiring disclosure of accelerated payout arrangements for salespersons who change firms.

      Included with this Notice are Attachment A (the text of the proposed amendments) and Attachment B (general questions that NASD Regulation requests comments on from members and interested parties).

      Request For Comment

      NASD Regulation encourages all members, investors, and interested parties to comment on the proposed rules. Comments must be received by October 29, 1999. For each proposal, we have included questions for you to consider in drafting your response. In addition, for your convenience, we have provided a checklist (see Attachment B) so that in a minimum amount of time you can provide NASD Regulation with your general comments.

      Note: Each Notice to Members may contain different and more specific questions we encourage you to consider. While information concerning how many members are generally for or against a proposal is important to the Board, because this is not a vote in considering whether to proceed with or modify a proposal, the Board will also heavily rely upon information and data concerning the substantive merits of a proposal. Therefore, even when using the checklist, we encourage you to provide any specific comments you can.

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

      1) mailing in the checklist (Attachment B)
      2) mailing in written comments
      3) e-mailing written comments
      4) submitting comments online at the NASDR 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

      You may also e-mail comments to: pubcom@nasd.com

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

      Before becoming effective, the NASD Regulation 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 Comments may be directed to Louise Corso, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6939; or Stephanie M. Dumont, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8176.

      Background

      Historically, NASD Regulation has not attempted to regulate the internal compensation arrangements of member firms and their representatives. In general, examination of compensation practices at firms has been done on a case-by-case basis and has taken into account the nature of the firm's business and structure. In the early 1990s, SEC Chairman Arthur Levitt sought broader information about compensation practices throughout the securities industry. Chairman Levitt formed an industry committee that issued a report on compensation practices in 1995, known as the Tully Report. This report described a number of compensation practices that exist in the securities industry that may create conflicts of interest for member firms and their representatives. The Tully Report also identified best practices to address these actual or perceived conflicts of interest.

      In Notice to Members 97-50, NASD Regulation sought member comment on cash compensation issues relating to the sale and distribution of investment company and variable contract securities. The cash compensation arrangements included, for example, the offering of higher commissions for sale of proprietary products (those sponsored by the member or an affiliated company) as compared to non-proprietary products, and the offering of cash awards for sales contests. The Notice asked generally whether certain forms of incentive-based cash compensation were harmful or beneficial to investors. We also asked for comment on possible regulatory responses, such as requiring disclosure or prohibiting certain compensation practices. We did not propose any specific rules at that time, but rather solicited comments on a broad range of issues relating to compensation.

      In response, we received 20 comment letters from member firms, individual representatives, and other interested parties. Most commenters generally favored the continued application of current sales practice and suitability rules or, alternatively, some form of generic disclosure for cash compensation practices. Some commenters, however, recognized that certain practices create particularly strong point-of-sale incentives or "product favoritism" and felt that it was important to distinguish those practices from other cash compensation arrangements between offerors and broker/dealers that are not passed on to salespersons and do not create such incentives.

      In 1998, the SEC approved amendments to Rules 2820 and 2830 regulating non-cash compensation arrangements in the sale of variable contracts and investment company securities, respectively ("Non-Cash Compensation Rules"). As described in Notice to Members 98-75, the Non-Cash Compensation Rules limit the manner in which members can pay or accept non-cash compensation and impose certain recordkeeping requirements. "Non-cash" compensation includes, for example, merchandise offered to brokers, gifts and prizes, or reimbursement of travel expenses. These rules are based on the belief that the increased use of non-cash compensation creates significant point-of-sale incentives that may compromise the requirement to match the investment needs of the customer with the most appropriate investment product. The Non-Cash Compensation Rules do permit certain non-cash compensation arrangements that are based on total production and equal weighting of sales of a variety of products and are organized and run by the member or certain affiliates. In addition, with limited exceptions, the Non-Cash Compensation Rules prohibit a person associated with a member from accepting any compensation, cash or non-cash, from any person other than the member with which the person is associated.

      Discussion

      We are soliciting comment on certain compensation practices described as problematic in the Tully Report, as well as three rule proposals addressing such practices. A number of NASD Regulation committees, including the District Committees, the Small Firm Advisory Board, the Membership Committee, the Investment Companies Committee, and the Bank Broker/Dealer Committee, had the opportunity to review and comment on some or all of the three potential regulatory responses proposed in this Notice. Committee members expressed a wide range of opinions in discussing these topics. We have incorporated many of the committees' suggestions in the proposals and questions presented in this solicitation of comment. We are publishing these rule proposals for comment to the full membership to give all members and other interested parties an opportunity to express their views as well.

      Specifically, we are requesting comment on rule proposals to address the following compensation practices:

      • Payment of higher payout ratios to representatives for the sale of proprietary investment company products;


      • Single security sales contests; and


      • "Accelerated payouts," which are higher commission payouts offered to representatives who move from one broker/dealer to another.

      We are also requesting comment on additional issues regarding current salesperson compensation practices. Commenters should consider the need to provide members and associated persons the flexibility to structure compensation arrangements in the most effective manner possible in accordance with their business requirements, while addressing any investor protection concerns that may result.

      Payment Of Differential Cash Compensation

      Compensation Practice: The Tully Report concluded that the payment of higher compensation to registered representatives for the sale of proprietary products can create incentives to inappropriately favor such products over nonproprietary products. Such compensation arrangements can create conflicts of interest by encouraging representatives to recommend proprietary products to maximize their commissions, rather than to best meet their customers' needs. Such arrangements may provide point-of-sale incentives that could compromise proper customer suitability determinations and may present a situation where the salesperson's interests are not, in some circumstances, fully aligned with the interests of customers. In this regard, the Tully Report cited as a "best practice" the use of identical payout ratios for representatives that offer both proprietary and non-proprietary products, noting that most firms interviewed had already adopted this practice.

      The Proposal: NASD Regulation is proposing for comment the attached amendment to NASD Rule 2830, which applies to the sale and distribution of investment company securities. The proposed amendment prohibits the payment of a higher percentage of gross dealer concessions to representatives for the sale of proprietary investment company securities than the percentage provided on the same dollar amount of non-proprietary investment company securities with similar investment objectives.

      Although firms use differential compensation arrangements for a variety of products, the importance of mutual funds to retail investors may make differential payouts involving investment company products of particular concern, and we have therefore limited our current proposal to those types of products. However, NASD Regulation is soliciting comments on the extent to which these restrictions should extend to other kinds of products as well.

      Commenters are asked to consider the proposed rule as well as any alternative regulatory approaches to such compensation arrangements. One option would permit such differential compensation arrangements to continue, but require oral or written disclosure to customers at or before the point of sale. A disclosure approach would be consistent with the NASD's long-standing practice of not substantively regulating internal compensation arrangements of member firms and their registered representatives and instead permitting investors to evaluate whether a registered representative's particular product recommendation was influenced by such arrangements.

      However, as noted by the NASD Regulation committees, questions arise as to the form and timing of such disclosures, as well as the message that such a disclosure may send to customers, implying, for example, that representatives may not have their customers' best interests in mind. Further, customers are rarely in a position to evaluate the impact of a compensation arrangement on the ultimate recommendation. Commenters in favor of a disclosure approach are asked to provide input on the type of information that would be useful to investors and the format and timing of such a disclosure. In addition, commenters are asked to discuss the firm's ability to monitor and enforce a disclosure requirement in this area.

      NASD Regulation also recognizes that existing commission-based compensation systems reflect legitimate business considerations that derive from a competitive market. For example, certain fund issuers may provide additional compensation to members in order to encourage their representatives to learn more about their products and how those products can help customers meet their investment objectives. NASD Regulation would appreciate any comments on the effect this proposal may have on such strategic business considerations or initiatives.

      Finally, NASD Regulation is soliciting views on whether these types of compensation arrangements and the resulting potential conflicts of interest are adequately addressed under existing NASD rules. For example, when recommending 2310 requires that the member have reasonable grounds for believing that the recommendation is suitable for the customer. Would these potential conflicts of interest be adequately addressed through the provision of more detailed guidance concerning the applicability of the suitability requirements?

      Attachment A includes the draft rule language for this proposal.

      Questions For Members And Other Interested Parties

      A-1. To what extent do member firms pay representatives higher compensation for selling proprietary products compared to non-proprietary products?

      A-2. If a disclosure approach were taken, should the disclosure be oral or provided in a written document? What would be the appropriate content of such disclosure?

      A-3. How would firms ensure compliance with a requirement to disclose these arrangements?

      A-4. Should the NASD's rules regarding variable products restrict similar compensation arrangements involving those products? Should restrictions extend to other kinds of products as well?

      A-5. What business reasons or considerations exist for providing differential compensation to representatives?

      A-6. Rather than substantive regulation or disclosure, is it more appropriate to address concerns regarding compensation arrangements under existing NASD sales practice rules, such as rules regarding suitability requirements? Are there additional supervisory procedures that could be put in place to deal with potential conflicts of interest related to salesperson compensation?

      Single Security Sales Contests

      Compensation Practice: Some firms have used single security sales contests to stimulate the sales of particular securities, including equities and proprietary mutual funds. A "sales contest" is an arrangement that promotes the sale of a security by offering an incentive payment to a salesperson who achieves a specified level of sales of the security over a specified period of time. The argument against this practice is that a representative may recommend a security to increase his or her chances of earning a cash award, without proper consideration as to whether it is a suitable security for the customer. Arguably, an incentive like this, offered at the point of sale, may be more likely to influence (or at the least, gives the appearance of influencing) the sale of a security than an incentive which is earned on a delayed basis and takes into account total production.

      The Non-Cash Compensation Rules governing variable products and investment company products prohibit the payment of non-cash compensation through sales contests, except under certain specified conditions.1 However, the Non-Cash Compensation Rules do not regulate contests that result in cash awards,2 nor do they prohibit contests involving products other than mutual funds and variable contracts.

      The Proposal: We are proposing a new rule that would prohibit all single security sales contests, not just those involving investment company shares and variable products. The proposed rule is intended to prohibit all single security sales contests that could improperly influence the advice of a representative. The proposed rule does not prohibit a sales contest involving a type or family of securities, such as mutual funds, or a group of equities.

      In reviewing drafts of the rule proposal, NASD Regulation committees, including the Membership Committee and the Investment Companies Committee, expressed a number of concerns, many of which are reflected in the questions below. For example, committee members discussed whether prohibition or disclosure would be the appropriate solution. They also questioned whether existing NASD rules, such as those relating to suitability, may already address the issue adequately.

      Attachment A includes the draft rule language for this proposal.

      Questions For Members And Other Interested Parties

      B-1. To what extent do member firms conduct single security sales contests?

      B-2. What types of securities are sold through sales contests today?

      B-3. Are sales contests necessary to encourage new product innovation? Please explain.

      B-4. The proposed rule addresses contests involving one security only, which may limit its impact. Is there a significant benefit to investors to this type of prohibition? Should the prohibition extend to contests involving more than one security or a group of securities? What are the advantages or disadvantages of such an approach?

      B-5. The proposed rule applies to all types of securities. Should we limit the rule to only certain types of securities? If so, identify the types of securities and explain why.

      B-6. As an alternative approach, we could require disclosure of sales contests to investors.

      a. Would disclosure of the fact that the representative is participating in a sales contest be an effective alternative to prohibiting sales contests?
      b. How, when, and in what manner would the disclosure be made?
      c. Describe the burden on firms to supervise for compliance with a disclosure rule.

      B-7. NASD Rule 2310 requires that representatives must have reasonable grounds for believing that a recommendation is suitable for a customer. Does this rule (or other rules) adequately cover the type of potential misconduct that the proposed rule addresses? Are they more or less easily enforced than a disclosure rule would be?

      Accelerated Payouts

      Compensation Practice: As part of an incentive package, representatives who move from one member firm to another may receive higher commission payouts for a short, specified period of time, sometimes three to six months or a year. These temporarily increased commission payouts, known as "accelerated payouts," are often offered to attract a representative to a new firm.

      The perceived problem with this practice is that it could act as an incentive for the representative to trade customer accounts inappropriately by, for example, "churning" or trading the accounts excessively, in order to generate as much revenue as possible during the time that higher commission payouts are being paid.

      An argument in favor of accelerated payouts is that they make up for the potential financial losses associated with moving to a new firm. For example, it takes time for the representative to complete the administrative tasks associated with transferring customer accounts from the former firm to a new firm. Also, it is likely that not all of the representative's customers will transfer to the new firm so the accelerated payouts can make up for some lost income.

      The Proposal: Our proposal would require that, when a representative transfers to a new firm, the firm must disclose, in writing, the existence and general nature of the compensation arrangements to customers whose accounts are being transferred. The firm would also provide this written disclosure to new customers as long as the higher payout arrangement is in effect. The specific compensation formula or amount paid to the representative would not need to be disclosed.

      NASD Committees, including the Membership Committee and a number of the District Committees, reviewed earlier drafts of the rule and expressed their views as to whether we need to propose such a rule. A number of committee members observed that the accelerated payouts serve legitimate business purposes and questioned why their use should be limited, especially in the absence of documented evidence of abuse. Moreover, many committee members noted that there are rules already in place to address suitability and churning, and therefore, questioned the need for more regulation in this area.

      Attachment A includes the draft rule language for this proposal.

      Questions For Members And Other Interested Parties

      C-1. To what extent do member firms offer accelerated payouts to representatives who transfer from one broker/dealer to another?

      C-2. The proposed rule is based on the assumption that accelerated payouts act as an incentive for a representative to act improperly, for example, to trade excessively in customer accounts. Is this assumption correct?

      C-3. The proposed rule does not prohibit the payment of accelerated payouts offered by a firm to keep a representative at a firm, which raises the same point-of-sale concerns. First, to what extent do member firms offer accelerated payouts to retain representatives who are considering transferring to another firm? Second, should the proposed rule be expanded to include this type of compensation practice?

      C-4. The proposed rule does not dictate the specific language of the required disclosure. Should we mandate the specific form that a disclosure statement should take?

      C-5. The proposed rule does not specify how the written disclosure should be made. For example, it could be provided on account opening forms or on a separate disclosure sheet. Should we specify how the disclosure should be made?

      C-6. Does the proposed rule affect the ability of smaller firms to attract experienced representatives? Please explain.

      C-7. Rather than requiring written disclosure, should we propose a rule that would require firms to provide more supervision during the time that a newly transferred representative is receiving accelerated payouts?

      C-8. Do existing rules that cover sales practice abuses, such as those prohibiting unsuitable recommendations and churning, adequately address the type of potential misconduct that the proposed rule is intended to address?

      Other Questions

      We have additional questions for members, investors, and interested parties to address regarding the regulation of compensation practices:

      D-1. The proposed rules will increase the burden on firms to ensure compliance with the proposed requirements. Will the cost of compliance with each of the proposed rules be significant? Will the cost to firms for increased compliance activities be greater than the benefit to the investor?

      D-2. As an alternative to imposing the specific requirements above, should we instead require that customers receive a general disclosure statement that explains how representatives are compensated, including both cash and non-cash compensation arrangements?

      D-3. Are there other compensation practices that NASD Regulation should address in addition to, or instead of, the three practices above?


      ATTACHMENT A

      Text Of Proposed Amendments

      Proposed additions are underlined; proposed deletions are bracketed.

      Payment Of Differential Cash Compensation

      Rule 2830. Investment Company Securities

      (a) No change
      (b) Definitions
      (1) The terms "affiliated member," "compensation," "cash compensation," "non-cash compensation," [and] "offeror," "differential cash compensation," "gross dealer concessions," "non-proprietary investment company" and "proprietary investment company" as used in paragraph (l) of this Rule shall have the following meanings:
      (A) - (E) No change
      (F) "Differential cash compensation" shall exist if a member pays to its associated persons a higher percentage of its gross dealer concessions for the sale of a stated dollar amount of proprietary investment company securities than the percentage of its gross dealer concessions for the sale of the same dollar amount of securities of a non-proprietary investment company with similar investment objectives.
      (G) "Gross dealer concessions" shall mean the total amount of any discounts, concessions, fees or commissions provided by the offeror to the member in connection with the sale and distribution of investment company securities.
      (H) "Non-proprietary investment company" shall mean any investment company other than a proprietary investment company.
      (I) "Proprietary investment company" shall mean an investment company for which the member, or an affiliate of the member, is the investment adviser or principal underwriter.
      (l) Member Compensation

      In connection with the sale and distribution of investment company securities:
      (1) - (5) No change
      (6) No member shall pay or offer to pay, and no associated person shall accept payment of, differential cash compensation.

      Single Security Sales Contest

      Proposed New Rule XXXX

      (a) No member or person associated with a member shall accept or make payments or offers of payments of any cash compensation that is related to a single security sales contest.
      (b) The terms "cash compensation," and "sales contest" as used in this Rule shall have the following meanings:
      (1) "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override, or cash employee benefit received in connection with the sale or distribution of securities.
      (2) "Single security sales contest" shall mean any arrangement that promotes the sale of a single security whereby a member offers to an associated person an incentive payment or payments of cash compensation based on the achievement of a specified level of sales of such security over a pre-determined period of time.

      Accelerated Payouts

      11870. Customer Account Transfer Contracts

      (a) Responsibility to Expedite Customer's Request
      (1) When a customer whose securities account(s) is carried by a member (the "carrying member") wishes to transfer the entire account(s) to another member (the "receiving member") and gives written notice of that fact to the receiving member, both members must expedite and coordinate activities with respect to the transfer. If a customer desires to transfer a portion of an account, a letter of authorization should be transmitted to the carrying member indicating such intent and specifying the portion of the account to be transferred. Although such transfers are not subject to the provisions of this rule, members must expedite authorized partial transfers of customer securities accounts and coordinate their activities with respect thereto. The automated customer account transfer capabilities referred to in paragraph (m)(1) of this Rule shall be utilized for partial transfers.
      (2) When a customer transfers an account from the carrying member to the receiving member in connection with the transfer of employment of a registered representative from the carrying member to the receiving member, and where the receiving member provides the registered representative with increased transactionbased compensation for a specific period of time in connection with the transfer of employment or the transfer of the customer's account, the receiving member shall provide to the customer written notice describing the existence and the general nature of the compensation arrangements. For the period of time that such compensation arrangements are in effect, such written notice shall also be provided to new customers of the registered representative at the receiving member at or prior to opening an account.
      (b) No change

      Endnotes

      1 A non-cash contest can be held only if it meets the following requirements: (1) the non-cash compensation arrangement must be based on the total production of associated persons with respect to all investment company or variable product securities distributed by that member; (2) the credit received for each investment company or variable contract security must be equally weighted; (3) no unaffiliated non-member company or other unaffiliated member may directly or indirectly participate in the member's or non-member's organization of a permissible non-cash compensation arrangement; and (4) recordkeeping requirements must be satisfied. See Rule 2820(h)(4)(D) and Rule 2830(l)(5)(D).

      2 In response to comments received on an earlier version of the Non-Cash Compensation Rules that would have imposed substantive prohibitions on cash compensation, NASD Regulation decided to delete those provisions pertaining to cash compensation, and instead, solicit specific comments on cash compensation arrangements in Notice to Members 97-50.


      ATTACHMENT B

      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 regarding salesperson compensation. 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 29, 1999. Members and interested parties can submit their comments using the following methods:

      • mailing in this checklist


      • mailing in written comments


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


      • 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

      Differential Compensation

      1. Should the NASD adopt a rule addressing the practice of paying registered representatives higher compensation for selling proprietary mutual funds than non-proprietary mutual funds?

        Yes   No   See my attached written comments
      2. If your response to question #1 is yes, what type of rule should be adopted:

        a. A rule requiring a firm to orally disclose to customers the difference in compensation.
        b. A rule requiring a firm to disclose in writing the difference in compensation.
        c. A rule prohibiting this practice altogether.
        d. Other (See my attached written comments)
      3. Should the NASD adopt rules addressing differential compensation practices with respect to other types of products?

        Yes   No  
      4. If your response to question #3 is yes, please provide written comments regarding the other types of products.

      Single Security Sales Contest
      5. Should the NASD ban sales contests that promote the sale of a single security by offering cash compensation as a prize if a representative reaches a certain level of sales?

        Yes   No   See my attached written comments
      6. If your response to question #5 is no, should the NASD instead require firms to disclose to investors the existence of sales contests that offer representatives cash compensation?

        Yes   No   See my attached written comments

      Accelerated Payouts
      7. Should the NASD adopt a disclosure rule addressing the payment of increased payouts for a period of time to representatives who transfer from one firm to another?

        Yes   No  
      8. If your response to question #7 is no, should the NASD instead require firms to more strictly supervise representatives who are receiving accelerated payouts?

        Yes   No   See my attached written comments
      9. Should the NASD prohibit firms from offering such payouts to representatives in these circumstances?

        Yes   No   See my attached written comments

      Other
      10. Please discuss any other practices relating to compensation of representatives that the NASD should address.

        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:

    • 99-82 Fixed Income Pricing System Additions, Changes, And Deletions As Of July 22, 1999

      View PDF File

      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      As of July 22, 1999, the following bonds were added to the Fixed Income Pricing SystemSM (FIPS®).

      Symbol Name Coupon Maturity
      BFI.GA Browning-Ferris Inds Inc. 9.250 05/01/21
      BFI.GB Browning-Ferris Inds Inc. 7.875 03/15/05
      BFI.GC Browning-Ferris Inds Inc. 6.100 01/15/03
      BFI.GD Browning-Ferris Inds Inc. 6.375 01/15/08
      BFI.GE Browning-Ferris Inds Inc. 7.400 09/15/35
      BGFI.GA BGF Industries Inc. 10.250 01/15/09
      BLUI.GA Blount Inc. 7.000 06/15/05
      CDIU.GB Canandaigua Brands Inc. 8.625 08/01/06
      CLHS.GB Coast Hotels & Casinos Inc. 9.500 04/01/09
      CPE.GC Callon Petroleum Co. 10.250 09/15/04
      EMMS.GA Emmis Communications Corp.Ser B 8.125 03/15/09
      EVFI.GA Evenflo Co.Inc. Series B 11.750 08/15/06
      GSTU.GA GST USA Inc. 13.875 12/15/05
      HAZ.GA Hayes Lemmerz Intl Inc.Series B 8.250 12/15/08
      HEFR.GB Heafner (J.H.) Co. Series D 10.000 05/15/08
      KEG.GA Key Energy Svs Inc. Series B 14.000 01/15/09
      LMRM.GA Lamar Media Corp. 9.625 12/01/06
      MCLD.GE McLeod USA Inc. 8.125 02/15/09
      NCIB.GA NCI Building Systems Inc.Series B 9.250 05/01/09
      NENA.GC Neenah Corp. Series F 11.125 05/01/07
      RBFF.GA RBF Finance Co. 11.375 03/15/09
      RBFF.GB RBF Fiance Co. 11.000 03/15/06
      RMKS.GA Richmont Marketing Special 10.125 12/15/07
      SDVS.GA Special Devices Inc. Series B 11.375 12/15/08
      SFY.GA Swift Energy Co. 10.250 08/01/09
      SKS.GD Saks Inc. 7.000 07/15/04
      SQA.GF Sequa Corp. 0.000 08/01/09
      TRK.GB Speedway Motor Sports Inc.Series D 8.500 08/15/07
      TSFL.GA Transamerica Finl Corp. 0.000 03/01/10
      TSFL.GB Transamerica Finl Corp. 0.000 09/01/12

      As of July 22, 1999, the following bonds were deleted from FIPS.

      Symbol Name Coupon Maturity
      BARC.GA Bar Technologies Inc. 13.500 04/01/01
      CNLP.GE Conn Light & Power Co. 7.500 07/01/23
      CNLP.GH Conn Light & Power Co. 8.500 06/01/24
      CNLP.GI Conn Light & Power Co. 7.875 06/01/01
      CUI.GA Coach USA Inc. 9.378 07/01/07
      FFDM.GA Fairfield Mfg Inc. 11.375 07/01/01
      FXLN.GB Fox Liberty Networks LLC 9.750 08/15/07
      IN.GA Integon Corp. Del 8.000 08/15/99
      IRDM.GB Iridium LLC/Capital Corp. 14.000 07/15/05
      MARI.GA Marriott Intl Inc. 6.750 12/01/09
      PNFT.GB Penn Traffic Co. New 10.375 10/01/04
      PNFT.GC Penn Traffic Co.New 9.625 04/15/05
      PNFT.GD Penn Traffic Co. New 8.625 12/15/03
      PNFT.GF Penn Traffic Co. New 10.250 02/15/02
      PNFT.GG Penn Traffic Co. New 11.500 04/15/06
      PNFT.GH Penn Traffic Co. New 10.650 11/01/04
      REGL.GC Regal Cinemas Inc. 9.500 06/01/08
      SCTT.GA Scotts Co. 9.875 08/01/04
      SXFE.GA Six Flags Theme Parks Inc. 12.250 06/15/05
      TSFL.GB Transamerica Finl Corp. 0.000 09/01/12
      UIHI.GA United Intl Hldgs Inc. 0.000 11/15/99
      UIHI.GB United Intl Hldgs Inc. 0.000 11/15/99

      As of July 22, 1999, changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol Name Coupon Maturity
      CPE.GA CLNP.GA Callon Petroleum Co. 10.000 12/15/01
      CPE.GB CNLP.GB Callon Petroleum Co. 10.125 09/15/02

      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®, at (301) 590-6447.

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

    • 99-80 Maximum SOES Order Sizes Set To Change October 1, 1999

      View PDF File

      ACTION REQUIRED

      SOES Order Sizes

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Systems
      Trading
      SOES Maximum Order Sizes

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      Effective October 1, 1999, the maximum Small Order Execution SystemSM (SOESSM) order sizes for 420 Nasdaq National Market® (NNM) securities will be revised in accordance with National Association of Securities Dealers, Inc. (NASD®) Rule 4710(g).

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

      Description

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

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

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

      In accordance with Rule 4710, Nasdaq periodically reviews the maximum SOES order size applicable to each NNM security to determine if the trading characteristics of the issue have changed so as to warrant an adjustment. Such a review was conducted using data as of June 30, 1999, pursuant to the aforementioned standards. The maximum SOES order-size changes called for by this review are being implemented with three exceptions.

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


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


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

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

      Thus, IPOs listed on Nasdaq within the 45 days prior to June 30, 1999, were not subject to SOES ordersize reranking procedures.

      Following is a listing of the 420 NNM issues that will have the maximum SOES order size changed on October 1, 1999.


      Endnote

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

      Maximum SOES Order Size Changes In NNM Securities
      All Issues In Alphabetical Order By Security Name
      (Effective October 1, 1999)
      Symbol Security Name Old Level New Level
      FSBC 1ST STATE BNCP INC 200 500
      A
      ABANP ABI CAP TRUST PFD 1000 500
      BOUT ABOUT.COM INC 200 500
      ABOV ABOVENET COMMUNICTNS 500 1000
      ABRI ABRAMS INDS INC 200 500
      ACLE ACCEL INTL CP 500 1000
      ACDO ACCREDO HEALTH INC 200 500
      ADFC ADFORCE INC 200 500
      DINEW ADVANTICA WTS 500 1000
      AMRI ALBANY MOLECULAR RES 500 1000
      ALCI ALLCITY INSURANCE 200 500
      ALLN ALLIN CORP 200 500
      ALOY ALLOY ONLINE INC 200 500
      AMNB AMER NATL BANKSHS 200 500
      ANFI AMERICAN NATL FINL 500 1000
      ASCA AMERISTAR CASINO 500 1000
      AMTD AMERITRADE HLDG A 1000 500
      AMPI AMPLICON INC 500 1000
      AFSC ANCHOR FIN CORP 500 1000
      ANCR ANCOR COMMUN INC 500 1000
      ANDR ANDERSEN GROUP INC 500 1000
      ANTV ANTENNA TV SA ADR 200 500
      ATHY APPLIEDTHEORY CP SR 200 500
      ARCAF ARCADIS N.V. 1000 500
      AREM AREMISSOFT CORP 200 500
      ARGY ARGOSY ED GRP CL A 200 500
      ARIS ARI NETWORK 500 1000
      ABFSP ARKANSAS BEST CV P 500 1000
      ARMHY ARM HLDGS ADS 500 1000
      ARTNA ARTESIAN RES CP A 500 1000
      ATYT ATI TECHNOLOGIES 500 1000
      ATLPP ATLANTIC PFD CAP CP 500 1000
      ABTL AUTOBYTEL.COM INC 200 500
      AWEB AUTOWEB.COM INC 200 500
      AXHM AXIOHM TRANS SOL 200 500
      B
      BFEN B F ENTERPRISES INC 200 500
      BTEK BALTEK CP 500 1000
      BKCT BANCORP CONN INC 500 1000
      BNSC BANK OF SANTA CLAR 200 500
      BANCP BBC CAPITAL TR I P 1000 500
      BNHNA BENIHANA INC 1000 500
      BIDS BID.COM INTL INC 200 500
      BIZZ BIZNESSONLINE.COM 200 500
      EPAY BOTTOMLINE TECH INC 500 1000
      BRAD BRADLEES INC 500 1000
      BRCM BROADCOM CORP CL A 1000 500
      BUCA BUCA INC 200 500
      C
      CBBI C B BANCSHARES 1000 500
      CDWI C D WAREHOUSE INC 500 1000
      CEMX C E M CP 500 1000
      CERB C E R B C O INC 200 500
      CFCI C F C INTL INC 1000 500
      CNBF C N B FINANCIAL CP 500 1000
      CFFI C&F FINANCIAL CP 500 200
      CTOO C2 INC 200 500
      CIBN CALIFORNIA IND BNC 500 200
      CNTBY CANTAB PHARM 500 200
      CAII CAPITAL ASSOC 1000 500
      CSWC CAPITAL SOUTHWEST 500 1000
      CBCL CAPITOL BANCORP LT 500 1000
      CFFN CAPITOL FEDERAL FINL 200 500
      CBCLP CAPITOL TRUST I PF 1000 500
      CBDR CAREERBUILDER INC 200 500
      CMDC CAREMATRIX CP 200 500
      CFBI CAROLINA FIRST BNCSH 200 500
      CATT CATAPULT COMM CP 500 1000
      CEBK CENTRAL BANCORP INC 1000 500
      CNBKP CENTURY BCP CAP TR 500 1000
      CHANF CHANDLER INS CO LTD 1000 500
      CTIX CHEAP TICKETS INC 200 500
      CHDN CHURCHILL DOWNS IN 500 1000
      CCHE CLINICHEM DEV CL A 1000 500
      CNBB CNB FLORIDA BCSHS INC 500 1000
      CBSAO COASTAL BCP PFD A 200 500
      COHB COHOES BANCORP 500 1000
      CBAN COLONY BANKCORP 500 200
      CFKY COLUMBIA FIN KY 500 1000
      CCBP COMM BANCORP INC 200 500
      CBNY COMMERCIAL BK OF N 500 1000
      CNAF COMMERCIAL NATL FI 500 200
      CFIC COMMUNITY FIN CP 500 1000
      CFBC COMMUNITY FIRST BN 500 1000
      CMSV COMMUNITY SVGS 500 1000
      CDOT COMPS.COM INC 200 500
      CCRT COMPUCREDIT CORP 200 500
      CNQR CONCUR TECHNOLOGIES 500 1000
      CNXT CONEXANT SYSTMS 500 1000
      CMETS CONTL MORTGAGE EQUIT 1000 500
      CMTN COPPER MOUNTN NTWKS 200 500
      COCO CORINTHIAN COLLEG SE 500 1000
      EXBD CORP EXEC BOARD CO 200 500
      CRTQ CORTECH INC 500 1000
      DLVRY CORTECS INTL SPO ADR 1000 500
      CRRC COURIER CP 500 1000
      COVD COVAD COMMUN GROUP 500 1000
      CMST CREATIVE MASTER INTL 500 1000
      CPTH CRITICAL PATH INC 200 500
      AMEN CROSSWALK.COM INC 500 1000
      CTCI CT COMMUNICATIONS 500 1000
      D
      DEAR DEARBORN BANCORP 200 500
      HYTDL DECS TRUST IV 500 1000
      DLTDF DELPHI INTL LTD 500 200
      DELT DELTA GALIL INDS ADS 200 500
      DSGX DESCARTES SYS GRP 500 1000
      DEST DESTIA COMMUNICATNS 200 500
      DGJL DG JEWELLERY CDA 500 1000
      DFXI DIRECT FOCUS INC 200 500
      DOCD DOCDATA NV 500 1000
      DOMZ DOMINGUEZ SVCS CP 500 1000
      DHOM DOMINION HOMES INC 500 1000
      DORLP DORAL FINL CP PFD 200 500
      DIIBF DOREL INDS CL B 1000 500
      DCLK DOUBLECLICK INC 500 1000
      DRRAP DURA AUTO CAP TR 500 1000
      DXPE DXP ENTERPRISE 500 200
      E
      ETEK E-TEK DYNAMICS INC 500 1000
      ELXS E L X S I CP 500 1000
      EWBC EAST WEST BANCORP 500 1000
      EDEL EDELBROCK CP 500 1000
      EDCO EDISON CONTROL CP 500 200
      ELBI ELDORADO BANCSHARES 200 500
      ELET ELLETT BROTHERS IN 500 1000
      EMLX EMULEX CP 1000 500
      ENGSY ENERGIS ADS 500 200
      ENSI ENERGYSOUTH INC 500 1000
      EMCO ENGINEERING MEASUR 500 1000
      EQSB EQUITABLE FED SAV 500 1000
      EMCC EUROPEAN MICRO HLD 1000 500
      EXAP EXCHANGE APPLICATNS 500 1000
      EXCO EXCO RESOURCES INC 500 1000
      EXTR EXTREME NETWORKS 200 500
      F
      FMCO F M S FINANCIAL CP 500 1000
      FRPP F R P PROPERTIES I 500 1000
      FTUS FACTORY 2-U STR 500 1000
      FCPYQ FACTORY CARD OUTLE 1000 500
      FDCC FACTUAL DATA CORP 500 1000
      FDCCW FACTUAL DATA WTS 500 1000
      FATB FATBRAIN.COM INC 500 1000
      FFLC FFLC BNCP INC 500 1000
      FSBI FIDELITY BANCORP I 200 500
      FFFLP FIDELITY CAP TR I 500 1000
      FFED FIDELITY FED BNCP 1000 500
      FDHG FIDELITY HLDGS INC 500 1000
      FBEI FIRST BNCP OF IND 200 500
      BUSE FIRST BUSEY CL A 500 1000
      FTCG FIRST COLONIAL GP 200 500
      FFSX FIRST FED BKSHS 200 500
      FFKY FIRST FED FIN KENT 200 500
      FFHS FIRST FRANKLIN CP 200 500
      FGHC FIRST GEORG HLDGS 500 1000
      FIFS FIRST INV FIN SVC 1000 500
      FPFC FIRST PLACE FINL 500 1000
      FSTH FIRST SO BCSHS INC 500 200
      FLGSO FLAGSTAR TR PFD 200 500
      FLAS FLASHNET COMMUNICATN 200 500
      FFBK FLORIDAFIRST BNCP 200 500
      FCST FLYCAST COMMUN CP 200 500
      FNBP FNB CORP 200 500
      FELE FRANKLIN ELEC INC 500 1000
      FRNT FRONTIER AIRLINES 500 1000
      FTNB FULTON BANCORP INC 500 1000
      G
      GBNK GASTON FED BANCP 500 1000
      GBBKP GBB CAP I CUM TR PFD 500 200
      GLDBO GBCI CAP TR II 200 500
      GIFT GERALD STEVENS INC 500 1000
      GNET GO2NET INC 500 1000
      GNCNF GORAN CAPITAL INC 1000 500
      GFLS GREATER COMMUNITY 1000 500
      GSLI GSI LUMONICS INC 500 1000
      H
      HDVS H. D. VEST INC 500 1000
      HAMP HAMPSHIRE GROUP LT 200 500
      HRBF HARBOR FED BNCP IN 1000 500
      HLTH HEALTHEON CORP 500 1000
      HSII HEIDRICK & STRUGGLES 200 500
      HIFN HI/FN INC 500 1000
      HBNK HIGHLAND FEDERAL B 500 1000
      HBFW HOME BANCORP 500 1000
      HOMEF HOME CTRS (DIY) LTD 500 1000
      HLFC HOME LOAN FINL CP 500 1000
      I
      IMAL IMALL INC 500 1000
      INDBP INDEP CAP TR I PFD 200 500
      INHO INDEPENDENCE HLDG 500 1000
      INFA INFORMATICA CORP SR 200 500
      INSP INFOSPACE.COM INC 500 1000
      INFY INFOSYS TECHN ADS 200 500
      INKT INKTOMI CORP 1000 500
      INMG INSURANCE MGMT SOLUT 500 1000
      ILIF INTELLIGENT LIFE 200 500
      ICPT INTERCEPT GRP INC 200 500
      DENT INTERDENT INC 500 1000
      GEEK INTERNET AMERICA INC 500 1000
      INTT INTEST CORPORATION 500 1000
      INRS INTRANET SOLUTIONS 500 1000
      ITRA INTRAWARE INC 200 500
      IVGN INVITROGEN CORP 200 500
      IROQ IROQUOIS BNCP 1000 500
      TURF ITURF INC 200 500
      IVIL IVILLAGE INC 200 500
      XOSY IXOS SOFTWARE ADS 500 1000
      J
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      X
      XNVA XENOVA GR PLC ADS 1000 500
      XMCM XOOM.COM INC 500 1000
      Y
      YAVY YADKIN VALLEY BK&TR 200 500

    • 99-79 NASD Regulation Requests Comment on Proposed Amendments to Provisions Governing Communications with the Public

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      ACTION REQUESTED BY OCTOBER 29, 1999

      Comment Period Expires October 29, 1999

      Advertising Regulation

      NASD Regulation Requests Comment on Proposed Amendments to Provisions Governing Communications with the Public; Comment Period Expires October 29, 1999

      SUGGESTED ROUTING

      KEY TOPICS

      Advertising/Investment Companies
      Internal Audit
      Legal & Compliance
      Mutual Fund
      Registered Representatives
      Senior Management
      Variable Contracts
      Advertising
      Communications with the Public
      NASD Rule 2210

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      NASD Regulation, Inc. (NASD Regulation®) requests comment from members and other interested parties on proposed amendments to modernize, simplify, and clarify the rules governing member communications with the public. One of the most significant aspects of the proposal is to exempt all member firm communications to institutional investors from pre-use approval and NASD Regulation filing requirements. Form letters and group e-mail to existing customers and fewer than 25 prospective retail customers also would be eligible for this exemption. Additionally, the proposal would exempt article reprints and certain press releases regarding investment companies from the filing requirements and simplify the standards applicable to member communications.

      Included with this Notice are Attachment A (the text of the proposed amendments) and Attachment B (specific questions that NASDR requests comments on from members and interested parties).

      Request For Comment

      NASD Regulation encourages members and other interested parties to comment on all aspects of the proposed rules. Comments must be received by October 29, 1999. For your convenience we have provided a checklist (see Attachment B) so that in a minimum amount of time you can provide NASD Regulation with your general comments.

      Note: Each Notice to Members may contain different and more specific questions we encourage you to consider. While information concerning how many members are generally for or against a proposal is important to the Board, in considering whether to proceed with or modify a proposal, the Board will also heavily rely upon information and data concerning the substantive merits of the proposal. Therefore, even when using the checklist, we encourage you to provide any specific comments you can.

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

      1) mailing in the checklist (Attachment B)
      2) mailing in written comments
      3) e-mailing written comments
      4) submitting comments online at the NASDR 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

      You may also e-mail comments to: pubcom@nasd.com

      Before a rule change becomes effective, the NASD Regulation Board of Directors must adopt, and the Securities and Exchange Commission (SEC) must approve, any rule change. The National Association of Securities Dealers, Inc. (NASD®) Board of Governors also may review the rule change.

      Questions/Further Information

      As noted, written comments should be submitted to Joan Conley. Questions concerning this Notice may be directed to Thomas M. Selman, Vice President, Investment Companies/Corporate Financing, NASD Regulation, at (240) 386-4533; Thomas A. Pappas, Director, Advertising/Investment Companies Regulation, NASD Regulation, at (202) 728-8453; Joseph P. Savage, Counsel, Advertising/Investment Companies Regulation, NASD Regulation, at (202) 728-8233; or Laura Gansler, Assistant General Counsel, NASD Regulation, at (202) 728-8275.

      Discussion

      Background

      NASD Regulation is proposing the most comprehensive set of amendments to the NASD advertising rules in recent history. These amendments are intended to enhance the effectiveness with which the advertising rules protect investors. The proposed amendments would modernize the advertising rules so that they reflect technological developments and appropriate business activities. The amendments would dramatically simplify many of the provisions of the advertising rules, and would provide greater clarity and conciseness to those rules.

      NASD Regulation has consulted with five of its member committees and its National Adjudicatory Council (NAC) to develop these proposed amendments. Additionally, in October 1998, NASD Regulation issued Notice to Members (NtM) 98-81, which sought comment on whether any NASD rules or By-Laws should be repealed as obsolete, should be modernized in light of technological or industry developments, or should distinguish between retail and institutional customers in their application. The proposed amendments reflect many of the comments received in response to NtM 98-81.

      Members should note that the existing NASD advertising rules and the interpretations of these rules by NASD Regulation staff will continue to govern members' communications with the public until NASD Regulation's Board of Directors and the SEC approve the proposed amendments.

      Additionally, the proposal does not reflect proposed amendments to Rule 2210 and its related Interpretive Materials that are currently pending at the SEC, including those concerning independently prepared research reports, related performance information, and bond fund volatility ratings. If the SEC approves any of these proposed amendments, we anticipate revising the proposal to incorporate such amendments.

      Definitions

      As discussed below, the proposal would amend the definition of "correspondence," and would create new definitions of "institutional sales material," "institutional investor," "existing retail customer," and "prospective retail customer." The proposal would exclude from the definitions of "advertisement" and "sales literature" institutional sales material, which is discussed more fully below. The proposal also would amend the definition of "sales literature" to include expressly press releases concerning a member's product or service. This amendment would codify the existing interpretation of this definition by NASD Regulation's Advertising/Investment Companies Regulation Department (the Department). As discussed below, the proposal would exempt certain press releases regarding investment companies from the filing requirements of Rule 2210.

      Approval And Recordkeeping

      The proposal would reword, but otherwise maintain, the current provisions requiring registered principals to approve, initial, and date each advertisement or item of sales literature before the earlier of its first use or filing with the Department, and requiring that a separate file of sales material be maintained for a three-year period from the date of last use.1 The proposal would maintain the current provision allowing supervising analysts of New York Stock Exchange members to approve corporate debt and equity security research reports. As discussed below, the proposal also would exempt institutional sales material, certain retail form letters, and group e-mail from the pre-use approval requirements.

      A commenter to NtM 98-81 recommended that NASD Regulation revise Rule 2210(b) to indicate that a principal's approval of sales material may be evidenced by an electronic as well as a written signature.2 NASD Regulation has already issued an interpretive letter stating that the principal approval requirements of NASD Conduct Rules 3010 and 3110 (which require the signature of the principal that accepts a customer account opening) may be satisfied through the use of electronic signatures, provided certain safeguards are in place.3

      Although the letter does not cite the principal approval requirements under Rule 2210, the principles articulated in that letter should apply to Rule 2210(b) as well. Consequently, a principal's approval of sales material may be evidenced by an electronic as well as a written signature.

      Filing Requirements And Review Procedures

      The proposal would significantly revise the pre-use approval and the filing requirements applicable to certain types of member communications. The proposal would create a separate category of advertisements and sales literature distributed solely to institutional investors, which would be exempted from Rule 2210's pre-use approval and filing requirements. The proposal also would exempt from the pre-use approval and filing requirements all form letters and group e-mail sent to existing retail customers and to fewer than 25 prospective retail customers. Finally, the proposal would exempt from only the filing requirements article reprints used as sales material and press releases regarding investment companies that are made available only to members of the media.

      Institutional Sales Material

      Today Rule 2210 does not expressly distinguish between retail and institutional sales material. Moreover, the rule currently defines "sales literature" to include any "form letter," which the NASD has interpreted to mean written communications, including e-mail messages, sent to at least two persons. Consequently, any communication sent to two or more institutional investors is deemed "sales literature," must comply with the content standards of Rule 2210, must be pre-approved by a registered principal, and may have to be filed with the Department, depending upon its content.

      A number of commenters to NtM 98-81 urged that communications sent only to institutional investors should not be subject to all of the specific content, pre-use approval, and filing standards of Rule 2210 to which retail communications are subject.4 NASD Regulation agrees with this conclusion. The proposed amendments would eliminate the pre-use approval and filing requirements applicable to sales material sent only to institutional investors ("Institutional Sales Material"). Sales material that is distributed to beneficiaries of institutional accounts, such as 401(k) plan participants, would be treated as retail sales material. NASD Regulation believes that plan participants and other beneficiaries of institutional accounts should receive the same investor protections as other retail investors. Moreover, Institutional Sales Material would continue to be subject to Rule 2210's content and recordkeeping requirements.

      The proposal would define "institutional investor" as:

      • any natural person or entity described in Rule 3110(c)(4) (regardless of whether they have an account with an NASD member); and


      • any NASD member or associated person of a member.

      Rule 3110(c)(4) defines the term "institutional account" as the account of:

      • a bank, savings and loan, insurance company, or registered investment company;


      • an investment adviser registered with either the SEC or any state; or


      • any other entity or individual with total assets of at least $50 million.

      Form Letters And Group E-Mail

      The use of group e-mail has become commonplace in many firms. For example, registered representatives may provide customers with information concerning their accounts, changes in market conditions, or current economic conditions. Given the volume of form letters and group e-mail that members and their associated persons may send and the speed with which this material can be dispatched to customers, a pre-use approval requirement may be less effective than standards that are more specifically tailored to these forms of communication.

      NASD Regulation believes that Rule 3010(d), which governs the approval and review of correspondence, provides a more effective means of supervising form letters and group e-mail. Rule 3010(d) requires members to adopt written procedures for the review of correspondence by registered principals. Any member that does not pre-approve all correspondence must educate and train associated persons as to NASD rules governing communications with the public and the firm's procedures, must document this training, and must monitor adherence to these procedures. Members must retain all correspondence of registered representatives related to the member's investment banking or securities business.

      Several commenters to NtM 98-81 recommended that Rule 2210 be amended to clarify that only those letters that meet the definition of "form letter" in Rule 24b-1 under the Investment Company Act of 1940 (i.e., a sales letter sent to 25 or more persons within a 90-day period) are subject to the filing requirements.5 Others have urged NASD Regulation to look to content rather than the number of recipients in determining whether a communication is subject to the filing requirements.6

      NASD Regulation is concerned that an exemption based solely on the number of recipients may not address the practical issues related to the supervision of group e-mail and form letters. It would seem that a content-based approach would be difficult to implement due to the inherently subjective nature of determining which communications are intended to solicit products and services.

      Accordingly, NASD Regulation has proposed an alternative approach, which would subject form letters and group e-mail sent to existing retail customers and fewer than 25 prospective retail customers ("Group Correspondence") to the supervisory and review requirements of Rule 3010(d) applicable to correspondence, and would exempt Group Correspondence from the pre-use approval and filing requirements of Rule 2210. "Existing retail customer" would be defined as any person, other than an institutional investor, who has opened an account with a member. "Prospective retail customer" would be defined as any person, other than an institutional investor, who has not opened an account with the member.

      This approach would continue to require filing and pre-use approval for sales material that raises the greatest potential for abuse - material sent to large numbers of prospective retail investors. At the same time, the proposal would subject Group Correspondence to the supervisory requirements of Rule 3010(d) and the content and recordkeeping requirements of Rule 2210.

      In connection with the exemption from the pre-use approval and filing requirements for Group Correspondence, the definition of "correspondence" also would be revised. Currently, "correspondence" means any written or electronic communication prepared for delivery to a single current or prospective customer, and not for dissemination to multiple customers or the general public. As proposed, "correspondence" would simply mean any written or electronic communication that does not meet the definition of "advertisement" or "sales literature."

      Article Reprints And Press Releases

      Rule 2210 defines "sales literature" to include "reprints or excerpts of any other . . . sales literature or published article." Article reprints thus may have to be filed with the Department, depending upon their content (such as whether they pertain to mutual funds or variable products). NASD Regulation has received comments in the past, including those made in response to NtM 98-81,7 that third-party article reprints that are used as sales literature should not be subject to the filing requirements of Rule 2210. Commenters have argued that reprints often are available to the public through large-circulation periodicals published by firms that are not NASD members. Commenters have thus argued that it makes little sense to require members to file reprints with the Department, especially when members have no control over the content of these articles.

      In response to these concerns, the proposal would eliminate the need to file any article reprint that has not been materially altered by the member. Members still would have to ensure that article reprints comply with the content standards of Rule 2210. Thus, members could not distribute an article reprint that contains false or misleading statements. Moreover, article reprints would continue to be subject to the pre-use approval and recordkeeping requirements of Rule 2210.

      Rule 2210 also defines "sales literature" to include "any written or electronic communication distributed or made generally available to customers or the public," which the Department historically has interpreted to include press releases.8 Commenters to NtM 98-81 have argued that press releases should be excluded from the filing requirements on the ground that media outlets typically excerpt only certain portions of press releases for their stories, and members have no editorial control over the content of the article that will appear.9 In response to this concern, the proposal would exclude from the filing requirements press releases concerning investment companies, provided that such releases are made available only to members of the media. These press releases would continue to be subject to the content, pre-use approval, and recordkeeping requirements of Rule 2210.

      Shareholder Reports

      Several commenters to NtM 98-81 have argued that investment company annual and semi-annual reports that are used as sales material also should be exempt from the filing requirements.10 These commenters note that shareholder reports are already subject to specific content requirements under SEC rules and are filed with the SEC, and argue that these requirements should address any investor protection concerns.

      Members are not required to file shareholder reports with NASD Regulation if they are only sent to current fund shareholders. However, if a member uses a shareholder report as sales material with prospective investors, the member must file the management's discussion of fund performance (MDFP) portion of the report (as well as any supplemental sales material attached to or distributed with the report) with the Department. The Department is concerned that members frequently supplement the MDFP with marketing material that goes far beyond the SEC regulatory requirements for shareholder reports. Accordingly, NASD Regulation does not propose at this time to exempt mutual fund shareholder reports. However, interested parties are encouraged to comment on this issue.

      Television And Video Advertisements

      The proposal would require members that have filed a draft version or "story board" of a television or video advertisement pursuant to a filing requirement also to file the final filmed version within 10 business days of first use or broadcast. This rule change would codify an existing Department policy regarding television and video sales material.

      Electronic Filing Of Sales Material

      NASD Regulation received a number of recommendations regarding ways to allow members to file sales material and receive Department comments electronically.11 NASD Regulation agrees with these commenters that electronic filing may improve the speed and efficiency of the filing and review process over the current paper-based system. Due to possible regulatory and technological constraints, however, NASD Regulation is not prepared at this time to allow electronic filing. NASD Regulation is examining the means to allow electronic filing and looks forward to working with its committees and members to determine whether electronic filing would be feasible.

      Other Filing Issues

      One commenter to NtM 98-81 requested that NASD Regulation eliminate the requirement that members file a copy of the ranking or comparison used in sales material that contains rankings. This comment appears to assume that the filing is pro forma because the ranking information is reflected in the sales material itself, or that the ranking information is readily available to NASD Regulation staff. In fact, it is not unusual for the Department to comment on sales material that presents a ranking in a manner inconsistent with the backup ranking information. Additionally, many sales material items contain rankings that are not readily available. Because the Department staff relies on the backup filings when reviewing sales material that contains rankings, elimination of this requirement could significantly delay completion of the staff's review. Accordingly, NASD Regulation does not propose to eliminate the backup filing requirement for sales material that contains rankings. The public is invited to comment further on this issue, however.

      Another commenter recommended exempting from the filing requirements generic mutual fund advertisements that comply with Rule 135a under the Securities Act of 1933.12 Members rarely file generic advertisements. To the extent the Department has received generic advertisements, however, it has found that members sometimes misunderstand the content requirements of Rule 135a, and sometimes misclassify advertising that falls under other rules as generic advertisements. We are concerned that an exemption for generic advertisements could lead some members not to file investment company sales material that should be filed due to their misunderstanding of Rule 135a. Accordingly, NASD Regulation does not propose to exempt generic fund advertisements. Nevertheless, we invite further public comment on this issue.

      Standards Applicable To Member Communications

      The proposal would substantially shorten and simplify the standards applicable to communications with the public that are contained in Rule 2210(d). The proposal would essentially eliminate the distinction between general and specific standards applicable to communications with the public, and would rewrite many of the standards in "plain English."

      The proposal would relocate certain standards from Rule 2210(d) to a new Interpretive Material 2210-1, Guidelines to Ensure that Communications Are Not Misleading. New proposed IM-2210-1 would clarify that members have the primary responsibility to ensure that their communications with the public are fair, balanced, and not misleading, including determining what disclosures are necessary to meet this standard. IM-2210-1 also would note that, while member communications must comply with these guidelines, they do not represent an exclusive list of considerations that a member must make in determining whether a communication complies with all applicable standards.

      IM-2210-1 would not contain certain of the specific standards currently in Rule 2210. Partially in response to comments received on NtM 98-81,13 the proposal would eliminate the current specific standards regarding offers of free service, claims for research facilities, hedge clauses, recruiting advertising, and periodic investment plans, for the following reasons.

      First, to the extent that these provisions prohibit statements that are misleading, unbalanced, or inaccurate regarding particular types of communications, the rule already prohibits the use of such statements.

      Second, certain required disclosures, such as those currently applicable to any advertisement or sales literature that discusses periodic investment plans, may not be necessary depending upon the context.

      The proposal also would delete current Rule 2210(d)(2)(J), regarding references to regulatory organizations, for similar reasons. However, the proposal would relocate the prohibition on communications that imply NASD or regulatory agency endorsement or approval of securities to Interpretive Material 2210-4 (Limitations on the Use of Association's Name).

      The proposal would streamline and clarify the current provisions in Rule 2210(d)(2)(B) regarding use of recommendations in sales material, including research reports. The proposal also would move these provisions to IM-2210-1(6).

      The proposal would clarify that a member making a recommendation in sales material must disclose if the member or any officer, director, or the associated person making the recommendation has any financial interest in the recommended security or any related security. Further, the member would be required to disclose the nature of such financial interest, including whether the financial interest consists of any options or warrants on the recommended security.

      The proposal would continue to require any member to disclose, if applicable, that the member usually makes a market in the recommended security or any related security of the issuer. Additionally, the proposal would continue to require the member to disclose, if applicable, that the member was manager or comanager of a public offering of any securities of the recommended issuer within the last 12 months. The proposal would shorten the underwriting look-back period contained in the current rule from three years to 12 months to better reflect current underwriting practices.

      The proposal also would require the recommendation to disclose the price at the time the recommendation was made and the date of the recommendation. When presenting past recommendations in sales material, the proposal would require disclosure of all of the member's recommendations for similar securities and time periods.

      One commenter requested that NASD Regulation rescind its policy announced in NtM 98-107 regarding the obligations of members to portray mutual fund fees and expenses in a balanced manner.14 That Notice addressed several concerns with the presentation of mutual fund fees and expenses, including the need to ensure that a discussion of fees that are not charged is balanced with a discussion of fees and expenses that are charged. Since publication of NtM 98-107, NASD Regulation has detected a marked improvement in the quality of this disclosure. Consequently, NASD Regulation reaffirms its position in NtM 98-107.

      Use And Disclosure Of A Member's Name

      The proposal would dramatically simplify the provisions concerning disclosure of member names. Every member communication that promotes a product or service would have to prominently disclose the member's name, although a member could disclose a fictional name by which the member is commonly recognized or that is required in any state in addition to the member's name. The proposal also would require disclosure of any relationship between the member and any non-member or individual who is named.

      To prevent confusion, communications that include names other than the member name would be required to describe which products or services are being offered by the member. Members would not be required to disclose their names in "blind" recruiting advertisements (employment advertisements that do not identify the potential employer).

      Variable Products Communications

      The proposal would not amend Interpretive Material 2210-2, Communications with the Public About Variable Life Insurance and Variable Annuities. NASD Regulation believes it would be premature to amend these provisions before the SEC takes final action on its proposed Form N-6, the registration form for insurance company separate accounts that are registered as unit investment trusts and that offer variable life insurance policies.15

      Ranking Guidelines

      The proposal would make several changes to the Ranking Guidelines contained in Interpretive Material 2210-3.

      1) The proposal would eliminate the requirement that certain disclosures16 appear in "close proximity" to any headline or other prominent statement that refers to a ranking. The subjective nature of this requirement has complicated the Department's administration of the Ranking Guidelines. Moreover, this change addresses a similar request made in response to NtM 98-81.17
      2) The proposal would modify the current requirement that rankings be based on total return for periods of one, five, and 10 years (as applicable), or if rankings for such periods are not available, for short, medium, and long-term periods. Instead, rankings would have to be based on the total return for short, medium, and long-term periods for investment companies in the same category, to the extent that the investment company has been in existence for each of these periods.
      3) The proposal would eliminate certain disclosure requirements applicable to investment company rankings that are based on subcategories of funds or categories created by an investment company or its affiliate.18

      One commenter requested that NASD Regulation amend the Ranking Guidelines to allow sales material to include rankings of entire fund families, in addition to rankings of individual funds.19 NASD Regulation is concerned that fund family rankings would confuse or even mislead investors. Accordingly, NASD Regulation does not propose to amend the Ranking Guidelines in this manner. Nevertheless, NASD Regulation solicits comment on whether the Ranking Guidelines should permit sales material to include rankings of entire fund families.

      Limitations On Use Of The Association's Name

      The proposal would simplify and shorten the requirements in Interpretive Material 2210-4 concerning the use of the NASD's name. The proposal would permit a member to use the NASD's name in any public communication, so long as it complies with the requirements of Rule 2210 and does not imply that the NASD or any other regulatory authority endorses or guarantees the member's business practices, selling methods, or securities offered. The provisions of IM-2210-4 regarding use of the NASD's name in an over-thecounter transaction confirmation and certification of membership would generally remain the same. The proposal would delete paragraph (c), which prohibits the fraudulent or misleading use of the NASD's name, and paragraph (d), which deems a violation of IM-2210-4 to be a violation of NASD Rule 2110. NASD Regulation believes that these paragraphs simply repeat standards that already exist in Rules 2110 and 2210.

      Communications About Collateralized Mortgage Obligations

      The proposal would rewrite Interpretive Material 2210-1 (the CMO Guidelines), which governs communications about collateralized mortgage obligations (CMOs), and renumber it as IM-2210-6. The current CMO Guidelines may give the impression that different standards apply to educational material, advertisements, and "communications." The proposal attempts to simplify, shorten, and reorganize the CMO Guidelines to provide a more straightforward and uniform list of disclosure requirements for all CMO communications.

      The proposal would reorganize the CMO Guidelines by expanding the "General Considerations" section of existing IM-2210-1 to incorporate all of the requirements generally applicable to CMO communications. The proposal would separate out requirements concerning specific products and CMO educational material.

      The CMO Guidelines require all member communications to describe CMOs as "collateralized mortgage obligations" and prohibit the use of "proprietary names." This prohibition was designed to prevent the use of names that mimic government agency nicknames (e.g., Freddie Mac, Ginnie Mae). Nevertheless, the term "proprietary" may be confusing. The proposal would replace these provisions with a general requirement that the name of the product include the term "Collateralized Mortgage Obligation."

      The CMO Guidelines require members to accurately depict CMO guarantees, and state that in most cases it would be misleading to use the term "government guaranteed." They also state that private-issue CMO advertisements should not refer to guarantees or backing, but may disclose the rating.

      NASD Regulation believes that the more specific requirements concerning use of the term "government guaranteed" and private-issue CMOs already are covered by the general requirement that guarantees be accurately depicted. Moreover, the language used for these specific issues is admonishing rather than compulsory. For these reasons, the proposal would eliminate these specific standards in favor of the general requirement that guarantees be accurately depicted. Members could continue to present ratings in their CMO communications, provided use of the rating is not otherwise misleading.

      The proposal would clarify that educational material must be offered before a CMO sale. The proposal also would also reorganize this portion of the CMO Guidelines to make it clearer.

      The current CMO Guidelines provide a set of general requirements concerning print advertisements. The proposal would eliminate this section because it is redundant of other provisions of the new IM and the other advertising rules. Of course, print advertisements would still be permitted, subject to the advertising rules and IM-2210-6.

      The proposal would eliminate the provisions regarding television advertisement story boards and non-material updating of previously filed radio or television CMO advertising, since Rule 2210 as amended would cover these areas. The proposal also would significantly reduce the number of required disclosures for radio and television CMO advertisements.

      The proposal would move the current "Standardized CMO Advertisement" section into a new section entitled "Specific CMO Communications with the Public." The new CMO Guidelines would clarify that any communication discussing a specific CMO must provide a standardized presentation of anticipated yield and other disclosures. The proposal would revise the standardized sample communication to reflect interest rates that are more common today (7.5 percent rather than 8.5 percent) and to update the maturity date.

      One commenter to NtM 98-81 recommended that NASD Regulation exempt communications to institutional investors regarding CMOs from the CMO Guidelines, on the grounds that many of the Guidelines' required disclosures assume a retail investor's level of knowledge.20 NASD Regulation solicits comment on whether it should exempt institutional sales material regarding CMOs from the CMO Guidelines.


      ATTACHMENT A

      Text Of Proposed Amendments To Rule 2210 And Related Interpretive Materials

      (Note: Rule 2210 and Interpretive Materials 2210-1, 2210-3, and 2210-4 are deleted in their entirety and the following new language is substituted in their place.)

      2200. MEMBER COMMUNICATIONS

      2210. Communications with the Public

      (a) Definitions
      (1) For purposes of this Rule and any interpretation thereof, "communications with the public" consist of:
      (A) "Advertisements." Any material, other than institutional sales material, that is published or designed for use in any electronic or other public media, including Web sites and any newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, sign or billboard, motion picture, or telephone directory (other than routine listings).
      (B) "Sales Literature." Any written or electronic communication, other than institutional sales material, that is generally distributed or made available to customers or the public, but which does not meet the foregoing definition of "advertisement," including circulars; research reports; market letters; performance reports or summaries; form letters; telemarketing scripts; seminar texts; reprints or excerpts of any other advertisement, sales literature or published article; and press releases concerning a member's product or service.
      (C) "Correspondence." Any written or electronic communication that does not meet the foregoing definition of "advertisement" or "sales literature."
      (D) "Institutional Sales Material." Any material that would otherwise be deemed an "advertisement" or "sales literature," but that is distributed only to institutional investors.
      (E) Participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public appearance or speaking activity.
      (2) "Institutional investor" means any:
      (A) natural person or entity described in Rule 3110(c)(4), regardless of whether such person or entity has an account with an Association member; and
      (B) Association member or associated person of such a member.
      No member may treat a communication as having been distributed to an institutional investor if the member has reason to believe that the communication (or any excerpt thereof) will be forwarded to any person other than an institutional investor.
      (3) "Existing retail customer" means any person who has opened an account with a member and is not an institutional investor. "Prospective retail customer" means any person who has not opened such an account and is not an institutional investor.
      (b) Approval and Recordkeeping
      (1) A registered principal of the member must approve, initial and date each advertisement and item of sales literature before the earlier of its use or filing with the Association's Advertising/Investment Companies Regulation Department ("Department"). With respect to corporate debt and equity securities that are the subject of research reports as that term is defined in Rule 472 of the New York Stock Exchange, this requirement may be met by the signature or initial of a supervisory analyst approved pursuant to Rule 344 of the New York Stock Exchange.
      (2)
      (A) Institutional sales material; and
      (B) Form letters or electronic mail messages distributed only to:
      (i) existing retail customers; and
      (ii) fewer than 25 prospective retail customers within any 90 calendar-day period
      need not be approved by a registered principal prior to use, but must be approved prior to any voluntary filing with the Department. Such communications are subject to the requirements of Rule 3010 regarding the supervision and review of correspondence.
      (3) Members must maintain all advertisements, sales literature, and institutional sales material in a file for a period of three years from the date of last use.

      The file must include the name of each person who prepared and approved each advertisement and item of sales literature or institutional sales material and the date that approval was given.
      (4) Members must maintain in a file information concerning the source and data of any statistical table, chart, graph or other illustration used by the member in communications with the public.

      Cross Reference - NASD Conduct Rule 3010 (Supervision) and Rule 3110 (Books and Records)

      (c) Filing Requirements and Review Procedures
      (1) The member must provide with each filing under this paragraph the actual or anticipated date of first use, the name and title of the individual who approved the advertisement or sales literature, and the date that the approval was given.
      (2) Within 10 business days of first use or publication, a member must file the following advertisements and sales literature with the Department:
      (A) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) not included within the requirements of paragraph (c)(3). The filing of any advertisement or sales literature that includes or incorporates a ranking or comparison of the investment company with other investment companies must include a copy of the ranking or comparison used in the advertisement or sales literature.
      (B) Advertisements and sales literature concerning public direct participation programs (as defined in Rule 2810).
      (C) Advertisements concerning government securities (as defined in Section 3(a)(42) of the Act).
      (3) At least 10 business days prior to first use or publication (or such shorter period as the Department may allow), a member must file the following communications with the Department and withhold them from publication or circulation until any changes specified by the Department have been made:
      (A) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) that include or incorporate rankings or comparisons of the investment company with other investment companies when the ranking or comparison category is not generally published or is the creation, either directly or indirectly, of the investment company, its underwriter or an affiliate. Such filings must include a copy of the data, ranking or comparison on which the ranking or comparison is based.
      (B) Advertisements concerning collateralized mortgage obligations (CMOs).
      (4) A member must file each advertisement with the Department at least 10 business days prior to use, for a one-year period from the date of its first filing of any advertisement or sales material with the Department (or with a registered securities exchange having standards comparable to those contained in this Rule).
      (5) If a member has filed a draft version or "story board" of a television or video advertisement pursuant to a filing requirement, then the member must also file the final filmed version within 10 business days of first use or broadcast.
      (6)
      (A) Notwithstanding the foregoing provisions, the Department upon review of a member's advertisements or sales literature, and after determining that the member has departed from the standards of this Rule, may require that the member file all advertisements and sales literature, or the portion of the member's material that is related to any specific type or class of securities or services, with the Department at least 10 business days prior to use. The Department will notify the member in writing of the types of material to be filed and the length of time such requirement is to be in effect.
      (B) Any filing requirement imposed under this paragraph (6) will take effect 30 calendar days after the member receives the written notice, during which time the member may appeal pursuant to the hearing and appeal procedures of the Code of Procedure contained in the Rule 9510 Series.
      (7) In addition to the foregoing requirements, each member's advertisements, sales literature, institutional sales material, and correspondence may be subject to a spot-check procedure. Upon written request from the Department, each member must submit the material requested in a spot-check procedure within the time frame specified by the Department.
      (8) The following types of material are excluded from the filing requirements and (except for the material in paragraph (I)) the foregoing spot-check procedures:
      (A) Advertisements and sales literature that previously have been filed and that are to be used without material change.
      (B) Advertisements or sales literature solely related to recruitment or changes in a member's name, personnel, location, ownership, offices, business structure, officers or partners, telephone or teletype numbers, or concerning a merger with, or acquisition by, another member.
      (C) Advertisements or sales literature that do no more than identify the Nasdaq or other national securities exchange symbol of the member or identify a security for which the member is a Nasdaq registered market maker.
      (D) Advertisements or sales literature that do no more than identify the member or offer a specific security at a stated price.
      (E) Prospectuses, preliminary prospectuses, mutual fund profiles, offering circulars and similar documents that have been filed with the Securities and Exchange Commission (the "SEC") or any state, or that concern a securities offering that is exempt from such registration, except that an investment company prospectus published pursuant to SEC Rule 482 under the Securities Act of 1933 will not be considered a prospectus for purposes of this exclusion.
      (F) Advertisements prepared in accordance with Section 2(10)(b) of the Securities Act of 1933, as amended, or any rule thereunder, such as SEC Rule 134, unless the advertisements are related to direct participation programs or securities issued by registered investment companies.
      (G) Press releases concerning investment companies, provided that such releases re made available only to members of the media.
      (H) Reprints of published articles that the member has not materially altered.
      (I) Form letters or electronic mail messages distributed only to:
      (i) existing retail customers; and
      (ii) fewer than 25 prospective retail customers within any 90 calendar-day period.
      (9) Material that refers to investment company securities, direct participation programs, government securities or exempted securities (as defined in Section 3(a)(12) of the Act) solely as part of a listing of products or services offered by the member, is excluded from the requirement of paragraphs (c)(1) and (c)(2).
      (10) Pursuant to the Rule 9600 Series, the Association may exempt a member or person associated with a member from the pre-filing requirements of this paragraph for good cause shown.
      (d) Standards Applicable to Communications with the Public
      (1) All member communications with the public must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service. No member may omit any material fact or qualification if the omission, in the light of the context of the material presented, would cause the communication to be misleading.
      (2) No member may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. No member may publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
      (3) Material information must appear in the main text of the communication and may not be relegated to footnotes.
      (4) Communications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.
      (5) Any testimonial concerning a member's products and services in advertisements or sales literature must state the following:
      (A) The fact that the testimonial may not be representative of the experience of other clients.
      (B) The fact that the testimonial is no guarantee of future performance or success.
      (C) If more than a nominal sum is paid, the fact that it is a paid testimonial.
      (6) If any testimonial in a communication with the public concerns a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion.
      (7) Any comparison in advertisements or sales literature between investments or services must disclose all material differences between them, including investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features.
      (e) Violation of Other Rules

      Any violation by a member of any rule of the SEC, the Securities Investor Protection Corporation or the Municipal Securities Rulemaking Board applicable to member communications with the public will be deemed a violation of this Rule.

      Cross Reference — SEC Rules Concerning Investment Company Sales Literature and Advertising (SEC Rules and Regulation T Tab)

      (f) Disclosure of the Member's Name
      (1) Every member communication with the public that promotes a product or service (which for purposes of this provision includes business cards and letterhead) must:
      (A) prominently disclose the name of the member and may also include a fictional name by which the member is commonly recognized or which is required by any state or jurisdiction;
      (B) disclose any relationship between the member and any non-member or individual who is also named; and
      (C) if it includes other names, clearly identify which products or services are being offered by the member.
      (2) This provision does not apply to so-called "blind" advertisements used to recruit personnel.

      Cross Reference - Conduct Rule 3010(g)(2) (Concerning telephone directory line listings, business cards and letterhead)

      IM-2210-1. Guidelines to Ensure That Communications Are Not Misleading

      Every member is responsible for determining whether any communication with the public, including material that has been filed with the Department, complies with all applicable standards, including the requirement that the communication not be misleading. In order to meet this responsibility, member communications with the public must conform with the following guidelines. These guidelines do not represent an exclusive list of considerations that a member must make in determining whether a communication with the public complies with all applicable standards.

      (1) Members must ensure that statements are not misleading within the context in which they are made. A statement made in one context may be misleading even though such a statement could be appropriate in another context. An essential test in this regard is the balance of treatment of risks and potential benefits.
      (2) Members must consider the nature of the audience to which the statement will be directed. Different levels of explanation or detail may be necessary depending on the audience to which a communication is directed. Members must keep in mind that it is not always possible to restrict the audience that may have access to a particular communication with the public. Additional information or a different presentation of information may be required depending upon the medium used for a particular communication and the possibility that the communication will reach a larger or different audience than the one initially targeted.
      (3) Member communications must be clear. A statement made in an unclear manner can cause a misunderstanding. A complex or overly technical explanation may be more confusing than too little information.
      (4) Income or investment returns may not be characterized in communications with the public as tax free or exempt from income tax where tax liability is merely postponed or deferred. If taxes are payable upon redemption, that fact must be disclosed in advertisements and sales literature. References to tax free/tax exempt income must indicate which income taxes apply, or which do not, unless income is free from all applicable taxes. For example, if income from an investment company investing in municipal bonds is subject to state or local income taxes, this fact must be stated, or the illustration must otherwise make it clear that income is free only from federal income tax.
      (5) Communications that refer to individuals may not refer to nonexistent or self-conferred degrees or designations, nor may these communications refer to bona fide degrees or designations in a misleading manner.
      (6) Any member making a recommendation in advertisements and sales literature must disclose, whenever applicable, that the member usually makes a market in, or that the member, any of its officers or directors or the associated person providing the recommendation has any financial interest in the recommended security or any related security, and the nature of the financial interest. The member also must disclose, if applicable, that the member was manager or co-manager of a public offering of any securities of the recommended issuer within the last twelve months. The member must disclose the price at the time the recommendation was made and the date of the recommendation. When presenting past recommendations in advertisements and sales literature, a member must disclose all of its recommendations for similar securities and time periods.

      IM-2210-2. Communications with the Public About Variable Life Insurance and Variable Annuities

      IM-2210-3. Use of Rankings in Investment Company Advertisements and Sales Literature

      (a) Definition of "Ranking Entity"

      For purposes of the following guidelines, the term "Ranking Entity" refers to any entity that provides general information about investment companies to the public, that is independent of the investment company and its affiliates, and whose services are not procured by the investment company or any of its affiliates to assign the investment company a ranking.
      (b) General Prohibition

      Members may not use investment company rankings in an advertisement or sales literature other than rankings developed and produced by Ranking Entities and conforming to the following requirements.
      (c) Required Disclosures
      (1) Headlines/Prominent Statements

      A headline or other prominent statement may not state or imply that an investment company is the best performer in a category unless it is actually ranked first in the category.
      (2) All advertisements and sales literature containing an investment company ranking must disclose prominently:
      (A) the name of the category (e.g., growth);
      (B) the number of investment companies in the category;
      (C) the name of the Ranking Entity and, if applicable, the fact that the investment company or an affiliate created the ranking;
      (D) the length of the period (or the first day of the period) and its ending date; and
      (E) the criteria on which the ranking is based (e.g., total return, risk-adjusted performance).
      (3) All such advertisements and sales literature also must disclose:
      (A) the fact that past performance is no guarantee of future results;
      (B) for investment companies that assess front-end sales loads, whether the ranking takes those loads into account;
      (C) if the ranking is based on total return or the current SEC standardized yield, and fees have been waived or expenses advanced during the period on which the ranking is based and the waiver or advancement had a material effect on the total return or yield for that period, a statement to that effect;
      (D) the publisher of the ranking data (e.g., "ABC Magazine, June 1999"); and
      (E) if the ranking consists of a symbol (e.g., a star system) rather than a number, the meaning of the symbol (e.g., a four-star ranking indicates that the fund is in the top 30% of all investment companies).
      (d) Time Periods
      (1) Any investment company ranking included in an advertisement or sales literature must be, at a minimum, current to the most recent calendar quarter ended, in the case of advertising, prior to the submission for publication, or, in the case of sales literature, prior to use. If no ranking that meets this requirement is available from the Ranking Entity, then a member may only use the most current ranking available from the Ranking Entity unless use of the most current ranking would be misleading, in which case no ranking from the Ranking Entity may be used.
      (2) Except for money market mutual funds:
      (A) advertisements and sales literature may not present any ranking that covers a period of less than one year, unless the ranking is based on yield;
      (B) an investment company ranking based on total return must be accompanied by rankings based on total return for short, medium and longterm periods for investment companies in the same investment category, to the extent that the investment company has been in existence for each of these periods;
      (C) an investment company ranking based on yield may be based only on the current SEC standardized yield and must be accompanied by total return rankings for the time periods in (2)(B).
      (e) Categories
      (1) The choice of category (including a subcategory of a broader category) on which the investment company ranking is based must be one that provides a sound basis for evaluating the performance of the investment company.
      (2) An investment company ranking must be based only on (A) a category or subcategory created and published by a Ranking Entity, or (B) a category or subcategory created by an investment company or an investment company affiliate, but based on the performance measurements of a Ranking Entity.
      (3) The advertisement or sales literature may not use any category or subcategory that is based upon the investment company's asset size, whether or not it has been created by a Ranking Entity.
      (f) Multiple Class/Two-Tier Funds Investment company rankings for more than one class of investment company with the same portfolio must be accompanied by prominent disclosure of the fact that the investment companies or classes have a common portfolio.

      IM-2210-4. Limitations on Use of Association's Name

      (a) Members may indicate membership in the Association in conformity with Article XV, Section 2 of the NASD By-Laws in the following ways:
      (1) in any communication with the public, provided that the communication complies with the applicable standards of Rule 2210, and neither states nor implies that the Association or any other regulatory organization endorses, indemnifies, or guarantees the member's business practices, selling methods, the class or type of securities offered, or any specific security;
      (2) in a confirmation statement for an over-the-counter transaction, that states: "This transaction has been executed in conformity with the Uniform Practice Code of the National Association of Securities Dealers, Inc."
      (b) Certification of Membership

      Upon request to the Association, a member will be entitled to receive an appropriate certification of membership, which may be displayed in the principal office or a registered branch office of the member. The certification will remain the property of the Association and must be returned by the member upon request of the NASD Board or the Chief Executive Officer of the Association.

      IM-2210-5. Presentation of Mutual Fund Related Performance Information

      IM-2210-6 Communications with the Public About Collateralized Mortgage Obligations (CMOs)

      (a) Definition

      For purposes of the following guidelines, the term "collateralized mortgage obligation" (CMO) refers to a multi-class debt instrument backed by a pool of mortgage passthrough securities or mortgage loans, including real estate mortgage investment conduits (REMICs) as defined in the Tax Reform Act of 1986.
      (b) Communications with the Public
      (1) General Considerations

      All communications with the public concerning CMOs:
      (A) must include within the name of the product the term "Collateralized Mortgage Obligation;"
      (B) may not compare CMOs to any other investment vehicle, including a bank certificate of deposit;
      (C) may not exaggerate the relative safety offered by an investment in CMOs;
      (D) must accompany any claim concerning the liquidity of a CMO with disclosure that, upon resale, an investor may receive more or less than his original investment;
      (E) that discusses any guarantee, must depict the guarantee accurately and may not imply that either the market value or the anticipated yield of the CMO is guaranteed;
      (F) must disclose, as applicable, that a government agency backing applies only to the face value of the CMO and not to any premium paid;
      (G) may not imply that CMOs are simple securities suitable for any investor; and
      (H) must disclose that a CMO's yield and average life will fluctuate depending on the actual rate at which mortgage holders prepay the mortgages underlying the CMO and changes in current interest rates.
      (2) Required Educational Material Before the sale of a CMO, a member must offer to the customer educational material that includes the following:
      (A) a discussion of:
      (i) characteristics and risks of CMOs including credit quality, prepayment rates and average lives, interest rates (including their effect on value and prepayment rates), tax considerations, minimum investments, transaction costs and liquidity;
      (ii) the structure of a CMO, including the various types of tranches that may be issued and the rights and risks pertaining to each (including the fact that two CMOs with the same underlying collateral may be prepaid at different rates and may have different price volatility); and
      (iii) the relationship between mortgage loans and mortgage securities;
      (B) questions an investor should ask before investing; and
      (C) a glossary of terms.
      (c) Specific CMO Communications with the Public

      In addition to the standards set forth above, communications that promote a specific security or contain yield information must conform to the standards set forth below. An example of a compliant communication appears at the end of this section.
      (1) The communication must present the following disclosure sections with equal prominence. The information in Sections 1 and 2 must be included. The information in Section 3 is optional; therefore, the member may elect to include any, all or none of this information. The information in Section 4 may be tailored to the member's preferred signature.

      Section 1

      Title - Collateralized Mortgage Obligations
      Coupon Rate
      Anticipated Yield/Average Life
      Specific Tranche - Number & Class
      Final Maturity Date
      Underlying Collateral

      Section 2 Disclosure Statement:

      "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions."

      Section 3

      Product Features (Optional):

      Minimum Denominations
      Rating Disclosure
      Agency/Government Backing
      Income Payment Structure
      Generic Description of Tranche (e.g., PAC, Companion)
      Yield to Maturity of CMOs Offered at Par

      Section 4

      Company Information:

      Name, Memberships
      Address
      Telephone Number
      Representative's Name
      (2) The following conditions must also be met:
      (A) All figures in Section 1 must be in equal type size.
      (B) The disclosure language in Section 2 may not be altered and must be given equal prominence with the information in Section 1.
      (C) The prepayment assumption used to determine the yield and average life must either be obtained from a nationally recognized service or the member firm must be able to justify the assumption used. A copy of either the service's listing for the CMO or the firm's justification must be attached to the copy of the communication that is maintained in the firm's advertising files in order to verify that the prepayment scenario is reasonable.
      (D) Any sales charge that the member intends to impose must be reflected in the anticipated yield.
      (E) The communication must include language stating that the security is "offered subject to prior sale and price change." This language may be included in any one of the four sections.
      (F) If the security is an accrual bond that does not currently distribute principal and interest payments, then Section 1 must include this information.
      (3) Radio/Television Advertisements
      (A) The following oral disclaimer must precede any radio or television advertisement in lieu of the Title information set forth in Section 1:

      "The following is an advertisement for Collateralized Mortgage Obligations. Contact your representative for information on CMOs and how they react to different market conditions."
      (B) Radio or television advertisements must contain the following oral disclosure statement in lieu of the legend set forth in Section 2:

      "The yield and average life reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life."
      (4) Standardized CMO Communication Example:

      Collateralized Mortgage
      Obligations

      7.50% Coupon
      7.75% Anticipated Yield to 22-Year Average Life FNMA 9532X, Final Maturity
      March 2023
      Collateral 100% FNMA 7.50%

      The yield and average life shown above reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions.

      $5,000 Minimum Income Paid Monthly Implied Rating/Volatility Rating Principal and Interest Payments Backed by FNMA PAC Bond

      Offered subject to prior sale and price change.

      Call Mary Representative at (800)555-1234

      Your Company Securities,
      Inc., Member SIPC
      123 Main Street
      Anytown, USA 12121

      Endnotes

      1 See NASD Conduct Rule 2210(b).

      2 See Letter from Bruce Saxon, Compliance Specialist, Van Kampen Investments Inc., to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 12, 1999).

      3 See Letter from David A. Spotts, NASD Regulation, Inc. to Laura Moret, American Express Financial Corporation (Nov. 26, 1997) (available on the NASD Regulation Web Site).

      4 Letter from Brian C. Underwood, Senior Vice President, A.G. Edwards & Sons, Inc., to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Nov. 24, 1998); Letter from Joanne Medero, Managing Director and Chief Counsel, Barclays Global Investors, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 13, 1999); Letter from Kathryn V. Natale, Chairman, NASD Rule Review Task Force, The Bond Market Association, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 15, 1999) ("BMA Letter"); Letter from Cornelius J. Sullivan and Debra S. Wekstein, Eaton Vance Distributors, Inc., to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 14, 1999); Letter from David A. Spotts, Senior Legal Counsel, Fidelity Investments, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 15, 1999) ("Fidelity Letter"); Letter from Craig S. Tyle, General Counsel, Investment Company Institute, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 12, 1999) ("ICI Letter"); Letter from Michael W. Reinhardt, House Counsel, Ragen MacKenzie Incorporated, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Nov. 30, 1998); Letter from James A. Tricarico, R. Gerald Baker, and Howard J. Schwartz, the Securities Industry Association, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 23, 1999) ("SIA Letter"); Letter from Henry H. Hopkins and David A. Roscum, T. Rowe Price Associates, Inc. to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 11, 1999) ("T. Rowe Price Letter").

      5 Fidelity Letter; ICI Letter.

      6 SIA Letter; see also Letter from R. Gerald Baker, Securities Industry Association, to Thomas A. Pappas and Robert J. Smith, NASD Regulation, Inc. (Nov. 9, 1998).

      7 Fidelity Letter; T. Rowe Price Letter.

      8 Additionally, the proposal would amend the definition of "sales literature" expressly to include press releases to conform it to this interpretation.

      9 See T. Rowe Price Letter; ICI Letter; see also Letter from Craig S. Tyle, Vice President and Senior Counsel, Investment Company Institute, to Thomas M. Selman, Director, Advertising/Investment Companies Regulation, NASD Regulation, Inc. (April 9, 1997).

      10 ICI Letter; T. Rowe Price Letter.

      11 Fidelity Letter; ICI Letter.

      12 ICI Letter.

      13 See Fidelity Letter; ICI Letter.

      14 T. Rowe Price Letter.

      15 See Securities and Exchange Release Nos. 33-7514 and IC-23066 (Mar. 2, 1998), 63 Fed. Reg. 13988 (Mar. 23, 1998).

      16 These disclosures include the investment company's ranking, the total number of investment companies in the category, the name of the category, and the period on which the ranking is based (i.e., the length of the period and the ending date, or the first day of the period and the ending date).

      17 T. Rowe Price Letter.

      18 Currently when an investment company ranking is based on a subcategory, sales material that contains such a ranking must disclose the name of the full category, the investment company's ranking in the full category, and the number of funds in the full category (this requirement does not apply under certain circumstances). See IM-2210-3(e)(3). Sales material containing a headline or other prominent statement that proclaims an internally created ranking must indicate, in close proximity to the headline or statement, that the fund ranking is based on a category created by the fund or its affiliate. See IM-2210-3(e)(6). The proposal would eliminate these disclosure requirements; however, proposed IM-2210-3(c)(2) would require prominent disclosure if an investment company or its affiliate created a ranking category or subcategory.

      If an advertisement uses a category or subcategory created by the investment company or its affiliate, the advertisement must prominently disclose the fact that the investment company or its affiliate created the ranking category, the number of investment companies in the category, the basis for selecting the category, and the ranking entity that developed the research on which the ranking is based. See IM-2210-3(e)(5). These disclosure requirements would be eliminated in IM-2210-3(e)(5), but they would be reflected in proposed IM-2210-3(c)(2).

      19 Fidelity Letter.

      20 BMA Letter.


      ATTACHMENT B

      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 to modernize the advertising rules. This list of questions does not cover all of the changes contained in the proposal, including proposed changes regarding the standards applicable to member communications, other filing and pre-use approval exemptions, limitations on the use of the NASD's name, and fund rankings. Accordingly, 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 29, 1999. Members and interested parties can submit their comments using the following methods:

      • mailing in this checklist


      • mailing in written comments


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


      • 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

      Institutional Sales Material

      1. Should the NASD exempt from the Advertising Rule's internal pre-use approval and filing requirements sales material that is distributed only to institutional investors?

        Yes   No   See my attached written comments

      Article Reprints and Press Releases

      2. Should the NASD exempt from the Advertising Rule's filing requirements reprints of articles that the member has not materially altered?

        Yes   No   See my attached written comments
      3. Should the NASD exempt from the Advertising Rule's filing requirements press releases concerning investment companies that are only made available to members of the media?

        Yes   No   See my attached written comments

      Use and Disclosure of a Member's Name

      4. Do you favor the proposed changes that would simplify the provisions governing disclosure of member names?

        Yes   No   See my attached written comments

      Communications About Collateralized Mortgage Obligations

      5. Do you favor the proposed changes to the provisions governing communications about collateralized mortgage obligations?

        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:

    • 99-78 Industry/Regulatory Council On Continuing Education Issues Firm Element Advisory

      View PDF File

      INFORMATIONAL

      Continuing Education

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education Testing/Qualifications
      Legal & Compliance
      Senior Management
      Continuing Education
      Firm Element

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      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 topics are drawn from a review of the performance of registered persons in the Regulatory Element computer-based training as well as regulatory advisories issued by industry self-regulatory organizations (SROs) since the publication of the last Firm Element Advisory in March 1998.

      Firms should review the training topics listed in the Firm Element Advisory in conjunction with their annual Firm Element Needs Analysis whereby 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 Regulation®), at (301) 208-2932; 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.

      The Securities Industry Continuing Education Program Firm Element Advisory

      One function of the Securities Industry/Regulatory Council on Continuing Education (Council) is to identify and recommend pertinent regulation and sales practice issues for possible inclusion in Firm Element training plans.

      Attached are 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 March 1998.

      These issues are listed here to complement topics that firms may have already determined to be appropriate to their specific Firm Element Needs Analysis and training plan. It is not mandatory for firms to address every topic listed here in their Firm Element training. However, each firm should review this list of topics vis a vis:

      1) relevance to the financial products and services it offers to investors; and
      2) its overall performance in related topic areas of the Regulatory Element.

      Each firm has an obligation to determine the relevancy of these topics to its lines of business and training needs. However, firms should not limit their review of relevant topics to those listed in the Advisory as they are obligated to undertake a comprehensive Firm Element Needs Analysis.

      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 Advisories to either Christian Billet, Continuing Education Manager, the New York Stock Exchange, at (212) 656-2156; or John Linnehan, Director, Continuing Education, NASD Regulation, Inc. (NASD Regulation®) at (301) 208-2932.

      Training Topic Relevant Training Point(s) and Reference(s)
      Arbitration There have been amendments to the New York Stock Exchange (NYSE) arbitration rules that expedite and streamline the process by encouraging early resolution through mediation.

      See Arbitration, NYSE Information Memo 98-42, December 1998 and NYSE Information Memo 98-44, December 1998.
      Books and Records Requirements Amendments to National Association of Securities Dealers, Inc. (NASD®) Rule 3110 (the Books and Records Rule) change the definition of "institutional account" to include the accounts of investment advisers that are now required to register with the states pursuant to the National Securities Markets Improvement Act of 1996 (NSMIA), and exclude certain customer accounts from the requirement to obtain certain tax and employment information from the customer.

      See SEC Approves Changes To Books And Records Requirements, NASD Notice to Members 98-47, July 1998.
      Clearing Agreements On June 2, 1999, the SEC approved amendments to the Clearing Agreement Rules of the NASD (Rule 3230) and NYSE (Rule 382). The amendments govern clearing agreements between members with respect to: (1) the handling of customer complaints about introducing firms that are received by their clearing firms; (2) exception and other reports clearing firms make available to their introducing firm clients to assist them in their supervisory obligations; and (3) clearing firms granting their introducing firm clients check writing privileges on the clearing firm's account.

      See Amendment to Rule 382, ("Carrying Agreements") NYSE Information Memo 99-33, July 1, 1999, and SEC Approves Rule Amendments Governing Clearing Firms And Their Introducing Firm Clients' Relationship; Effective Date: July 19, 1999, NASD Notice to Members 99-57, July 1999.
      COD Orders Certain private vendors, which meet prescribed standards, may now provide electronic confirmation/affirmation services for COD ("Collection on Delivery") and POD ("Payment on Delivery") delivery-eligible transactions of customers of members and member organizations.

      See Amendment to Rule 387 ("COD Orders"), NYSE Information Memo 99-25, May 1999.
      Cold Calling

      The Use of Aliases
      The use of aliases when making cold calls violates NASD Rule 2211 and the Federal Communications Commission's telephone solicitation rules, 47 C.F.R. 64.1200(e)(iv) (1997)1, which require anyone calling a residence for the purpose of solicitation to identify themselves; NASD Rule 2210, which requires members to observe high standards of commercial honor and just and equitable principles of trade; and NASD Interpretive Material 2310-2, which requires that sales efforts be undertaken only on a basis that can be judged as being within the ethical standards of the NASD's rules, with particular emphasis on the requirement to deal fairly with the public.

      See Use Of Alias Prohibited During Cold Calling, For Your Information, May 1998.
      Cold Calling and Advertising to Persons in the United Kingdom The Financial Services Authority (FSA) in the United Kingdom (U.K.) detected an increase in the frequency with which NASD member firms were soliciting U.K. citizens and asked NASD Regulation to alert its members to the standards governing the solicitation of U.K. citizens generally and implications of cold calling and advertising to persons in the U.K. in particular.

      See NASD Alerts Members To Their Obligations Concerning Cold Calling And Advertising To Persons In The United Kingdom, NASD Notice to Members 98-91, November 1998.
      Compensation

      Non-Cash Compensation for Mutual Funds and Variable Products
      New rules regulate compensation arrangements for the sale and distribution of variable products and investment company securities. See SEC Approves Rule Change Relating To Non-Cash Compensation For Mutual Funds And Variable Products, NASD Notice to Members 98-75, September 1998, and Questions And Answers Relating To Non-Cash Compensation Rules, NASD Notice to Members, 99-55 July 1999.
      Continuing Education

      Amendments to SRO Continuing Education Rules
      Effective July 1, 1998, participation in the Regulatory Element portion of Continuing Education is required within 120 days of the 2nd anniversary of a registered person's initial securities registration, and every three years thereafter, with no graduation from the program. In addition, there is a new Regulatory Element program for persons registered in supervisory capacities.

      See Amendments to the Board's Continuing Education Program: Rule G-3, MSRB Reports, Vol. 18, No. 2 (August 1998) at 33-35, Amendment to Rule 345A ("Continuing Education for Registered Persons"), NYSE Information Memo 98-19, June 1998, and SEC Approves Changes To Continuing Education Rules, NASD Notice to Members 98-35, April 1998.
      Continuing Education

      Status Report, Q&A
      A status report and updated brochure on Questions and Answers regarding the Continuing Education Program have been published that address new Continuing Education initiatives, provide updated information and clarification of the amendments to the Continuing Education rules, and answer frequently asked questions regarding both the Regulatory and Firm Element components of the program.

      See NYSE Information Memo 98-28, September 1998 and NASD Notice to Members 98-68, August 1998.
      Correspondence

      Standards for Written or Electronic Individual Correspondence
      The SEC approved amendments to NASD Rule 2210 to require that written or electronic communications prepared for a single customer be subject to the general standards and those specific standards of NASD Rule 2210 that prohibit misleading statements, but not to the specific standards of the rule that prescribe specific disclosure or the filing and review requirements.

      See SEC Approves Rule Change Relating To Standards For Individual Correspondence, NASD Notice to Members 98-83, October 1998.
      Customer Account Transfer Contracts The required time period for the transfer of accounts between member organizations has been reduced from seven days to six days, effective February 8, 1999.

      See Amendment to Rule 412 (Customer Account Transfer Contracts), NYSE Information Memo 99-1, January 1999.
      Customer Complaint Reporting Procedures There have been three significant changes to customer complaint reporting procedures: 1) the product and problem codes have been expanded; 2) all complaint statistics must be reported electronically; and 3) "individual amendment records" for reports filed under Rule 351(d) will no longer be accepted.

      See Changes to Customer Complaint Reporting Procedures, NYSE Information Memo 99-32, June 1999.
      Free-Riding and Withholding See SEC Approves Amendments To Free-Riding And Withholding Interpretation; Effective August 17, 1998, NASD Notice to Members 98-48, July 1998. These amendments address direct and indirect owners of broker/dealers, investment grade debt offerings, foreign investment companies, secondary offerings, issuer directed share programs, and accounts under the Employment Retirement Income Security Act.
      Gifts and Entertainment Members and member organizations are reminded of the NYSE's policy relating to gifts, gratuities, and entertainment.

      See Exchange Guidelines on Gifts and Entertainment, NYSE Information Memo 98-40, December 1998.
      Margin

      Calculating Margin for Day-Trading and Cross-Guaranteed Accounts
      The NASD expects that members will calculate margin for day traders and cross-guaranteed accounts in a manner that is consistent with Regulation T and Rule 2520. Accordingly, members are advised to review their margin calculation practices to ensure that they conform to the requirements of these rules, which are in the best interest of the investing public and serve to protect the financial security of members that extend credit.

      In addition, members are reminded to take certain account-related charges when computing their net capital pursuant to SEC Rule 15c3-1. These charges include those specified in Rule 2520(f)(4) for certain guaranteed accounts. Members should review the requirements of SEC Rule 15c3-1 and Rule 2520 to determine whether they are in compliance with these rules.

      The NASD intends to examine member firms for compliance with these rules.

      See Calculating Margin For Day-Trading And Cross-Guaranteed Accounts, NASD Notice to Members 98-102, December 1998.
      Margin

      Changes to Margin Rules
      Effective April 1, 1998, the Board of Governors (Board) of the Federal Reserve System (FED) adopted several amendments to Regulation (Reg) T, as well as to Regs U and X. In addition, it eliminated Reg G, which had applied to credit extended by "other lenders" (i.e., other than banks and broker/dealers). These changes were made to reflect changes to the FED's statutory authority under the Securities Exchange Act of 1934, as amended by NSMIA.

      See Federal Reserve System Amends Regulations T, U, And X, NASD Notice to Members 98-43, June 1998.
      Margin

      Maintenance Margin Rules for Certain Volatile Stocks
      Information about current margin requirements and steps taken by the industry to increase maintenance margin requirements for certain volatile stocks.

      See NASD Regulation Advises Members About Maintenance Margin Requirements For Certain Volatile Stocks And Solicits Comment On Margin Practices; Comment Period Expires May 31, 1999, Special NASD Notice to Members 99-33, April 1999.
      Mini Tender Offers In a mini tender offer, the offeror makes an offer directly to an issuer's shareholders to purchase a small number or percentage (under five percent of the total shares outstanding) of an issuer's securities, often at a price below the current market price, by a certain day. The offer also contains a promise to pay for the tendered shares within a specified period. When the offeror obtains tendered shares, the offeror resells the shares in the open market, pays the tendering shareholder, and retains the difference as profit. The NASD has alerted its members to the practice of mini tender offers and discusses the steps members can take to reduce the risk that customers and others tendering shares in a mini tender offer will be victimized.

      See NASD Regulation Offers Guidance To Members Forwarding Mini Tender Offers To Their Customers, NASD Notice to Members 99-53, July 1999, and Member organizations should review tender offer materials for shares at or below market prices before the materials are disseminated to customers, NYSE Information Memo 99-11, February 1999.
      Municipal Securities

      Consultants
      See MSRB Rule G-38: Consultants. MSRB Manual ¶3686.
      Municipal Securities

      Delivery of Official Statements
      See MSRB Rule G-32: Disclosures in Connection with New Issues. MSRB Manual ¶3656; and 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 Manual ¶3676.
      Municipal Securities

      Electronic Delivery and Receipt of Information
      See Notice entitled "Electronic Delivery and Receipt of Information by Brokers, Dealers and Municipal Securities Dealers," MSRB Reports, vol 19, no.1, p.3; February 1999.
      Municipal Securities

      Political Contributions
      See MSRB Rule G-37: Political Contributions and Prohibitions on Municipal Securities Business. MSRB Manual ¶3681.
      Municipal Securities

      Reporting Sales and Purchases
      See MSRB Rule G-14: Reports of Sales and Purchases, and MSRB Rule G-14: Transaction Reporting Procedures, MSRB Manual ¶3566, and "User's Manual for Customer Transaction Reporting" contained on MSRB's Web Site at www.msrb.org.
      Municipal Securities

      Suitability Issues
      See MSRB Rule G-19: Suitability of Recommendations and Transactions; Discretionary Accounts. MSRB Manual ¶3591.
      Mutual Funds

      Breakpoint Sales
      The application of the mutual fund breakpoint sales rule to modern portfolio investment strategies.

      See SEC Approves Rule Change Relating To Mutual Fund Breakpoint Sales, NASD Notice to Members 98-98, December 1998.
      Mutual Funds

      Fees and Using the Term "No Load"
      Discussions concerning fees and expenses in mutual fund advertisements and sales literature as defined in NASD Rule 2210(a) must be fair, balanced, and not misleading.

      See NASD Reminds Members Of Their Obligations To Disclose Mutual Fund Fees, NASD Notice to Members 98-107, December 1998, for guidance concerning fee and expense disclosure in certain types of mutual fund sales material.
      Options

      Guidelines Concerning Discretionary Accounts
      The Division [of Regulatory Services, Chicago Board Options Exchange] believes that some clarification regarding the use of discretion in public customer accounts, including time and price discretion and third-party discretion, is warranted. See Guidelines Concerning Discretionary Accounts, CBOE Regulatory Circular, RG99-115, April 28, 1999.
      Options

      Guidelines Concerning Uncovered (short) Options Accounts
      See Guidelines Concerning Uncovered (short) Options Accounts, CBOE Regulatory Circular, RG99-109, April 26, 1999.
      Options

      Independent Contractors
      Individuals compensated as independent contractors are considered associated persons under [CBOE] rules if they directly or indirectly control a member, are controlled by a member, or are under common control of a member.

      See Independent Contractors, CBOE Regulatory Circular, RG98-122, November 9, 1998.
      Options

      Index Options - Margin Accounts
      See Margin Accounts - Writing Index Options on a Covered Basis and Eligibility for Covered Writing Approval, CBOE Regulatory Circular, RG99-09, January 12, 1999.
      Options

      Index Options - Restrictions on Exercise of American-Style, Cash Settled Index Options
      See Restrictions on Exercise of American-Style, Cash Settled Index Options, CBOE Regulatory Circular, RG 99-44, February 17, 1999.
      Options

      Types of Orders Permitted on the Exchange's Public Limit Order Book
      The Equity Floor Procedure Committee ("the Committee") has received recent member inquiries regarding the handling of contingency orders on the Exchange Floor. Exchange Rule 7.4 - Obligations for Orders states that the Committee may specify the types of orders for acceptance into the Exchange's Public Limit Order Book ("the Book"). The [Equity Floor Procedure Committee of the CBOE] has determined not to allow the entry of contingency orders, including all or none orders into the Book. In addition, no member, without prior knowledge and consent from the subject customer, may change, alter, or remove a contingency placed on an order ticket such as to allow the order to be entered onto the Book. Changing, altering, or removing a contingency placed on an order without the subject customer's prior knowledge and consent constitutes a violation of Exchange Rules 4.6 - False Statements and 7.4 - Obligations for Orders.

      See Types of Orders Permitted on the Exchange's Public Limit Order Book, CBOE Regulatory Circular, RG98-44, April 30, 1998.
      Registration - Conditions, Restrictions, and Requirements When Updating Form U-4 Significant changes have been made to the customer complaint questions of Form U-4. These questions have been revised so as to require disclosure of all pending arbitrations and civil proceedings that relate to securities or commodities transactions; pending written customer complaints alleging sales practice violations and compensatory damages of $5,000 or more for 24 months from original posting, if closed without a settlement by the firm; and settlements of $10,000 or more of arbitrations, civil suits, and customer complaints involving securities or commodities transactions.

      See Interim Forms U-4 And U-5 Go Into Effect; Interim Form BD Also Approved, Special NASD Notice to Members 98-27, March 1998. This Special Notice to Members provides guidance to members in filling out the Interim Forms U-4 and U-5, which became effective on March 16, 1998, and in understanding what information NASD Regulation will release as part of its Public Disclosure Program. See also SEC Approves and Adopts Revised Forms and Electronic Filing Requirement, NASD Notice to Members 99-63, August 1999.
      Registration

      NYSE Floor Employees
      The Exchange has requirements about the registration, termination, dual employment, and compensation with respect to Floor Employees, including, but not limited to, Post Clerks and Booth Clerks, also known as Trading Assistants.

      See Reminder of the Exchange's requirements with respect to registration of Floor Employees, NYSE Information Memo 99-20, April 1999.
      Registration

      Requirements of the SROs
      NASD Regulation receives numerous inquiries regarding whether certain individuals are required to be registered with the NASD under Rules 1021 and 1031, and has issued a Notice to Members to provide interpretive guidance to members on some of these issues.

      See NASD Regulation Provides Interpretive Guidance On Registration Requirements, NASD Notice to Members 99-49, June 1999.
      Short Sales Certain NASD members may be assisting customers in the circumvention of the Short-Sale Rule (Rule 3350). Specifically, these members are failing to net security positions of accounts for customers who maintain accounts in their name and exercise control over, or operate in concert with, other accounts with a strategy designed to circumvent the Short-Sale Rule. The failure to net these positions has permitted these customers, who operate the two accounts with a single investment strategy, to avoid application of the Short-Sale Rule. Members are expected to establish and maintain supervisory procedures to detect and deter this improper trading activity.

      See NASD Reminds Members Of Obligations Relating To The Short-Sale Rule, NASD Notice to Members 99-28, April 1999.
      Supervision

      Research Reports/Supervisory Analysts
      On June 22, 1998, the SEC approved amendments to NASD Rule 2210 (Communications with the Public) that permit the approval of research reports by a supervisory analyst approved by the NYSE to satisfy NASD requirements that research reports be approved by a registered principal.

      See SEC Approves Rule Change Regarding Approval Of Research Reports, NASD Notice to Members 98-54, July 1998, and Revised Interpretation To Rule 344 ("Supervisory Analysts"), NYSE Interpretation Memo 99-3, February 22, 1999.
      Supervision

      Responsibilities for Trade Reporting and Market-Making Activities
      Many of the failure-to-supervise charges recently imposed on NASD members have been for inadequacies revealed in the NASD Regulation's Trading and Market Maker Surveillance (TMMS) examination process.

      See NASD Elaborates On Member Firms' Supervision Responsibilities For Trade Reporting And Market-Making Activities, NASD Notice to Members 98-96, December 1998. This Notice highlights common supervisory deficiencies relating to trade reporting, market making, and equity order handling areas, and gives guidance for preventing these deficiencies.
      Supervision

      Review of Incoming Written Correspondence
      On November 30, 1998, the SEC approved amendments to NASD Rule 3010, requiring firms to review incoming, written correspondence to identify customer complaints and funds and to ensure they are properly handled.

      See New Rules - Supervision and Review of Communications with the Public, NYSE Information Memo 98-03, January 1998 and SEC Approves Rule Amendments Requiring Review Of Incoming, Written Correspondence; Effective March 15, 1999, NASD Notice to Members 99-03, January 1999, which provides guidance on how to implement this rule.
      Supervision

      Supervisory and Inspection Obligations
      See NASD Reminds Members Of Supervisory And Inspection Obligations, NASD Notice to Members 98-38, May 1998, which addresses firm obligations to supervise associated persons located in Offices of Supervisory Jurisdiction (OSJs), branch offices, and all other offices, and to inspect these offices.
      Supervision

      Supervisory Responsibilities
      See NASD Provides Guidance On Supervisory Responsibilities, NASD Notice to Members 99-45, June 1999, for guidance on the sections of NASD Rule 3010 that require firms to establish a supervisory system and develop and maintain written supervisory procedures.
      Supervision

      Taping
      On April 17, 1998, the SEC approved an amendment to NASD Rule 3010 to require members to establish special supervisory procedures, including the tape recording of conversations, when they have hired more than a specified percentage of registered persons from certain firms that have been expelled or that have had their broker/dealer registrations revoked for violations of sales practice rules.

      See SEC Approves Taping Rule; Effective August 17, 1998, NASD Notice to Members 98-52, July 1998.
      Trading/Markets

      Alternative Trading Systems
      On April 21, 1999, SEC Rules 3a1-1, 3b-16, and Regulation Alternative Trading System (ATS) took effect. Regulation ATS established certain thresholds for share volume of trading.

      See Implementation of Securities Exchange Act Regulation ATS, Forms ATS, ATS-R and new additions to Rules 17a-3, 17a-4, NYSE Information Memo 99-23, May 13, 1999 and NASD Offers Guidance On Complying With New SEC Rule Regarding Alternative Trading Systems; NASD Notice to Members 99-34, May 1999.
      Trading/Markets

      Changes to NASD Rules on SOES Orders Entered Within Five Minutes of Each Other
      On January 13, 1999, The Nasdaq Stock Market, Inc. filed a rule change with the SEC that eliminates the single investment decision aggregation presumption for Small Order Execution SystemSM (SOESSM) orders entered within five minutes of each other (NASD Notice to Members 88-61). The elimination of the presumption was effective immediately.

      See The Nasdaq Stock Market Eliminates The SOES Five-Minute Presumption, NASD Notice to Members 99-21, March 1999.
      Trading/Markets

      Firm Quotation Requirements
      On June 22, 1999, the SEC approved changes to NASD Rule 4613(b) regarding quotation updates following execution of an order. NASD Rule 4613(b), as now amended, will require a Market Maker to disseminate an inferior quote whenever the Market Maker fails to execute the full size of an incoming order that is at least one normal unit of trading greater than the Market Maker's published quotation size. The rule change will also modify IM-4613 to prohibit the use of automatic quote updating in violation of Rule 4613(b).

      See SEC Approves Changes To Rule 4613—Firm Quotation Requirements; Effective Date: August 2, 1999, NASD Notice to Members 99-61, July 1999.
      Trading/Markets

      Index Arbitrage Trading Restrictions
      There has been a revision to the rule that governs the advance/decline of the Dow Jones Industrial Average that triggers Rule 80A's tick restrictions. In addition, the amendment to Rule 80A eliminates sidecar provisions and codifies the definition of index arbitrage.

      See Amendment to Rule 80A (Index Arbitrage Trading Restrictions), NYSE Information Memo 99-8, February 1999.
      Trading/Markets

      Order Handling Rules During Market-Wide Trading Halts
      On September 9, 1998, the SEC Division of Market Regulation (the Division) issued Staff Legal Bulletin No. 8 setting forth the Division's views on the appropriate handling of customer orders when market-wide circuit breakers halt trading. In addition, the SEC again stressed that broker/dealers must have sufficient internal system capacity to operate properly during periods of market stress.

      See SEC Issues Guidance On Handling Customer Orders During Market-Wide Trading Halts, NASD Notice to Members 99-05, January 1999.
      Trading/Markets

      Percentage Order Rules
      The way percentage orders are handled has changed effective March 1999.

      See Amendment to Percentage Order Rules, NYSE Information Memo 99-13, February 1999.
      Trading/Markets

      Stock Volatility Disclosures
      The sharp increase in price volatility and volume in many stocks, particularly of companies that sell products or services via the Internet (Internet issuers) suggests that firms should make certain disclosures to retail customers to educate them about the risks of price and volume volatility.

      See NASD Regulation Issues Guidance Regarding Stock Volatility, NASD Notice to Members 99-11, February 1999.
      Trading/Markets

      The Operation of Automated Order Execution Systems During Turbulent Market Conditions
      In light of the recent dramatic intraday volatility and significant surges in trading volume with respect to certain issues, particularly Internet-based issues, firms' best execution obligations require that firm procedures treat customer orders in a fair, consistent, and reasonable manner. To the extent that firms (particularly wholesale firms) deviate from or alter their execution algorithms or procedures during turbulent market conditions, they should consider disclosing such altered procedures and the basis for activating such altered procedures to their customers and firms sending them order flow.

      See NASD Regulation Issues Guidance Concerning The Operation Of Automated Order Execution Systems During Turbulent Market Conditions, NASD Notice to Members 99-12, February 1999.
      Trading/Markets

      Trade Reporting. The Order Audit Trail System
      On March 6, 1998, the SEC approved new NASD Rules 6950 through 6957 which establish an Order Audit Trail System (OATSSM).

      OATS imposes obligations on member firms to record in electronic form and to report to NASD Regulation certain items of information with respect to orders they receive to effect transactions in equity securities traded on The Nasdaq Stock Market®. NASD Regulation combines this order information with transaction data currently reported by members through the Automated Confirmation Transaction ServiceSM (ACTSM) and quotation information disseminated by members through Nasdaq to construct an integrated audit trail of quotation, transaction, and order data.

      See SEC Approves New Order Audit Trail System (OATS), Special NASD Notice to Members 98-33, March 1998.
      Trading/Markets

      Transaction Reporting and Quotation Obligations Under the Fixed Income Pricing SystemSM (FIPS®)
      As the list of bonds requiring FIPS reporting continues to expand, members are reminded of their reporting and quotation obligations.

      See Transaction Reporting And Quotation Obligations Under The Fixed Income Pricing System (FIPS), NASD Notice to Members 98-55, July 1998.
      Variable Annuities

      Sales of Variable Annuities
      Guidelines intended to assist members 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 that NASD Regulation would expect to be addressed in the procedures of members that offer and sell variable annuities.

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

      To Obtain More Information
      For more information about publications contact the SROs at these addresses:

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

    • 99-77 NASD Regulation Modifies Default Decision Procedures

      View PDF File

      INFORMATIONAL

      Default Decisions

      NASD Regulation Modifies Default Decision Procedures

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Default Decisions
      Disciplinary Actions
      Hearing Officers

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The purpose of this Notice to Members is to give National Association of Securities Dealers, Inc. (NASD®) members notice that if members or persons associated with members fail to file an answer to a complaint or fail to make any other filing or request related to a complaint with the Office of Hearing Officers within the time required, or fail to appear at a hearing of which they have been duly notified, the allegations of the complaint may be treated as admitted, and a default decision against the members or associated persons entered by a Hearing Officer. The procedures described in this Notice to Members will apply to all complaints filed on or after October 1, 1999.

      Questions/Further Information

      Questions concerning this Notice to Members should be directed to Shirley H. Weiss, Associate General Counsel, Office of General Counsel, NASD Regulation, Inc. (NASD Regulation®), at (202) 728-8844.

      Discussion

      Procedures To Set Aside Or Appeal A Default Decision

      In July 1998, the National Adjudicatory Council of NASD Regulation (NAC) remanded the default decision issued in the Nancy H. Martin matter (Complaint No. C02970027) in order to establish a record that would allow the NAC to conduct a review of the case. The NAC's remand in Martin was consistent with the decision issued by the Securities and Exchange Commission (SEC) in In re James M. Russen, Jr., 51 S.E.C. 675 (1993) (establishment of a complete record will give the SEC a basis for discharging its review function under Section 19 of the Securities Exchange Act of 1934).

      In both of those cases, the defaulting respondent had appealed a District Business Conduct Committee default decision. Both of those decisions stated that an adjudicator conducting a new review of a default decision needs evidentiary support for the default decision in order to uphold the findings and sanctions.

      It is not, however, necessary for the record to provide full evidentiary support in order for a default decision to be entered against a defaulting respondent by a Hearing Officer. Under Rule 9269(a) of the NASD's Code of Procedure, which was adopted and approved by the SEC subsequent to the issuance of the Russen decision, a Hearing Officer may consider the allegations against a defaulting respondent to be admitted and enter a default decision on that basis.

      We are issuing this Notice to Members to clarify and reconcile the Martin and Russen decisions with Rule 9269(a). Rule 9269(a) governs the issuance of initial default decisions by Hearing Officers. Accordingly, if a respondent defaults by failing to answer a complaint in a timely manner, make any other filing or request related to the complaint, or appear at a pre-hearing conference, the allegations of the complaint may be deemed admitted and a default decision validly entered against the respondent under Rule 9269(a).1

      Consistent with the decisions in Russen and Martin, however, if a respondent against whom a default decision has been validly entered under Rule 9269(a) makes a timely appeal or motion to set aside the default and also establishes good cause for not having participated in the proceeding below, he or she will be given the opportunity to participate in a hearing before a Hearing Panel. This hearing would allow the respondent, among other things, to have the opportunity to participate in a full evidentiary hearing on the merits and, if he or she wishes, to contest the findings and sanctions. In determining whether a respondent has established good cause, Hearing Officers and the NAC will consider such factors as:

      • whether the respondent notified the Central Registration Depository (CRDSM) of any change of address;


      • the length of time that has passed between the issuance of the default decision and the respondent's appeal or motion to set aside; and


      • the reasons for the respondent's failure to participate in the proceeding before the Hearing Officers.

      The procedures described in this Notice to Members will apply to all complaints filed on or after October 1, 1999.

      Duty To Update Address Information

      Registered persons are reminded that failure to keep the NASD informed of their most recent address may cause a default decision to be entered against them. Article V, Section 2 of the NASD By-Laws requires all persons who apply for registration with the NASD to submit a Form U-4 and to keep all information on the Form U-4 current. Accordingly, registered persons must keep their member firms informed of their current address, and a member firm is obligated to file an amendment to the Form U-4 to notify the NASD when any registered person in the firm's employ changes his or her address. In addition, the NASD may request information from, or file a formal disciplinary action against, persons who are no longer registered with a member for at least two years after their termination from the member (Article V, Sections 3 and 4 of the NASD's By-Laws). Requests for information and disciplinary complaints issued by the NASD during this two-year period will be mailed to such a person's last address in the NASD's records, and are considered to have been received at that address, whether or not the individual has actually received them. Thus, in order to receive mailings from the NASD, individuals must keep their address in CRD current during that two-year period. Individuals who are no longer associated with an NASD member firm and who have failed to update their addresses during the two years after they end their association may have a default decision issued against them (see Notice to Members 97-31).

      Letters notifying the NASD of such address changes should be sent to:

      Central Registration Depository National
      Association of Securities Dealers, Inc.
      P.O. Box 9495
      Gaithersburg, MD 20898-9401


      Endnote

      1 We note that Rule 9269(a) is consistent with federal practice under Rule 55 of the Federal Rules of Civil Procedure.

    • 99-76 Update On OTC Bulletin Board Eligibility Rule

      View PDF File

      INFORMATIONAL

      OTC Bulletin Board

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal & Compliance
      Operations
      Trading & Market Making
      OTC Bulletin Board
      Eligibility Rule

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      In Notice to Members 99-15, the National Association of Securities Dealers, Inc. (NASD®) described amendments to NASD Rules 6530 and 6540 to limit quotations on the OTC Bulletin Board® (OTCBB) to the securities of companies that report their current financial information to the Securities and Exchange Commission (SEC), banking, or insurance regulators. In Notice to Members 99-43, the NASD published the effective date schedule for the implementation of the new rules. This Notice to Members explains revised procedures that the NASD will follow in implementing the effective date schedule.

      Questions regarding this Notice should be directed to Liz Heese, Product Manager, Trading and Market Services, The Nasdaq Stock Market, Inc., at (202) 728-8191; or Tim Larkin, OTCBB Compliance Manager, Listing Qualifications, The Nasdaq Stock Market®, at (202) 496-2631 before September 1, 1999, or (301) 978-8093 thereafter.

      Background

      The OTCBB is a quotation service that displays real-time quotes, lastsale prices, and volume information in domestic and certain foreign securities. Eligible securities include national, regional, and foreign equity issues; and warrants, units, and American Depositary Receipts (ADRs) not listed on any other U.S. national securities market or exchange. Although the OTCBB is operated by the NASD, it is unlike The Nasdaq Stock Market or other listed markets where individual companies apply for listing and must meet and maintain strict listing standards; instead, individual brokerage firms or Market Makers initiate quotations for specific securities on the OTCBB. Currently, approximately 6,500 securities are quoted on the OTCBB.

      On January 4, 1999, the SEC approved amendments to NASD Rules 6530 and 6540. As revised, Rule 6530 limits quotations on the OTCBB to the securities of issuers that report their current financial information to the SEC, banking, or insurance regulators and Rule 6540 prohibits a member from quoting a security on the OTCBB unless the issuer has made current filings. These amendments were discussed in Notice to Members 99-15 and the full text of the rules appeared in that Notice.

      In Notice to Members 99-43, the NASD published the schedule for the effectiveness of the new rule. That Notice indicated that in order to continue to be quoted on the OTCBB, securities quoted on the OTCBB as of January 4, 1999, must be in compliance with the new Eligibility Rule based upon the schedule below.1

      Schedule Date Issue Symbol
      July 1999 A - AD
      August 1999 AE - AO
      September 1999 AP - BI
      October 1999 BJ - CT
      November 1999 CU - FL
      December 1999 FM - IG
      January 2000 IH - MD
      February 2000 ME - OR
      March 2000 OS - R
      April 2000 S - TN
      May 2000 TO - Z
      June 2000 All Banks & Insurance Companies

      Effective Date Procedures

      Notice to Members 99-43 also indicated that to continue to be quoted after the first trading day of the scheduled month (the "Eligibility Determination Date"), the issuer of the security must meet the requirements of the Eligibility Rule. In order to alleviate certain technical issues experienced during the implementation of the Eligibility Rule, a modified implementation schedule has been developed. Specifically, the NASD will divide the issuers in each scheduled month into two groups. The first group will have an Eligibility Determination Date at the beginning of the scheduled month and the second group will have an Eligibility Determination Date in the middle of the scheduled month. To determine whether an issuer falls into the first or second group, interested parties should refer to the OTCBB Web Site at www.otcbb.com. This modified implementation schedule will begin with the group of securities with an October Eligibility Determination Date.

      The NASD will begin evaluating the compliance status of issuers that file with the SEC 30 calendar days prior to the company's scheduled Eligibility Determination Date. For banks and insurance companies that do not file with the SEC and that are scheduled to be required to be in compliance with the Eligibility Rule during June 2000, the NASD will begin its evaluation 60 calendar days prior to the company's scheduled Eligibility Determination Date. If the NASD has no information that the issuer is compliant, it will append the issuer's symbol with a fifth character "E." 2 Symbol changes will appear on the OTCBB Daily List and will be reflected in the company's trading symbol four days after the date the notice appears on the OTCBB Daily List.

      If the NASD does not receive any information that an issuer is eligible for continued quotation, the issuer will be removed from the system after market close on its Eligibility Determination Date. Alternatively, if the NASD receives notification that an issuer is compliant with the filing requirement, the fifth character identifier will be removed. This symbol change will be completed two business days following publication on the OTCBB Daily List.

      A calendar of effective dates for each semi-monthly grouping of OTCBB securities is available on www.otcbb.com. In addition, approximately 30 days prior to the Eligibility Determination date for each group, a list of each security in the group, and each security's eligibility status according to Nasdaq's records, is posted to www.otcbb.com. Market Makers or other parties that wish to notify the NASD of any filing that has been made which would bring an issuer into compliance should contact:

      OTCBB Filings Department
      9801 Washingtonian Blvd.
      Gaithersburg, MD 20878-5356
      (202) 496-2542
      otcbbfeedback@nasd.com


      Endnotes

      1 This schedule is subject to change at the discretion of the NASD. The NASD will use the issue symbol as it appeared in the OTCBB quotation system on January 4, 1999, to determine where a particular issue falls in the schedule. Subsequent symbol changes will not be considered in determining an issuer's phase-in date.

      2 The fifth character "E" is intended to inform issuers, investors, and Market Makers that the NASD does not have information indicating that the issuer is eligible for continued quotation under the Eligibility Rule.

    • 99-75 Series 7 Examination Fee Increase Effective September 15, 1999

      View PDF File

      INFORMATIONAL

      NYSE Series 7 Examination

      SUGGESTED ROUTING

      KEY TOPICS

      Registration
      Examinations
      Fees

      The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.

      Executive Summary

      The New York Stock Exchange, Incorporated (NYSE) has increased the examination development fee from $40 to $90 for the Series 7 Examination, which is charged to each person who takes that Examination. The increase is effective on September 15, 1999.

      Questions/Further Information

      Questions concerning this Notice to Members may be directed to Mary M. Dunbar, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8252; or Mary Anne Furlong, NYSE, at (212) 656-4823.

      Discussion

      Each person who takes the Series 7 Examination (Series 7 Exam) must pay a NYSE examination development fee, as well as other fees. The National Association of Securities Dealers, Inc. (NASD®) collects the examination development fee on behalf of the NYSE.

      The NYSE has increased the fee from $40 to $90.1 The fee increase is effective on September 15, 1999. The fee charged by the NASD for taking the Series 7 remains $110. Therefore, on and after September 15, 1999, the fees to take the Series 7 will total $200.


      Endnote

      1 Exchange Act Rel. No. 41548 (Jun. 22, 1999), 64 FR 35231 (Jun. 30, 1999).

    • 99-74 Nominees for District 10 District Committee and District Nominating Committee

      Special NASD Notice to Members 99-74

      Suggested Routing

      • Senior Management


      • Advertising


      • Continuing Education


      • Corporate Finance


      • Executive Representatives


      • Government Securities


      • Institutional


      • Insurance


      • Internal Audit


      • Legal & Compliance


      • Municipal


      • Mutual Fund


      • Operations


      • Options


      • Registered Representatives


      • Registration


      • Research


      • Syndicate


      • Systems


      • Trading


      • Training


      • Variable Contracts

      National Association of Securities Dealers, Inc.

      Notice Of Nominees

      In accordance with the National Association of Securities Dealers, Inc. (NASD®) By-Laws, the purpose of this Special Notice to Members is to advise members of the nominees to fill vacancies on the District Committee and the District Nominating Committee in District 10 (New York). The individuals identified in this Special Notice to Members have been nominated for three-year terms on the District Committee and for one-year terms on the District Nominating Committee which begin in January 2000. (Nominees for Districts 1, 2, 3, 4, 5, 6, 7, 8, 9, and 11 were announced in Special Notice to Members 99-62 that was mailed to members on July 15, 1999.)

      We appreciate the interest shown by many of you in participating in the District Committees. We look forward to your participation in the matters of the Districts during the coming year. Following is a general description of the procedures pertaining to this stage of the election.

      • If an officer, director, or employee of an N A S D member is interested in being considered as an additional candidate, he/she must indicate his/her interest to the District Director within fourteen (14) calendar days of the date of this Special Notice to Members. The District Director shall make a written record of the time and date of such notification.


      • If an additional candidate does not come forward after the 14 days, the election of the committee is complete.

        If an additional candidate does come forward within the 14 calendar days, the Secretary of NASD Regulation® will provide a list of all NASD members eligible to vote in the District and their Executive Representatives to the additional candidate immediately following receipt of the additional candidate's notice by the District Director.

      • Additional candidate(s) may be nominated if a petition signed by the Executive Representative of at least 10 percent of the members eligible to vote in the District is filed with the District Nominating Committee within 30 calendar days from the mailing date of the list of members eligible to vote, unless the Secretary of NASD Regulation grants additional time for good cause shown. Only an Executive Representative may sign a petition on behalf of an NASD member.


      • If no additional candidate(s) are nominated within the 30-calendar day period, then the candidates nominated by the District Nominating Committee shall be considered duly elected, and the District Committee shall certify the election to the Board of Directors of NASD Regulation.

      Questions concerning this Special Notice may be directed to:

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

      National Association of Securities Dealers, Inc.

      District 10 District Committee Nominees And District Nominating Committee Nominees

      The following persons have been nominated to serve on District 10 District Committee and District Nominating Committee.

      District 10

      David A. Leibowitz, District Director
      NASD Financial Center
      33 Whitehall Street
      New York, NY 10004
      (212) 858-4000

      The five boroughs of New York City

      District Committee Nominees

      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

      District Nominating Committee Nominees

      Ralph J. Costanza
      Salomon Smith Barney Inc.
      New York, NY

      Joan S. Green
      BT Brokerage Corporation
      New York, NY

      Vicki Z. Holleman
      Loeb Partners Corporation
      New York, NY

      Norman H. Pessin
      Neuberger & Berman
      New York, NY

      Stuart J. Voisin
      Stuart Coleman & Co. Inc.
      New York, NY

    • For Your Information (September)

      View PDF File

      Y2K Testing Not Required For Legacy CRD And PC FOCUS

      Due to the availability of the new Web Central Registration Depository (CRDSM) system and Web-Based FOCUS filing system, the National Association of Securities Dealers, Inc. (NASD®) does not require Year 2000 testing of their predecessor systems - Legacy CRD and PC FOCUSSM. The new systems - Web CRD and Web-Based FOCUS - have successfully completed Year 2000 testing.

      If your firm uses the EFT functions of Legacy CRD and wishes to voluntarily conduct Year 2000 date testing, the NASD will accommodate your request. Contact the Year 2000 Program Office at (888) 227-1330 to arrange testing.

      Details about these applications can be found on the NASD Year 2000 Web Page on the following Web Sites: www.nasd.com and www.nasdr.com. If you have any questions, or require additional information, please contact the NASD Year 2000 Program Office at (888) 227-1330.

    • Year 2000 Update (September)

      Year 2000 Countdown

      As 1999 winds down, Year 2000 issues will receive increased focus as public attention to these issues increase and companies in virtually every industry accelerate efforts to meet Year 2000 compliance deadlines. During this critical period, the securities industry will heighten its focus on regulatory compliance, investor communication, Year 2000 testing, and contingency planning. All broker/dealers should be aware of the Year 2000-related deadlines and events noted below. Following these specific dates and events are general guidelines to help firms complete their compliance efforts.1

      1 Following these guidelines by themselves will not guarantee Year 2000 compliance.

      Securities Industry is Ready for Year 2000! Media Event (9/7) NASD Year 2000 Readiness Initiative Initial Submission (9/30) SEC Rule Final Compliance Deadline (11/15)  
      SEPTEMBER OCTOBER NOVEMBER DECEMBER
      SEC Rule 15b7-3T Compliance Deadline (8/31) Last date for Point-to-Point testing with the NASD (9/30) SIA Transition Conference (11/12) JANUARY 1, 2000

      September 1999

      • August 31, 1999: This was the compliance deadline for the Securities and Exchange Commission's (SEC) Operational Capability Rule for broker/dealers with internally developed or maintained missioncritical systems. All affected firms were required to comply with the provisions of the Rule by this date or submit to the SEC certified plans ensuring compliance by November 15, 1999. See www.nasd.com and www.nasdr.com for more information on this Rule.


      • September 7, 1999: Officials from the SEC, National Association of Securities Dealers, Inc. (NASD®), Securities Industry Association (SIA), Investment Company Institute (ICI), and President's Council on Year 2000 Conversion will participate in a Securities Industry Media Event, which will highlight industry preparedness and investor communication. The securities industry's Year 2000 Investor Kit can be obtained by accessing the NASD and NASD Regulation Web Sites (www.nasd.com and www.nasdr.com), or by calling the Year 2000 Program Office at (888) 227-1330. Firms can also purchase additional copies of the Kit for their customers at the cost of $28.75 in packages of 25 per order. View the Kit at: www.nasdr.com/3600_inv_kit.htm.


      • September 30, 1999: Certification letters for the NASD's Year 2000 Readiness Program should be submitted by this date. Letters received on or after September 30 will be posted to the NASD and NASD Regulation Web Sites periodically. This is also the last date for point-to-point testing with the NASD. See the NASD and NASDR Web Sites (www.nasd.com; www.nasdr.com) for more information.


      • November 12, 1999: The SIA Transition Conference, the SIA's final conference of the year, will detail the industry's Year 2000 plans over the course of the weekend of December 31, 1999-January 3, 2000. It will provide information about contingency planning as well as interaction with key communication and coordination center personnel, regulators, and the industry over the transition weekend.


      • November 15, 1999: This is the final compliance date for the SEC Operational Capability Rule. Applicable firms should have completed all requirements outlined in the Rule.

      Milestone Guidelines

      In addition to the specified dates listed above, firms should follow the activity guidelines below. These general activities should occur in the timeframe shown, and may vary depending on the size and complexity of the broker/dealer.

      September 1999

      • As outlined in the SEC Operational Capability Rule, firms should have completed all assessment, remediation, and testing processes of mission-critical systems by August 31, 1999. In addition, each firm should:


      • Communicate with investors about Year 2000 readiness efforts by submitting a voluntary Year 2000 readiness letter. Refer to www.nasd.com or www.nasdr.com for further information about this NASD Year 2000 Readiness Initiative.


      • Complete point-to-point testing with the Nasdaq® and NASD Regulation® applications (To schedule testing, call the NASD Year 2000 Program Office at (888) 227-1330).


      • Be prepared to submit the third-quarter FOCUS filings using the new Year 2000 ready version of Web-Based FOCUS.


      • Submit to the SEC a plan demonstrating how your firm will become compliant by November 31, 1999, if your firm was not able to confirm readiness as of the August 31, 1999 date specified in the SEC Operational Capability Rule.


      • Focus on investor communication about the securities industry's readiness and your firm's readiness.

      October 1999

      During October, firms should be finalizing Year 2000 project activities and should:

      • Complete and fully test Year 2000 contingency plans to ensure functionality.


      • Activate freeze dates for new software or hardware as applicable to prevent Year 2000 issues with newly implemented systems.


      • Activate third-party contingency arrangements for any vendors or suppliers failing to show acceptable Year 2000 progress or readiness.


      • Focus on investor communication about the securities industry's readiness and your firm's readiness.

      November 1999

      In November, firms should:

      • Focus on investor communication about the securities industry's readiness and your firm's readiness.


      • Complete legal reviews of Year 2000 plans and activities, including Year 2000 warranty information in contracts.

      December 1999

      December should be reserved for event management and final Year 2000 preparations. These should include:

      • Continued focus on investor communication.


      • Staffing and confirming activities over the course of the transition period, including required reporting of market maker and clearing firms to the NASD.

      The Year 2000

      After the new year arrives firms should begin focusing on:

      • Leap year considerations to ensure continued success.


      • Decimalization plans.

      In addition to the events noted above, refer to the following Year 2000 Education and Events schedule for more information on Virtual Workshops to be conducted by the NASD Year 2000 Program Office.

      Year 2000 Education And Events

      The NASD Year 2000 Program Office is continuing to offer Virtual Workshops—conference call-in sessions. The NASD strongly encourages registration for these sessions by calling (888) 567-0578. After placing the call, listen to the greeting, and provide the following information when prompted: firm name, Broker/Dealer #, and workshop date. On the day of the session, call (800) 857-7323 and indicate the password and confirmation number provided for the specific workshop. See below for a list of these specific workshops organized by date of session, as well as a brief summary of the issues to be discussed.

      September 14—Certification of Year 2000 Compliance and SEC Rule 15b7-3T

      Password: Certification

      Conf. #: 3117560

      Issues to be covered:

      • Certification and the Year 2000 issue


      • Latest developments in certification


      • Best practices for all types of firms

      Sept. 21—Peer Review of Best Practices III

      Password: Practices

      Conf. #: 3117592

      Issues to be covered:

      • A year review of the biggest challenges faced by broker/dealers of all sizes


      • Summary of the top 10 best practices to managing the Year 2000 issue

      October 12—State of Utilities and Other Critical Services

      Password: Utilities

      Conf. #: 3117608

      Issues to be covered:

      • State of utilities and recent guidelines


      • Other services


      • Possible impact on broker/dealers


      • Best practices in dealing with uncertainty

      October 19—State of the Securities Industry

      Password: Industry

      Conf. #: 3117632

      Issues to be covered:

      • Industry summary and overview


      • A look at clearing firms


      • A look at Market Makers


      • A look at introducing firms


      • In-depth look at where your firm should be in achieving Year 2000 readiness

      October 26—Legal Review for Broker/Dealers

      Password: Review

      Conf. #: 3117647

      Issues to be covered:

      • A review of legal issues for 1998 and 1999


      • Current broker/dealer trends reviewed


      • Checklist of what your firm may need to do with the little time remaining

      November 2—Day Zero Preparations

      Password: Day Zero

      Conf. #: 3117656

      Issues to be covered:

      • Day zero scenarios-the new year


      • Broker/dealer strategic scenarios


      • Helpful hints on day zero

      November 10—Contingency Planning and Reporting Requirements

      Password: Trends

      Conf. #: 3117664

      Issues to be covered:

      • Developments in contingency planning trends


      • Step-by-step guide to completing mandatory reporting to the SROs during the transition timeframes


      • Global view

      November 17—Risk Management

      Password: Risk

      Conf. #: 3117677

      Issues to be covered:

      • Key principles in risk management


      • What the NASD is doing to manage risk


      • What clearing firms and introducing firms can do


      • Review of seven areas that can affect your business operations

      December 9—Day Zero Preparations

      Password: Day Zero

      Conf. #: 3117664

      Issues to be covered:

      • Day zero scenarios-the new year


      • Broker/dealer strategic scenarios


      • Helpful hints on day zero

      December 14—Beyond Year 2000

      Password: Beyond

      Conf. #: 3117699

      Issues to be covered:

      • The Millennium-Doing business summary


      • Resources


      • Record retention and maintenance issues

      NASD Year 2000 Event Calendar

      Topic Location Date Time
      Certification of Year 2000 Compliance and SEC Rule 15b7-3T Virtual Sept. 14 11:00 a.m., ET
      Peer Review of Best Practices III Virtual Sept. 21 11:00 a.m., ET
      State of Utilities and Other Critical Services Virtual Oct. 12 11:00 a.m., ET
      State of the Securities Industry Virtual Oct. 19 11:00 a.m., ET
      Legal Review for Broker/Dealers Virtual Oct. 26 11:00 a.m., ET
      Day Zero Preparations Virtual Nov. 2 11:00 a.m., ET
      Contingency Planning and Reporting Requirements Virtual Nov. 10 11:00 a.m., ET
      Risk Management Virtual Nov. 17 11:00 a.m., ET
      Day Zero Preparations Virtual Dec. 9 11:00 a.m., ET
      Beyond Year 2000 Virtual Dec. 14 11:00 a.m., ET

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    • 99-73 NASD Requests Comment On Proposed Amendments To The Code Of Procedure And Other Provisions

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      Comment Period Expires September 13, 1999

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      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD® or Association) Code of Procedure (the Code) has been in place since August 7, 1997. In light of the Association's additional experience litigating matters under the Code, the Association is proposing a series of clarifying and substantive changes to the Code and other provisions as described more fully below. These changes include:

      • setting forth more clearly the Department of Market Regulation's role in disciplinary proceedings;
      • clarifying the authority of hearing officers and making some limited changes to that authority;
      • clarifying the scope of the Association's document production requirements;
      • providing for hearing panel review of staff determinations to impose limitations on member firms' business activities because of financial and/or operational difficulties;
      • providing for changes to the process for appeals of disciplinary actions, statutory disqualification proceedings, and certain other accelerated proceedings;
      • providing for a streamlined process to impose bars or expulsions for the failure to provide information to the Association; and
      • providing for a process by which the Association can more expeditiously cancel memberships of firms that fail to meet the Association's eligibility and qualification standards.

      Attachment A includes the text of the proposed changes.

      Request For Comment

      NASD Regulation encourages all interested parties to comment on the proposal. Comments must be received by September 13, 1999. Comments should be mailed to:

      Joa