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  • 2001

    • 01-85 Guidance on Compensation and Mixed Capacity Trading

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      INFORMATIONAL

      Compensation and Mixed Capacity Trading

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Registered Representatives
      Senior Management
      Training

      Disciplinary Information



      Executive Summary

      The Nasdaq Stock Market, Inc. (Nasdaq®) and NASD Regulation, Inc. (NASD Regulation) believe that market rules should enhance investor protection and promote competition among market participants. The advent of decimal pricing in the Nasdaq market has caused many Nasdaq market makers to re-evaluate methods of charging for their services, as well as the manner in which they represent customer orders in the marketplace. Consequently, firms have questioned whether Nasdaq rules accommodate different methods of compensation for a market maker's services. In turn, firms have approached Nasdaq and NASD Regulation for interpretive advice concerning their regulatory obligations when executing transactions on a commission or commission-equivalent basis. In response to these and other inquiries, Nasdaq and NASD Regulation have prepared this Notice to Members.

      The guidance relating to mixed capacity trades and the capability to change the Automated Confirmation Transaction ServiceSM (ACTSM) report capacity indicator on a post-execution basis, which are discussed below, relate principally to Nasdaq securities (Nasdaq National Market and SmallCap). Nasdaq continues to evaluate whether there is a need for similar guidance regarding securities traded in the OTC Bulletin Board, and will provide information regarding this issue in a separate document at a future date.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Nasdaq Office of General Counsel at (202) 728-8088, and the Legal Section, Market Regulation Department, NASD Regulation at (240) 386-5126.

      Discussion/Background

      Traditionally, the business model of Nasdaq market makers has been based on the difference between the price at which market makers were willing to buy and sell securities. The difference, or "spread," typically makes up a component of a market maker's compensation for the risk it assumes and the liquidity it supplies to the market. As a result of changes to the Nasdaq market resulting from decimalization, some market participants are seeking to alter their methods of charging and paying for market services. In many cases, this means expanding the use of a commission-based fee model.

      At the outset, Nasdaq wishes to emphasize that decisions about methods of compensation should be made in arm's length negotiations between broker/dealers and their customers. Each firm and its customers must make individual, independent determinations about the fee and payment structures that are appropriate for their business relationships. Therefore, the issuance of this Notice does not obligate any market participant to impose, or accept, any particular compensation model, nor does it suggest the appropriate level of compensation. Instead, this Notice seeks to provide interpretive advice and guidance to firms to assist them in meeting their regulatory obligations arising from whichever manner they choose to participate (and pay or receive compensation for that participation) in Nasdaq.

      I. Trade Capacity

      Q. 1. What is a principal trade?

      A. A principal trade is a trade in which the broker/dealer buys or sells for an account in which the broker/dealer has a beneficial ownership interest (e.g., a proprietary account). When executing transactions from this account, the broker/dealer typically charges its customer a markup, markdown, or commission equivalent, and may also trade on a "net" basis (see Question 4).

      Q. 2. What is an agency trade?

      A. An agency trade is a trade in which a broker/dealer, authorized to act as an intermediary for the account of its customer, buys (sells) a security from (to) a third party (e.g., another customer or broker/dealer). Such a trade is not executed in, or does not otherwise pass through, the broker/dealer's proprietary account. When executing an agency trade, the broker/dealer generally charges the customer a commission for its services.

      Q. 3. What is a riskless principal trade?

      A. In Nasdaq, a riskless principal trade is one in which a broker/dealer, after having received an order to buy (sell) a security, purchases (sells) the security as principal, at the same price, to satisfy that order. The broker/dealer generally charges its customer a markup, markdown, or commission equivalent for its services, which is disclosed on the confirmation required by Securities Exchange Act (Exchange Act) Rule 10b-10. For further guidance on riskless principal trade reporting obligations for Nasdaq securities, please see Notice to Members 99-65, Notice to Members 99-66, and Notice to Members 00-79.

      Q. 4. What is a net trade?

      A. A net trade takes place when a market maker, at the request of a customer, while holding a customer order to buy (sell), executes a buy (sell) as principal at one price (from the street or another customer) and then executes an offsetting sell to (buy from) the customer at a different price. The difference between the price of the market maker's transaction and the price of the offsetting transaction to the customer is the market maker's compensation, and such compensation generally is not separately disclosed on the customer confirmation. To the extent that the market maker executes a transaction to facilitate the execution of the customer order it holds, such a transaction appears to be a riskless principal transaction. However, because the two transactions are effected at two different prices, the market maker is required under NASD trade reporting rules to report both legs (i.e., the street (or another customer) side and the customer side) of the transaction to the tape. The market maker's capacity for both transactions in ACT is principal (P). See Notices to Members 95-67, 96-10, 99-65 and 00-79 for further guidance on net trading.1

      II. Fees In General

      Q. 5. Do NASD/Nasdaq rules prohibit a member firm from charging its customer a commission or commission equivalent?

      A. No. There are no NASD/Nasdaq rules or interpretations that prohibit a member firm from charging its customers either a commission when acting as agent, or a commission equivalent when acting in a principal or riskless principal capacity. It is up to each individual NASD member firm, consistent with its regulatory obligations, to reach an independent determination as to the manner in which it seeks to be paid by its customers for services rendered.

      Q. 6. Can a member firm charge its customer a commission when acting in a principal or riskless principal capacity?

      A. The NASD rules do not specifically address this issue. Members should, however, refer to Securities and Exchange Commission (SEC) guidance and interpretations on this issue.

      III. Handling Orders in Mixed Capacities

      7. Q. Can a market maker that handles orders at the same price but in different capacities (e.g., as agent, riskless principal and/or principal) combine these orders and represent them in a single quote?

      A. Yes. A market maker can combine agency, riskless principal and/or principal orders and represent them in a single quote. When a market maker is displaying trading interest in its quotation in Nasdaq and that quote is accessed by another participant through a Nasdaq system, Nasdaq systems currently assume that the market maker traded on a principal basis, and consequently default the execution report in ACT to a principal capacity indicator. Nasdaq and NASD Regulation understand that it is possible that the accessed quote represents an agency order or a combination of agency interest and proprietary (principal or riskless principal) interest. Nasdaq and NASD Regulation also understand that a firm may wish to adjust its Nasdaq system-generated ACT report to indicate that the market maker handled all or a portion of the execution of a mixed capacity quote as agent.

      As an accommodation, Nasdaq is providing a voluntary option that will allow firms to break out the agency and/or riskless principal components of a "mixed" capacity execution through an ACT Regulatory Report - similar to "Alternative 2" under NASD riskless principal trade reporting rules. Specifically, a market maker would submit a non-clearing/non-tape report or a clearing only report (collectively, ACT Regulatory Report) to ACT for the agency and/or riskless principal portion(s) of the larger, system-reported execution. The market maker would be required to submit the ACT Regulatory Report within 15 minutes of the original mixed capacity execution. Additionally, the ACT Regulatory Report would have to include: 1) in the memo field, the ACT control number for the original trade report generated by the Nasdaq system;2 and 2) in the execution time field, the time the order was allocated to the agency and/or principal account. As discussed in more detail below,3 the presumption is that the entire amount of such a mixed capacity execution has been done on a principal basis unless allocated to an agency account within a general time parameter of 60 seconds.4

      Q. 8. Can a market maker handling orders at the same price in different capacities (e.g., as agent, riskless principal and/or principal) combine these orders for entry into a Nasdaq system (i.e., SelectNet or the National Market Execution System (NNMS or SuperSOES)) for execution?

      A. Yes. While it would be preferable for such orders to be entered separately into a Nasdaq system whenever possible, a market maker can combine such orders for entry into SuperSOES or SelectNet as a single mixed capacity order.5 Similar to the procedure for the execution against mixed capacity quotes that is described in Question 7, Nasdaq will provide a voluntary option for firms to allocate the agency and/or riskless principal components of a "mixed" capacity execution resulting from the submission of a single "mixed order" into SuperSOES or SelectNet. As described in Question 7, this will be accomplished by the submission of an ACT Regulatory Report that identifies the agency and/or riskless principal order(s) that make up any or all of the executed mixed capacity order that was entered into the Nasdaq system.

      Q. 9. Is a member required to use the ACT Regulatory Report to break out executions of agency and/or riskless principal orders, as outlined in Questions 7 and 8?

      A. No. Member firms are not required to use this voluntary option to allocate the execution of a mixed capacity quote that is accessed via a Nasdaq system to its capacity component parts. Similarly, member firms that choose to aggregate multiple orders of differing capacities into a single mixed capacity order, for entry into SuperSOES or SelectNet, or into an Electronic Communications Network (ECN) or Alternative Trading System (ATS), are not required to use this voluntary option to allocate the execution of such orders to their capacity component parts. The above-described approach is one, but not the only, way for firms to document the capacity in which they traded.6

      Please see Section V for further guidance on record keeping obligations.

      Additional information on this functionality will be provided in a separate Technical Update. Until that time, we have included below an example illustrating the type of reports that can be submitted to adjust portions of a mixed capacity execution.

      Example 1: MMA is at the inside offer of $20.00 for 15,000 shares. MMA's quote is composed of a 7,500 share principal order and a 7,500 share agency order (both to sell). MMB enters a market order to buy 15,000 into SuperSOES. At 10:00:00 a.m., SuperSOES executes the incoming buy order for 15,000 shares against MMA's quote, and ACT reports the 15,000 share execution to the tape on behalf of MMA (ACT control number = 1150111111). MMA allocates the order to the agency account for a customer that is a non-NASD member (e.g., institution) within 30 seconds of execution at 10:00:30 a.m. If MMA wishes to use the ACT Regulatory Report to break out executions of the mixed capacity order, MMA would be required to submit an ACT Regulatory Report for 7,500 shares sold, with an allocation time of 10:00:30 a.m. (in the execution time field) and an ACT control number of 1150111111 in the memo field, as set forth below, within 15 minutes of the original mixed capacity execution:7

      Tape/Media Report Sent to ACT by SuperSOES

      MMID OEID Volume Price MMA
      Capacity
      ACT
      Control #
      Memo Execution
      Time
      Tape Rpt. Clrg
      MMA MMB 15,000 20.00 P 1150111111   10:00:00 Yes Yes

      MMA's ACT Regulatory Report

      MMID OEID Volume Price MMA
      Capacity
      ACT
      Control #
      Memo Execution
      Time
      Tape Rpt. Clrg
      MMA MMB 7,500 20.00 A 1150222222 1150111111 10:00:30 No No

      The categories in the above-referenced trade reports are for illustrative purposes only

      MMID Executing Reporting Party
      OEID Order Entry (Contra) Party
      Volume Shares executed
      Price Transaction price
      MMA Capacity Capacity indicator for Market Maker A: P = principal, A = agency, R = riskless principal
      ACT Control # Unique ACT identifier attached to each ACT report
      Memo ACT field for input of miscellaneous information. Must be used to indicate original ACT control #
      Execution Time Time of order execution. On the ACT Regulatory Report, indicated time represents the time of allocation.
      Tape Rpt. Indicates whether the ACT record is reported to the tape. For ACT Regulatory Reports, this should always be "No."
      Clrg Indicates whether the ACT record is cleared through the ACT system

      Example 2: MMA is holding an agency order to buy 10,000 shares at a price not to exceed $20.00, plus an agreed upon, separately disclosed commission. MMA then receives another agency order to sell 10,000 shares at $20.00. MMA's system is programmed to match agency orders and report the agency crosses to ACT.

      Q. 10. Can MMA cross two customer agency orders internally and report the transaction to ACT as agent?

      A. Yes, provided that the orders are not run through the market maker's proprietary account. Here, MMA would submit one trade report to ACT indicating that MMA acted as agent and effected an agency cross.

      Q. 11. Is it permissible for a market maker to use an omnibus account to allocate executions among agency, principal, and riskless principal accounts?

      A. Yes. A firm can maintain an omnibus account, which cannot be the firm's proprietary account (i.e., the firm cannot hold proprietary positions in the account), from which it allocates executions to sub-accounts. When allocating to an agency or riskless principal sub-account, the firm must have record keeping and supervisory systems in place that can demonstrate, on an order-by-order basis, that, prior to execution, the firm had in hand the agency or riskless principal order to which the execution in the omnibus account relates.

      IV. Trade Reporting Mixed Executions

      As stated previously, Nasdaq and NASD Regulation recognize that in today's market environment market makers may be representing multiple customers in multiple capacities in a single transaction. In order to assist those market participants in properly categorizing their activities for regulatory and business purposes, Nasdaq has determined to provide a voluntary mechanism for firms to break out larger mixed capacity executions into their appropriate component parts. The following questions and examples illustrate how this mechanism will work.8

      Example 3: Assume MMA is displaying 15,000 shares to buy at $20.00. This quotation represents two agency institutional orders of 5,000 each, along with an additional 5,000 of proprietary interest for the purpose of trading with retail customers. The market maker has been given discretion by the agency customer, subject to available best execution opportunities, to fill the customer's agency orders, or any part of them, on a principal basis. MMB accesses MMA's entire quote of 15,000 shares through SuperSOES, which automatically reports the trade to ACT with MMA's capacity as principal.

      Q. 12. How does MMA split out the mixed components of the execution?

      A. MMA would submit an ACT Regulatory Report for each agency portion of the trade it desired to split out from the original execution. Individual reports can be submitted for each order executed on an agency basis (i.e., two ACT Regulatory Reports of 5,000 shares each), or all orders executed in the same capacity can be combined in a single report (i.e., one ACT Regulatory Report for 10,000 shares). Assuming that the initial transaction report to ACT disclosed MMA's capacity as principal, there will be no additional report required to indicate that 5,000 shares of the original 15,000 share execution were effected on a principal basis, and Nasdaq and NASD Regulation will assume, for regulatory purposes, that the remaining portion was executed as principal.

      Example 4:

      Market is $12.95 - $13.00
      MMA is quoting $12.95 - $13.10
      MMB is quoting $12.70 - $13.00

      MMA receives an institutional order to buy 10,000 shares at a price not to exceed $13.00, plus an agreed upon, disclosed commission. The customer requests, and MMA agrees, to handle the order on an agency basis. MMA sends an order through SuperSOES, which executes all 10,000 shares against MMB at $13.00.

      Q. 13. MMA acted as agent and wishes to confirm the trade to the customer as agent. Is it permissible to change MMA's capacity to agency after the fact if MMA clearly documents the capacity in which it acted?

      A. Yes. Although Nasdaq and NASD Regulation are of the view that, wherever possible, orders should be marked correctly for capacity purposes at the time of entry into a Nasdaq system, if a market maker is unable to accurately designate its trading capacity at that time (because, for example, it is acting in a mixed capacity), it may voluntarily adjust its capacity postexecution by using Nasdaq's new functionality.

      However such a change may not be necessary in the above scenario. As the party that entered the SuperSOES order, MMA already possesses the capability of designating through SuperSOES its capacity as principal, riskless principal or agent when it enters the order that is executed against MMB.9 Note that, as of the date of this Notice, market participants cannot enter orders into SelectNet with a riskless principal capacity indicator.

      Example 5: MMA receives an institutional order to buy 10,000 shares at a price not to exceed $13.00, plus an agreed upon, disclosed commission. The customer instructs MMA to handle the order on an agency basis. MMA sends multiple SelectNet messages to fill the customer order. ECN 1 executes 9,000 shares and ECN 2 executes 5,000 shares resulting in two executions totaling14,000 shares at a price of $13.00.

      Q. 14. What happens to the "overbought" portion?

      A. MMA must take the "overbought" portion into inventory. Because all 14,000 shares were executed at a price of $13.00, it makes no difference which "portion" is allocated to the agency order, provided that the agency order is filled in its entirety. As the sender of the SelectNet orders, MMA may indicate agency (A) or principal (P) at the time of order entry. If MMA does not indicate agency at the time of order entry, it can change the capacity indicator to agency (A) for the order(s) by submitting an ACT Regulatory Report for those shares that are handled as agent. In the above scenario, therefore, the capacity indicator on the 9,000 shares that were purchased from ECN 1 would be changed to agency (A), and the 5,000 shares that were purchased from ECN 2 would be changed to reflect that only 1,000 shares were purchased as agent (with the remaining 4,000 shares of the 5,000 share execution having been purchased as principal).10

      Firms should be mindful of their best execution obligations when receiving better-priced executions from ECNs at prices superior to their displayed quotations (i.e., any price improvement received in such instances should be passed along to the customer).

      Example 6: Assume MMA receives from Customer #1 a not held buy order for 10,000 shares at a price not to exceed $13.00. MMA contemporaneously receives from Customer #2 a not held agency buy order for 10,000 shares at a price of $13.00. MMA sends a SelectNet message to ECN 1 to buy 20,000 shares at $13.00. ECN 1 executes 15,000 and moves to $13.10.

      Q. 15. How does MMA identify which portion of the execution goes to Customer #1 and which portion is allocated to Customer #2?

      A. Neither Nasdaq nor NASD Regulation has mandated any particular order handling and execution priority procedures among orders. In this Example, MMA may, therefore, allocate executions among its accounts as long as it employs a reasonable methodology for allocating shares, which is adequately and properly disclosed to its customers, is fair, consistently applied, and does not unfairly discriminate against any particular class of accounts or types of orders. For example, a member could use a FIFO method for all orders, allocate to accounts on a pro-rata or an "even split" basis, or use other objective methodologies or formulae. It would be inappropriate, however, for a member's methodology to allocate shares to institutional orders over retail orders or to the orders of certain preferred accounts. To the extent a member elects to implement such an allocation methodology, the firm must describe it in firm documentation on both a current and an historical basis.

      The member must further ensure that its written supervisory procedures and supervisory system review the extent to which its chosen methodology allocates shares in a manner consistent with the duty of best execution.11 Member firms should also understand that simply because they employ a methodology for allocating shares, and that methodology is followed in a particular circumstance, that it does not automatically mean that any or all customer orders executed pursuant to such a methodology received best execution. Lastly, firms are reminded that they must always treat limit orders that they have accepted in compliance with NASD Rule IM-2110-2 (the Limit Order Protection Interpretation, a.k.a. "Manning obligations").

      Q. 16. In a mixed capacity trade that is, upon execution, originally allocated to an omnibus account, do Manning obligations arise at the time of execution or allocation?

      A. The presumption is that the entire amount of an execution effected in an omnibus account is effected as a principal or riskless principal transaction, and is therefore a triggering trade for the purposes of Manning obligations, at the time of execution. For mixed capacity executions, however, this presumption may be rebutted, and the amount of shares subject to Manning protection reduced if, within a general time parameter of 60 seconds after the mixed capacity execution, all or a portion of the execution is allocated to an agency account. Allocations to an agency account more than 60 seconds after the original mixed capacity execution do not relieve a market maker of its Manning obligations to any protectable customer limit orders that it holds.

      For example, MMA is displaying 10,000 shares to buy at $20.00 in its quote. SuperSOES executes the full 10,000 shares, and MMA allocates those shares immediately to its omnibus account. Within 60 seconds of the SuperSOES executions, MMA, pursuant to its established allocation methodology, allocates 3,000 shares to an agency account for a 3,000 share not held agency order it is holding. In this hypothetical, MMA would, within a general time parameter of 60 seconds after the original mixed capacity execution, owe Manning fills up to 7,000 shares for any protectable limit orders that it was holding on its book to buy at $20.00 or higher. In addition, any shares remaining in the omnibus account within 15 minutes of the original mixed capacity execution will be deemed to be a proprietary position of MMA and must therefore immediately be allocated by MMA from its omnibus account to its proprietary trading account (see Question 11).

      V. Record Keeping Obligations

      Q. 17. Does a member firm have record keeping obligations when trading in a mixed capacity basis?

      A. Yes. In addition to any applicable record keeping obligations under SEC Rules 17a-3 and 17a-4 and NASD Conduct Rule 3110, any member firm trading in a mixed capacity basis, regardless of whether they are voluntarily submitting ACT Regulatory Reports or not, must have in place systems and controls that produce records that enable the firm and NASD Regulation accurately to reconstruct, in a time-sequenced manner, the activity in accounts used to engage in mixed capacity trading. Accordingly, for any given period of time throughout the trading day, and for all accounts used to engage in mixed capacity trading, firms must be able readily to reconstruct for NASD Regulation the details of all orders worked on an agency or riskless principal basis, all trades that could have been attributed to an agency or riskless principal order and whether those trades were executed on an agency or riskless principal basis (using ACT Regulatory Reports or otherwise), or on a principal basis.

      NASD Regulation will examine this activity to determine whether post-execution capacity adjustments were properly done and supported by the orders held by the firm at the time of the execution of the agency or riskless principal quote or order. Conversely, NASD Regulation will examine this activity to determine whether the firm improperly refrained from post-execution capacity adjustments due these orders.

      Failure to record and retain such information could result in disciplinary action. The inability to substantiate the capacity of a trade will also cause NASD Regulation to assume that the original (and potentially incorrect) capacity that it reported to ACT is its actual capacity and assess compliance with related regulatory obligations on that basis. Moreover, NASD Regulation will examine post-execution capacity adjustments (and failures to make adjustments) for possible best execution violations.

      Q. 18. How can a member demonstrate that a trade was executed as "riskless principal" where the member executes both principal and riskless principal transactions?

      A: The member must have written policies and procedures to assure that orders executed and reported as "riskless principal" comply with NASD Rules 4632, 4642, and 6420, which require that the transactions offsetting a customer order executed as riskless principal occur after the customer order is received to satisfy that order. At a minimum, these policies and procedures must require that the customer order was received prior to the offsetting transactions, and that the offsetting transactions are allocated to the riskless principal account in a consistent manner and on a prompt basis. Members must have supervisory systems in place that can demonstrate order-by-order compliance with this requirement. The above standard would apply to agency transactions allocated to an omnibus account as well.

      VI. Order Audit Trail Obligations (OATS)

      The ability to allocate, on a voluntary basis, the components of a mixed capacity execution into its individual parts requires members to provide certain additional information to OATS. The following questions and answers have been prepared by NASD Regulation to assist member firms in this regard.

      Q. 19. Are there any OATS requirements if a firm submits an ACT Regulatory Report to allocate the components of a mixed capacity execution?

      A. Yes. If a firm chooses to allocate, on a voluntary basis, the components of a mixed capacity execution in ACT into its individual parts, then that firm's OATS obligations are as follows:

      For Orders Entered on Behalf of a Customer for Execution

      Under current OATS requirements, a firm that enters an order into a Nasdaq system for execution must submit to OATS a Route Report indicating that the order was routed to a Nasdaq system. However, if a member chooses to allocate, on a voluntary basis, the components of a mixed capacity execution in ACT into its individual parts, such an allocation will take place after the time of the original execution. In addition, given the post-trade allocation process envisioned by the use of ACT Regulatory Reports, which may involve allocations among several agency orders and/or principal and riskless principal accounts, it may be that a firm has executed an order before it has had an opportunity to create a Route Report for submission to OATS. Accordingly, in this instance, a firm must submit an Execution Report to OATS rather than a Route Report. If a firm is representing multiple customer orders in the same ACT Regulatory Report, it must ensure that each OATS Execution Report contains the same branch/sequence number as reported on the ACT Regulatory Report. Alternatively, the firm may submit an ACT Regulatory Report for each separate customer order that comprises the mixed capacity execution and each such entry must contain the necessary information to ensure that the OATS Execution Report(s) can be matched to the related ACT Regulatory Report(s).12

      For Orders Displayed for Execution

      Under current OATS requirements, a firm must submit to OATS a New Order Report and an Execution Report when an order it is displaying is executed against.13 This will still be the case if a member chooses to allocate, on a voluntary basis, the components of a mixed capacity execution that resulted from a mixed capacity displayed order. However, if the firm does a voluntary allocation, it will be required to match the OATS Execution Report to the second ACT report (the ACT Regulatory Report) by entering a branch/sequence number in both the ACT Regulatory Report and the OATS Execution Report and omitting the Reporting Exception Code of "M" from the OATS Execution Report. If a firm is representing multiple customer orders in the same ACT Regulatory Report, it must ensure that each OATS Execution Report contains the same branch/sequence number as reported on the ACT Regulatory Report. Alternatively, the firm may submit an ACT Regulatory Report to ACT for each separate customer order that comprises the mixed capacity execution and each such entry must contain the necessary information to ensure that the OATS Execution Report(s) can be matched to the related ACT Regulatory Report(s).14

      Q. 20. If a firm elects not to use the voluntary ACT Regulatory Report to break out the executions of agency orders, as outlined in Questions 7 and 8, above, but rather relies on another approach, are there any additional OATS reporting requirements for that firm?

      A. Yes. If a firm chooses to allocate, through an approach other than the use of a voluntary ACT Regulatory Report, the components of a mixed capacity execution into its individual parts, then that firm's OATS obligations are as follows:

      For Orders Entered On Behalf Of A Customer For Execution

      Because such allocations will take place after the time of the original execution, it may be that the firm has executed an order before it has had an opportunity to create a Route Report for submission to OATS. In this instance, a firm must submit an Execution Report to OATS rather than a Route Report. However, unlike the case where a voluntary ACT Regulatory Report is used, there will be no related ACT report submitted that reflects the post-execution allocation. Consequently, a firm electing not to use the voluntary ACT Regulatory Report to allocate the components of a mixed capacity execution must append a Reporting Exception Code of "M" to any Execution Report(s) submitted to OATS for post-execution allocation.

      For Orders Displayed On Behalf Of A Customer For Execution

      The firm's OATS reporting obligations in this situation are the same as its current OATS reporting obligations when an order that is displayed in a quotation is executed. That is, an Execution Report must be submitted to OATS with a Reporting Exception Code of "M" to indicate that no ACT match will take place because the firm did not have the ability, at the time its quote was accessed, to enter a branch/sequence number into the Nasdaq system-generated ACT report.

      Q. 21. When allocating the components of a mixed capacity execution, what time should be submitted in the execution time field of an OATS Execution Report, the time of the execution or the time of allocation?

      A. The time of allocation, regardless of whether the member is using the voluntary (or any other) approach to track and record subsequent capacity adjustments to portions of mixed capacity executions.

      Q. 22. Do my OATS obligations change if I am using the Update feature in ACT to change the capacity of the entire execution rather than using the ACT Regulatory Report option?

      A. Yes. The Update feature not only allows the capacity indicator to be changed in ACT, but it also allows a change to, or the addition of, the branch/sequence number field. Therefore, if a branch/sequence number was not entered by the firm at the time of order entry, the firm must enter a branch/sequence number in the ACT Regulatory Report and include that same branch/sequence number on the related OATS Execution Report. In this case, the execution time on the OATS Execution Report must be the same as the execution time on the corresponding ACT Regulatory Report.


      Endnote(s)

      1 Nothing in this Notice to Members is intended to change the rules applicable to markups, fair prices, and commissions. See, e.g., NASD Conduct Rule 2440, Interpretive Memorandum (IM) 2440, and Notice to Members 92-16.

      2 The "Memo" field is available through all Nasdaq trade reporting mediums, including Computer-to-Computer Interface (CTCI), the ACT Trade Report Entry Screen on the NWII TM workstation, and the Application Program Interface (API). ACT assigns a control number to each trade report submitted to ACT. Nasdaq provides users with several methods for identifying the ACT control numbers assigned to trade reports, which will be discussed in greater detail in a later Technical Update.

      3 See Section IV of this Notice.

      4 See Notice to Members 95-67, at Question 5.

      5 Nothing in this Notice to Members is intended to change the rules relating to the trading of Nasdaq SmallCap securities on Nasdaq's Small Order Execution System (SOES). See NASD Rules 4750-4756.

      6 Firms may use the ACT Regulatory Report to break out the actual capacities of a mixed capacity execution in a variety of circumstances, including when they are: acting as the order sender or receiver (order-entry firm) through SuperSOES; acting as the order sender or receiver through SelectNet; and transacting through another execution venue, such as an ECN or ATS. In other words, members will have the ability to correct their capacity to a particular execution in ACT regardless of whether they are on the reporting side or the contra side to the execution and regardless of whether they received an execution through a Nasdaq system. Additionally, firms may use an ACT Regulatory Report to change the capacity on the entire original execution.

      7 Submission of such reports is discussed in greater detail in Section IV of this Notice.

      8 Nothing in this Notice to Members is intended to change the trade reporting requirements under the riskless principal trade reporting rules. See NASD Notices to Members 99-65, 99-66, and 00-79.

      9 See Technical Update #2001-22, September 24, 2001, regarding specifications, enhancements, and modifications related to riskless principal transactions through API and CTCI. The ability to enter riskless principal transactions through NW II will go into effect first quarter 2002.

      10 The allocation(s) to the agency account must occur within a general time parameter of 60 seconds in order to avoid potential Manning violations. Overbought shares in the proprietary account would trigger Manning obligations for any protectable limit orders the market maker was holding to buy at $13 or higher. See Question 17.

      11 See Notices to Members 98-96 and 99-45.

      12 In order for OATS to electronically "match" the OATS Execution Report to the related ACT Regulatory Report, the MPID, Issue Symbol, Execution Date, Execution Time Stamp to the second, and the Branch/Sequence number must match exactly on both reports. For purposes of the ACT Regulatory Reports and related OATS Execution Reports, the time of allocation is entered into the time of execution field.

      13 For these trades, the Execution Report must be submitted with a Reporting Exception Code of "M" to indicate that no ACT match will take place because the firm did not have the ability, at the time its quote was accessed, to enter a branch/sequence number into the ACT Regulatory Report.

      14 See footnote 12 as to which elements of the OATS Execution Report and the related ACT Regulatory Report must match.

    • 01-84 SEC Approves NASD Rule Proposal Requiring Member Clearing And Self-Clearing Firms To Report Prescribed Data

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      INFORMATIONAL

      INSITE Reporting Requirements

      Effective Date: December 10, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management

      INSITE
      Reporting Requirements



      Executive Summary

      On November 27, 2001, the Securities and Exchange Commission (SEC) approved proposed National Association of Securities Dealers, Inc. (NASD®) Rule 3150, "Reporting Requirements for Clearing Firms." Rule 3150 requires each member that is a clearing firm or self-clearing firm to report to the NASD in such format as the NASD may require prescribed data pertaining to itself and any member for which it clears.1 This data will be used to facilitate the surveillance component of NASD Regulation's INSITE program. Through the use of INSITE's technology, NASD Regulation will enhance investor protection by identifying potentially high-risk situations as they develop.

      The text of the amendments as provided in Attachment A became effective on December 10, 2001.

      Questions/Further Information

      Questions concerning this Notice may be directed to Frank J. McAuliffe, Member Regulation, NASD Regulation, at (240) 386-4670; Elizabeth A. Wollin, Member Regulation, NASD Regulation, at (240) 386-5156; or Shirley H. Weiss, Office of General Counsel, NASD Regulation, at (202) 728-8844.

      The INSITE Program

      The data gathered by NASD Regulation under Rule 3150 will be used to facilitate the surveillance component of INSITE (an acronym for Integrated National Surveillance and Information Technology Enhancements), a new business model that will permit NASD Regulation to use sophisticated statistical analysis techniques to detect emerging risk patterns at member firms. Through INSITE, NASD Regulation will collect and analyze information about members and produce reports that identify "exceptions" based on historical and current comparisons of member data. The exceptions will trigger follow-up reviews and possible examinations. INSITE will permit NASD Regulation to concentrate its examinations on the higher-risk segments of the industry, focus the content of each examination on higher-risk topics, streamline the examination process for examiners and members, and better coordinate regulatory findings with other NASD Regulation departments.

      Who Is Subject To The Requirements Of Rule 3150

      Rule 3150 requires each member clearing and self-clearing firm to report prescribed data to NASD Regulation. Members may enter into an agreement with a third party, such as a service bureau, pursuant to which the third party agrees to fulfill the clearing or self-clearing firm's obligations under proposed Rule 3150. Notwithstanding the existence of such an agreement, each member that is a clearing or self-clearing firm will be responsible for complying with the reporting requirements of Rule 3150.

      What Must Be Reported Under Rule 3150

      The text of Rule 3150 does not specify the data that must be reported to NASD Regulation, but members may review the reporting requirements on the NASD Regulation Web Site at www.nasdr.com/insite.asp (INSITE Firm Data Filing Technical Specifications). The reporting requirements have been designed to require firms to provide summaries of information that they are already collecting, including, among other things, aggregate net liquidating equity in each clearing firm's correspondents' proprietary accounts, exchange and non-exchange transactions, options transactions, debt transactions, customer accounts, short interest, unsecured customer debits, trade cancellations (T+1 forward), and as-of trades summaries. These data elements may change over time, and NASD Regulation will continue to work with its members and their service bureaus to identify the data that is needed to operate the surveillance component of INSITE and to modify the reporting requirements as necessary. The initial data elements will be reported daily. NASD Regulation will provide clearing and self-clearing firm members with advance notice (in an NASD Notice to Members or by other means of communication, such as the NASD Regulation Web Site) of any changes to the required data elements or filing frequency.

      What Are The Technical Reporting Requirements Under Rule 3150

      Rule 3150 does not specify the method to be used by members in reporting prescribed data. The technical requirements associated with all of the processes necessary for transmitting the required data to NASD Regulation can be found on NASD Regulation's Web Site at www.nasdr.com/insite.asp (INSITE Firm Data Filing Technical Specifications). Firms may report data via NASD Regulation's Form Filing Web Site or, for firms with connectivity to the NASD OATS private network, through that file transfer protocol. Members may obtain additional information about reporting responsibilities, technical specifications, compliance issues, and more by contacting NASD Business and Technology Support Services at (800) 321-NASD, or by sending an e-mail to nasdregfiling@nasd.com.

      As with any new program or technology, systems failures may arise. When that happens, NASD Regulation expects members to report these failures, correct them as expeditiously as possible, and restart the reporting process. Generally, NASD Regulation will not view a system failure as a disciplinary matter if it has occurred in the normal course of doing business, is not part of a series of systems failures, and the member is attempting to correct it.

      The NASD Regulation Web Site also features information that will aid members in making programming changes that will enable them to create the daily summaries required by INSITE. NASD Regulation is also committed to developing a system on its Web Site that will permit members to review the information that they or their service bureaus have reported.

      When Will NASD Regulation Require Clearing And Self-Clearing Firms To Report Data Under Rule 3150

      NASD Regulation will implement Rule 3150 reporting requirements in phases. The three clearing firms that have been part of an ongoing pilot program will be phased in first, as soon after December 10, 2001, as possible. NASD Regulation will phase in all other members in several stages. NASD Regulation will publish the schedule of phase ins as soon as it has been established, but in no event will NASD Regulation give member firms less than six months' notice of their start-up date. NASD Regulation will take into account broker/dealers' relationships with service bureaus in establishing the phase-in schedules. NASD Regulation expects Rule 3150 to be fully implemented by the end of 2002.2

      Effective Date Of Amendments

      These amendments became effective on December 10, 2001.


      Endnotes

      1 See Securities Exchange Act Release No. 45109 (Nov. 27, 2001), 66 FR 63271 (Dec. 5, 2001) (File No. SR-NASD-2001-19) (SEC Approval Order).

      2 Rule 3150 includes a provision that permits members to request an exemption from Rule 3150's reporting requirements pursuant to the Rule 9600 Series. As stated in Rule 3150(b), exemptions from any or all of the Rule 3150 reporting requirements will be granted only under exceptional and unusual circumstances.


      ATTACHMENT A—RULE TEXT

      New language is underlined.

      3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION

      3150. Reporting Requirements for Clearing Firms

      (a) Each member that is a clearing firm or self-clearing firm shall be required to report to the Association in such format as the Association may require, prescribed data pertaining to the member and any member broker-dealer for which it clears. A clearing firm or self-clearing firm may enter into an agreement with a third party pursuant to which the third party agrees to fulfill the obligations of a clearing firm or self-clearing firm under this Rule. Notwithstanding the existence of such an agreement, each clearing firm or self-clearing firm remains responsible for complying with the requirements of this Rule.
      (b) Pursuant to the Rule 9600 Series, the Association may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member or class of members unconditionally or on specified terms from any or all of the provisions of this Rule that it deems appropriate.

      PROCEDURES FOR EXEMPTIONS

      9610. Application

      (a) Where to File
      A member seeking exemptive relief as permitted under Rules 1021, 1070, 2210, 2320, 2340, 2520, 2710, 2720, 2850, 2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3150, 3210, 3230, 3350, 8211, 8212, 8213, 11870, or 11900, Interpretive Material 2110-1, or Municipal Securities Rulemaking Board Rule G-37 shall file a written application with the appropriate department or staff of the Association and provide a copy of the application to the Office of General Counsel of NASD Regulation.
      (b) and (c) No change

    • 01-83 Fixed Income Pricing SystemSM Additions, Changes, And Deletions As Of October 21, 2001

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      INFORMATIONAL

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      FIPS



      As of October 21, 2001, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

      Symbol Name Coupon Maturity
      ADLA.GS Adelphia Communications Corp. 10.250 11/01/06
      ADTR.GA Advanstar Inc. 15.000 10/15/11
      ARG.GA Airgas Inc. 9.125 10/01/11
      ALWA.GB Alamosa Delaware Inc. 13.625 08/15/11
      AN.GA AutoNation Inc. 9.000 08/01/08
      CWSR.GA Choctaw Resort Development Enterprises 9.250 04/01/09
      DNTC.GA Del Monte Corp 9.250 05/15/11
      DRNC.GA Dresser Inc. 9.375 04/15/11
      ENE.GA Enron Corp. 8.250 09/15/12
      ENE.GB Enron Corp. 6.750 07/01/05
      FMRE.GA Fresenius Med Cap Tr IV 7.875 06/15/11
      GLCS.GA Global Crossing Hldg Ltd. 8.700 08/01/07
      HAZ.GB Hayes Lemmerz Int'l Inc. 11.875 06/15/06
      HRGM.GA Herbst Gaming Inc. 10.750 08/15/08
      HWSV.GB Hollywood Casino Shreveport 13.000 08/01/06
      IM.GA Ingram Micro Inc. 9.875 08/15/08
      KM.GK K Mart Corp. 9.875 06/15/08
      MATR.GA Matria Healthcare Inc. 11.000 05/01/08
      MECU.GC Mediacom LLC/Cap Corp 9.500 01/15/13
      MIKE.GA Michaels Stores Inc. 9.250 07/01/09
      MSNH.GA Mission Energy Holding Co. 13.500 07/15/08
      MHTG.GC Mohegan Tribal Gaming Authority 8.375 07/01/11
      NXTO.GA NextMedia Operating Inc. 10.750 07/01/11
      ODP.GA Office Depot Inc. 10.000 07/15/08
      PRM.GB Primedia Inc. 8.875 05/15/11
      ROIA.GB Radio One Inc. 8.875 07/01/11
      REMG.GB Remington Product Co. LLC 11.000 05/15/06
      LVB.GA Steinway Musical Instrs. Inc. 8.750 04/15/11
      STEI.GC Stewart Enterprises Inc. 10.750 07/01/08
      STLH.GA Sun International Hotels Ltd. 8.875 08/15/11

      As of October 21, 2001, the following bonds were deleted from the Fixed Income Pricing System.

      Symbol Name Coupon Maturity
      CE.GC Calenergy Co Inc 9.500 09/15/06
      CE.GE Calenergy Co Inc 6.960 09/15/03
      CE.GF Calenergy Co Inc 7.230 09/15/05
      CE.GG Calenergy Co Inc 7.520 09/15/08
      CE.GH Calenergy Co Inc 8.480 09/15/28
      CYCL.GA Centennial Cellular Corp. 8.875 11/01/01
      CVXP.GG Cleveland Elec Illum Co. 7.625 08/01/02
      CVXP.GH Cleveland Elec Illum Co. 9.000 07/01/23
      CVXP.GI Cleveland Elec Illum Co. 7.375 06/01/03
      CVXP.GK Cleveland Elec Illum Co. 9.500 05/15/05
      GLCS.GA Global Crossing Hldg. Ltd. 8.700 08/01/07
      ITTD.GA ITT Industry Inc 6.750 11/15/03
      JOIN.GC Join Intercable Inc 9.625 03/15/02
      LENF.GC Lenfest Communications Inc 7.625 02/15/08
      ROV.GA Rayovac Corp. 10.250 11/01/06
      THC.GE Tenet Healthcare Corp. 8.000 01/15/05
      THC.GA Tenet Healthcare Corp. 9.625 09/01/02
      THC.GC Tenet Healthcare Corp. 8.625 12/01/03
      THC.GD Tenet Healthcare Corp. 7.875 01/15/03
      THC.GF Tenet Healthcare Corp. 8.625 01/15/07
      THC.GG Tenet Healthcare Corp. 7.625 06/01/08
      THC.GH Tenet Healthcare Corp. 8.125 12/02/08
      THC.GI Tenet Healthcare Corp. 9.250 09/01/10

      As of October 21, 2001 changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol New Name/Old Name Coupon Maturity
      There were no symbol changes for this time period.

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, NASDR Market Regulation, at (240) 386-4994.

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

    • 01-82 Trade Date — Settlement Date For 2002

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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



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

      The Nasdaq Stock Market® and the securities exchanges will be closed on Monday, January 21, 2002, 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. 15 Jan. 18 Jan. 23
      16 22 24
      17 23 25
      18 24 28
      21 Markets Closed
      22 25 29

      Presidents Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 18, 2002, 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. 12 Feb. 15 Feb. 20
      13 19 21
      14 20 22
      15 21 25
      18 Markets Closed
      19 22 26

      Good Friday: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, March 29, 2002. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      March 25 March 28 April 2
      26 April 1 3
      27 2 4
      28 3 5
      29 Markets Closed
      April 1 4 8

      Memorial Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 27, 2002, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      May 21 May 24 May 29
      22 28 30
      23 29 31
      24 30 June 3
      27 Markets Closed
      28 31 4

      Independence Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Thursday, July 4, 2002, 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 8
      July 1 5 9
      2 8 10
      3 9 11
      4 Markets Closed
      5 10 12

      Labor Day: Trade Date — Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, September 2, 2002, 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. 27 Aug. 30 Sept. 4
      28 Sept. 3 5
      29 4 6
      30 5 9
      Sept. 2 Markets Closed
      3 6 10

      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 14, 2002. 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. 8 Oct. 11 Oct. 15
      9 15 16
      10 16 17
      11 17 18
      14 17 21
      15 18 22

      Note: October 14, 2002, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 14, will be combined with transactions made on the previous business day, October 11, for settlement on October 17. 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 14.

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

      The schedule of trade dates-settlement dates below reflects the observance of the financial community of Veterans' Day, Monday, November 11, 2002, and Thanksgiving Day, Thursday, November 28, 2002. On Monday, 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 28, 2002, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 5 Nov. 8 Nov. 12
      6 12 13
      7 13 14
      8 14 15
      11 14 18
      12 15 19
      22 27 Dec. 2
      25 29 3
      26 Dec. 2 4
      27 3 5
      28 Markets Closed
      29 4 6

      Note: November 11, 2002, 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 8, for settlement on November 14. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

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

      The Nasdaq Stock Market and the securities exchanges will be closed on Wednesday, December 25, 2002, in observance of Christmas Day, and Wednesday, January 1, 2003, 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. 29 Dec. 27
      20 26 30
      23 27 31
      24 30 Jan. 2, 2003
      25 Markets Closed
      26 31 3
      27 Jan. 2, 2003 6
      30 3 7
      31 6 8
      Jan. 1, 2003 Markets Closed
      2 7 9

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

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


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

    • 01-81 NASD Provides Interpretive Guidance On The Conduct Of Business Abroad

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      INFORMATIONAL

      Conduct Of Business Abroad

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management

      Business Abroad



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) is issuing this Notice to Members as part of its continuing effort to provide members with guidance on complying with rules that govern their business in foreign locations. The NASD also reminds members and persons associated with members considering doing business in foreign jurisdictions of their obligations to comply with the applicable U.S. and foreign laws.1

      Questions concerning this Notice should be directed to: Grace Yeh, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc. (NASD Regulation), at (202) 728-6939, or Kyra Armstrong, Senior Attorney, Department of Member Regulation, at (202) 728-6962.

      Discussion

      The NASD has rules that apply to U.S.-based member firms conducting business in foreign locations, to member firms based in other countries that do business in the United States, and to foreign representatives who wish to engage in securities business in the U.S. Collectively, these rules and programs make it easier for NASD members to conduct business abroad. These rules include the following:

      • The NASD permits firms to register certain persons working in foreign offices as Foreign Associates without requiring qualification examinations (NASD Rule 1100).


      • The NASD authorizes member firms to maintain registrations for persons who are engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary (NASD Rules 1021(a) and 1031(a)).


      • The NASD allows, in limited circumstances, member firms and persons associated with a member to pay transaction-related compensation to non-registered foreign persons, or foreign finders (NASD Rule 1060(b)).


      • The NASD permits persons registered in certain foreign countries to work in the U.S. as general securities representatives after taking an abbreviated examination (NASD Rule 1032).

      The NASD also offers examinations and continuing education programs abroad.

      In addition, the NASD has issued previous Notices to Members that provide guidance concerning the conduct of business abroad. For example, in NASD Notice to Members 98-91, the NASD alerted members to their obligations with respect to cold calling and advertising to persons in the United Kingdom. In NASD Notice to Members 00-02, the NASD reminded members and persons associated with members of their obligations to comply with applicable U.S. laws and foreign laws when soliciting business in any foreign jurisdiction.

      In order to further facilitate member firms' awareness and understanding of their responsibilities, the NASD has prepared answers to the following frequently asked questions concerning the conduct of business abroad.

      Questions And Answers

      I. Foreign Associates

      Q 1. Who may be designated a Foreign Associate?

      A. Under NASD Rule 1100, a Foreign Associate is an individual who is not a citizen, national, or resident of the United States or any of its territories or possessions. A Foreign Associate cannot engage in securities activities with or for any resident, citizen, or national of the United States. This person may engage in securities activities for the member firm outside the jurisdiction of the United States only.

      Q 2. What is the scope of permissible business activity for a Foreign Associate?

      A. A Foreign Associate must be registered with the NASD and will be deemed an associated person or employee of the member. A Foreign Associate may act in any registered capacity on behalf of the member, consistent with their designation as a Foreign Associate. This can include acting as a general securities representative or trader. See Notice to Members 95-37. The limited supervisory functions that can be properly delegated to general securities representatives also may be assigned to Foreign Associates. However, the NASD rules do not permit Foreign Associates to perform functions that require principal registration, e.g., serving as the office supervisor for an Office of Supervisory Jurisdiction. As always, ultimate supervisory responsibility for every registered and unregistered branch office must be assigned to one or more appropriately registered principals.

      Q 3. Does a Foreign Associate have to take any U.S. qualifications examinations?

      A. No. Under NASD Rule 1100, Foreign Associates are exempt from the requirement to pass a qualification examination.

      Q 4. Does a Foreign Associate have to register?

      A. Yes. Under NASD Rule 1100, all persons associated with a member who are designated as Foreign Associates are required to be registered with the NASD.

      Q 5. How does a firm register a Foreign Associate?

      A. Before a member can classify a person as a Foreign Associate, it must:

      • file a form designated "Application for Classification as a Foreign Associate" (Form U-4 is currently used) with the NASD and certify that the person meets the criteria for Foreign Associate;


      • attest that the person is not disqualified from registration;


      • certify that service of process for any proceeding by the NASD for such person may be sent to an address designated by the member; and


      • submit a Form U-4 through the Central Registration Depository (CRD) system to request registration as a Foreign Associate on behalf of an individual.

      The member must notify the NASD immediately if the Foreign Associate is terminated by filing a Form U-5.

      II. Foreign Finder

      Q 6. What is a foreign finder, and in what capacity may a foreign finder act on behalf of a member firm?

      A. Foreign finders are non-registered foreign persons who refer non-U.S. customers to a member firm. Because foreign finders are not considered associated persons of a member, the sole involvement of a foreign finder in the business of a member firm is the initial referral of non-U.S. customers to the firm. See Notice to Members 95-37.

      Q 7. May a member pay finders' fees to foreign finders?

      A. Yes. NASD Rule 1060(b) provides that member firms and persons associated with a member may pay transaction-related compensation to foreign finders, based upon the business of customers such persons direct to member firms ("foreign finder exemption"). See Notice to Members 95-37.

      NASD Rule 1060(b) states that for the foreign finder exemption to apply, the member firm must assure itself that the foreign finder receiving the compensation neither is required to register in the U.S. as a broker/dealer nor is subject to a disqualification as defined in Article III, Section 4 of the NASD's By-Laws and must further assure itself that the compensation arrangement does not violate applicable foreign law.

      The following conditions must also be met:

      • the finder must be a foreign national (not a U.S. citizen) or a foreign entity domiciled abroad;


      • the customers are foreign nationals (not U.S. citizens) or foreign entities domiciled abroad transacting business in foreign or U.S. securities;


      • the customers must receive a descriptive document, similar to that required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940, that discloses what compensation is being paid to finders;


      • the customers must provide written acknowledgement to the member firm of the existence of the compensation arrangement and it must be retained and made available for inspection by the NASD;


      • records reflecting payments to finders must be maintained on the member firm's books and the actual agreements between the member firm and persons compensated must be available for inspection by the NASD; and


      • the confirmation of each transaction must indicate that a referral or finders' fee is being paid pursuant to an agreement.

      III. Maintenance Of Registrations While Working Abroad

      Q 8. Can persons working for U.S. broker/dealers maintain their registrations while working abroad?

      A. Yes. NASD Rules 1021(a) and 1031(a) permit members to maintain individual registrations as a principal or representatives, as applicable, for persons who are engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of the member.

      IV. Foreign Members

      Q 9. What is a foreign member?

      A. NASD Rule 1090 defines a foreign member as a member firm that does not maintain an office in the U.S. responsible for preparing and maintaining financial and other reports required to be filed with the Securities and Exchange Commission (SEC) and the NASD.

      Q 10. What special obligations must a foreign member perform?

      A. Under NASD Rule 1090, a foreign member must:

      • prepare all reports required to be filed with the SEC and the NASD and maintain a general ledger chart of account and any description thereof, in English and U.S. dollars;


      • reimburse the NASD for any expenses incurred in connection with the examinations of the member to the extent such expenses exceed the cost of examining a member located within the continental U.S. in the geographic location most distant from the District Office of appropriate jurisdiction;


      • ensure the availability of an individual fluent in English and knowledgeable in securities and financial matters to assist representatives of the NASD during examinations; and


      • utilize, either directly or indirectly, the services of a broker/dealer registered with the SEC, a bank or clearing agency registered with the SEC located in the U.S. in clearing all transactions involving members of the NASD, except where both parties to a transaction agree otherwise.

      V. Supervision And Inspection Obligations Of Member Firms With Foreign Offices

      Q 11. What level of supervision is required in foreign offices?

      A. Foreign offices of member firms must comply with the same rules of supervision as U.S. locations pursuant to NASD Rule 3010. See Notice to Members 99-45.

      Member firms must supervise all of their associated persons, regardless of location, compensation or employment arrangement, or registration status, in accordance with the NASD By-Laws and rules. See Notice to Members 98-38. Both the SEC and NASD have emphasized that small, dispersed offices need close attention and supervision. See In re Royal Alliance Associates Inc., Release No. 34-38174 (Jan. 15, 1997); Notice to Members 98-38.

      Q 12. What is a branch office?

      A. A branch office generally is defined in NASD Rule 3010(g)(2) as any location identified by any means to the public or customers as a location where an investment banking or securities business is conducted, subject to certain exclusions set forth in NASD Rule 3010(g)(2).

      Pursuant to Article IV, Section 8 of the NASD By-Laws, the NASD must be advised of the opening or closing of any branch office within 30 days of the opening or closing. Such notice must be filed with the NASD on Schedule E to Form BD. See Notice to Members 88-51.

      Q 13. What is an Office of Supervisory Jurisdiction (OSJ)?

      A. An OSJ is defined in NASD Rule 3010(g)(1) as any office of a member at which any of the following activities take place:

      • order execution and/or market making;


      • structuring of public offerings or private placements;


      • maintaining custody of customers' funds and/or securities;


      • final acceptance (or approval) of new accounts on behalf of a member;


      • review and endorsement of customer orders;


      • final approval of advertising or sales literature for use by persons associated with the member; or


      • responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.

      Under NASD Rule 3010(a)(4), every OSJ must have a registered principal located at the office. Foreign associates are not allowed to act in a registered principal capacity.

      Q 14. Must foreign offices be registered?

      A. Yes. All branch offices and OSJs, regardless of their location, must be registered with the NASD. Any location at which a member is onducting a securities business that does not fall within the definition of an OSJ or a branch office can be referred to as an "unregistered office." While "unregistered offices" do not have to be registered with the NASD, member firms should keep a list of and supervise such offices.2

      Q 15. Must firms inspect foreign offices?

      A. Yes. Firms must inspect all offices regardless of their location. Unregistered offices must have regularly scheduled inspections. Branch offices must have cyclical inspections and OSJs must have annual inspections. See In re Royal Alliance Associates Inc., Release No. 34-38174 (Jan. 15, 1997) (where the SEC stated that it harbored grave doubts that a practice of conducting a pre-announced compliance examination only once a year would necessarily discharge the supervisory obligations of any firm that incorporates a structure in which smaller offices are operated by only one or two representatives); Notice to Members 99-45: NASD Rule 3010.

      Q 16. Are firms required to supervise independent contractors?

      A. Yes. Independent contractors performing investment banking or securities services for a member firm are considered associated persons. See Notice to Members 98-38. Irrespective of an individual's location or compensation arrangements, all associated persons must be supervised by the firm with which they are registered. See Notice to Members 86-65. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements. See Notice to Members 86-65.

      VI. NASD Inspections

      Q 17. Are foreign offices subject to inspections by the NASD?

      A. Yes. Member firms with offices located outside the United States are assigned to an NASD District Office for purposes of examination, elections, and other functions. See Notice to Members 88-51. District Office staff may conduct onsite cause and cycle examinations at foreign locations of a member firm.

      VII. Compliance With Laws

      Q 18. What laws must members comply with when soliciting business in a foreign jurisdiction?

      A. Members and persons associated with members must comply with applicable U.S. and foreign laws when soliciting business in a foreign jurisdiction. See Notices to Members 00-02 and 98-91. Members should carefully review all foreign laws as foreign jurisdictions may have different laws and policies than the U.S. and the NASD.

      Q 19. What activities may be considered a "solicitation"?

      A. The term "solicitation" generally has been viewed as an expansive, fact-specific, and variable concept. Depending on the laws of the applicable foreign jurisdiction, a wide variety of firm activities may constitute solicitation of business for purposes of foreign local law. For example, solicitation of business may be deemed to occur through newspaper ads, Internet postings, e-mails, telephone calls, or facsimile transmissions. See Notice to Members 00-02.

      Q 20. What are the consequences of breaching applicable foreign laws?

      A. The consequences of breaching applicable foreign laws can be far reaching. Among other things, member firms in violation of particular foreign laws may be committing a criminal offense and be liable to prosecution. See Notices to Members 00-02 and 98-91.

      VIII. Qualification Requirements

      Q 21. What are the qualification requirements for persons registered in a foreign jurisdiction who want to work in the United States as general securities representatives?

      A. In general, the NASD requires persons registered in foreign jurisdictions to take the Series 7 examination prior to working in the U.S. as a general securities representatives. However, the NASD permits persons registered in Canada and the United Kingdom to work in the U.S. as general securities representatives after taking abbreviated versions of the Series 7 examination. Because the NASD relies, in part, on foreign regulators to ensure that representatives have attained certain minimal levels of qualification, these abbreviated examinations are meant to supplement tests that foreign representatives have already taken in their original jurisdiction.

      The examination for United Kingdom representatives (Series 17) consists of 90 questions and is 120 minutes long. The examination for Canadian representatives (Series 37) consists of 90 questions and is 150 minutes long, or alternatively, if the Canadian representative also has the Canadian options and futures program, such representative may choose to take the Series 38 examination, which contains 45 questions long and is 75 minutes long.

      Q 22. Do foreign regulators offer abbreviated qualification examinations for U.S. representatives?

      A. Yes. The United Kingdom and Canada currently offer abbreviated qualification examinations for U.S.-qualified registered representatives.

      Q 23. Have any foreign regulators waived their examination requirements?

      A. The NASD understands that some foreign regulators may waive their examination requirements for persons with significant experience. Member firms should contact foreign regulators with regard to any examination waiver programs and the application of such programs.

      Q 24. Can the NASD waive examination requirements for foreign representatives?

      A. NASD Rule 1070(e) provides that the NASD may waive the applicable qualification examination, on a case-by-case basis, in exceptional cases and where good cause is shown and accept other standards as evidence of an applicant's qualifications for registration.

      Q 25. Does the NASD offer examinations abroad?

      A. Yes. The NASD currently offers automated examinations in (1) Sydney, Australia, (2) Hong Kong, (3) Paris, France, (4) Frankfurt, Germany, (5) Tokyo, Japan, (6) Singapore, (7) Seoul, South Korea, and (8) London, England. To schedule an appointment at a foreign examination location, a member firm must submit a foreign appointment request form one month before the desired test date. Candidates may make arrangements for a paper examination in other locations. See www.nasdr.com.

      All candidates taking NASD examinations overseas may request an extra hour and the use of an English/native language dictionary. However, these requests are not automatically granted and must be approved by the staff. Upon arrival at the test center, candidates must provide an originally executed letter from the firm verifying that the candidate speaks English as a second language.

      IX. Continuing Education

      Q 26. Are foreign representatives required to comply with continuing education requirements?

      A. In general, yes. Under NASD Rule 1120, foreign representatives and domestic representatives are subject to the same continuing education requirements.

      The continuing education program is comprised of a Regulatory Element and a Firm Element. The Regulatory Element is computer-based training in which participants work through real-life regulatory and compliance problems. The Firm Element is internal training administered by firms and may include written material, computer-based training, videos, audio tapes, classroom training, direct broadcasts, or other presentations.

      Q 27. How can a registered person residing outside North America satisfy the regulatory element requirement?

      A. Registered persons outside North America are subject to the requirements of the Regulatory Element. A registered person subject to the Regulatory Element may satisfy his or her requirement at any Sylvan/Prometric Center in the United States and Canada, or one of the VUE Centers in Europe and the Pacific Rim. Registered persons outside the United States and Canada who are not living within 350 miles of a VUE Center may have their Regulatory Element requirement deferred until facilities are available. To obtain a deferral, a registered principal or supervisor of the firm must make the request in writing to the Continuing Education Department of NASD Regulation. The letter should contain the person's name, Social Security or CRD number, and the city and country in which the person resides. See Notices to Members 01-50 and 01-73 for more information.

      Q 28. Are Foreign Associates required to comply with continuing education requirements?

      A. No. Foreign Associates are exempt from the Regulatory Element and the Firm Element of the continuing education requirement.

      X. Miscellaneous

      Q 29. In connection with the establishment of a foreign office by a member firm, foreign regulators may ask for confirmation that the member firm is in good standing. Can the NASD opine on the good standing of a member?

      A. As a matter of policy, the NASD does not opine that a member is in "good standing" because that term may have different meanings in different jurisdictions. The NASD can confirm that a member is registered with the NASD as a broker/dealer and as such has initially satisfied and continues to meet certain mandatory qualification standards, and is subject to NASD rules and regulations requiring it to operate in a just and equitable manner.

      Q 30. How can foreign regulators be contacted?

      A. The International Organization of Securities Commissions (IOSCO), an organization of securities regulators, maintains a listing of regulators around the world. IOSCO can be contacted by e-mail at mail@oicv.iosco.org. IOSCO maintains a Web Site at www.iosco.org.


      Endnotes

      1 It is not the intent of this Notice to describe any specific foreign laws applicable to any foreign jurisdiction. Rather, the NASD urges members considering the conduct of business in foreign jurisdictions to carefully review and comply with all applicable U.S. and foreign laws.

      2 Members should review the rules and regulations in all applicable jurisdictions to determine whether offices may need to be registered with other regulators, including state and foreign regulators.

    • 01-80 Amendments To Broker/Dealer Books And Records Rules Under The Securities Exchange Act Of 1934

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      Federal Register

      INFORMATIONAL

      Books And Records Rules

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management

      Books and Records
      Exchange Act Rule 17a-3
      Exchange Act Rule 17a-4



      Executive Summary

      On October 25, 2001, the Securities and Exchange Commission (SEC or Commission) adopted amendments to Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934 (Exchange Act) to clarify and expand record keeping requirements in connection with purchase and sale documents, customer records, associated person records, customer complaint records, and certain other matters. The amendments also require broker/dealers to maintain or promptly produce certain records at each office to which those records relate.

      The amendments become effective on May 2, 2003. The Federal Register version of the SEC final rule release is provided in Attachment A. For a more complete description of the amendments, members should review the attached SEC final rule release.

      Questions/Further Information

      Questions concerning this Notice may be directed to Emily Gordy, Acting Director, Office of Regulation Policy, Department of Member Regulation, NASD Regulation, Inc. (NASD Regulation), at (202) 728-8070, or Grace Yeh, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6939.

      Discussion And Background

      In general, Rules 17a-3 and 17a-4 of the Exchange Act establish minimum requirements for records that broker/dealers must prepare and periods during which such records must be maintained.

      On October 11, 1996, the National Securities Market Improvement Act of 1996 (NSMIA) was enacted, prohibiting states from establishing books and records rules that differ from, or are more burdensome than those established by the Commission's rules. NSMIA also requires that the SEC periodically consult with states concerning the adequacy of the Commission's books and records rules. The SEC originally proposed amendments to its books and records rules in 1996 (the 1996 Amendments) in response to NSMIA and to concerns expressed by the members of the North American Securities Administrator's Association that the existing Commissions books and records rules do not require firms to make and retain records that would facilitate sales practice examinations and enforcement activities in individual broker/dealer offices by state regulators. Based on comments received on the proposed 1996 Amendments, the SEC substantially revised the amendments and re-proposed them in 1998 (the 1998 Amendments). The final rule amendments incorporate many of the suggestions raised in the approximately 115 comment letters and a letter from the Office of Management Budget that the Commission received in response to the proposed 1998 Amendments.

      Highlights Of Amendments

      The Commission believes that the final amendments balance the interests of securities regulators to obtain information in a timeefficient manner with the concerns expressed by many industry representatives that costs of complying with the proposed requirements, particularly the customer account record and rules that require records to be maintained at offices, will be unduly burdensome. The Commission further believes that since broker/dealers presently maintain a significant portion of the records required under the adopted amendments in order to comply with federal or selfregulatory organization (SRO) requirements or in the normal course of business, the new requirements should not present considerable additional burdens for most broker/dealers.

      Some of the more significant changes to the books and records rules are discussed below.

      1. Office - The amended rules define "office" as locations where one or more associated persons regularly conduct a securities business. The definition of office is significant because firms are required to create and maintain certain records at offices for two years. The final rules provide that instead of maintaining records at a particular office, a broker/dealer may choose to produce records promptly upon request at the office to which the records relate or at another place as agreed to by the regulator. In its final rule release, the Commission states that the word "promptly" has deliberately not been defined in the rule, and suggests that in general, records that are readily available at an office should be produced on the day of the request while the time frame for filling large or complex requests should be discussed between the firm and the regulator.

      A broker/dealer is not required to maintain records at an office that is a private residence if only one associated person (or multiple associated persons if members of the same immediate family) regularly conducts business at the office, the office is not held out to the public as an office, and neither customer funds nor securities are handled at the office. Instead, records pertaining to private residence offices may either be maintained at another location within the state of the office at the broker/dealer's choosing or be produce promptly at an agreed upon location.

      The records that broker/dealers must create as to each office include blotters, order tickets, customer account records, records with respect to associated persons, customer complaints, records evidencing compliance with SRO rules with regard to communications with the public, records of persons who can explain the information in the broker/dealer's records, and records of each principal responsible for establishing record keeping compliance procedures.
      2. Customer Account Records - New Rule 17a-3(a)(17) requires broker/dealers to create an account record for each customer. Broker/dealers must make a good faith effort to collect certain information including basic identification and background information on the customer and the account's investment objectives. Broker/dealers are required to furnish each customer with the information periodically, generally within 30 days of opening the account and at least every 36 months thereafter and when certain information is changed. Broker/dealers have three years from May 2, 2003 to obtain and furnish customers with the account record information for accounts in existence on May 2, 2003.

      Since the purpose of the customer account records is primarily to enable regulators to review for compliance with suitability rules, accounts that are not subject to SRO suitability requirements, including NASD Conduct Rules 2310 and 2860(b)(16)(B),1 are exempt from the account record requirements.2 Accounts that have been inactive for 36 months are also exempt from the customer account requirements.

      Broker/dealers should be aware that even if Rule 17a-3(a)(17) does not require them to create a customer account record for certain accounts, they must still comply with federal laws and SRO rules to collect or update information regarding customer accounts.3
      3. Order Tickets - To help securities regulators more efficiently determine whether certain individuals are engaged in sales practice violations, Rules 17a-3(a)(6) and 17a-3(a)(7) were amended to require that order tickets identify the time the order was received, even if subsequently executed, the identity of each associated person responsible for the account, if any, and any other person who entered or accepted the order on behalf of the customer, or, if applicable, a notation that a customer entered the order on an electronic system.4 Broker/dealers are not required to create a record of sales or purchase transactions entered into on a subscription basis directly from or to the issuer so long as the broker/dealer maintains a copy of the subscription agreement.
      4. Associated Persons Records - Rule 17a-3(a)(12) identifies the records and information that must be maintained with respect to each associated person. To help regulators identify associated persons and where they work, amendments to Rule 17a-3(a)(12) require broker/dealers to create records of all offices at which each associated person regularly conducts business as well as of all identification numbers assigned to the associated person.

      The final amendments specify new associated person records requirements, including records of every written complaint received by the broker/dealer against each associated person (or alternatively, firms have the option to keep a copy of the written complaint along with records of the disposition of the complaint),5 records of all agreements pertaining to the associated person's relationship with the broker/dealer and a summary of each associated person's compensation arrangement and records listing transactions for which each associated person will be compensated.
      5. Communications With Public - Under new Rule 17a-3(a)(20), broker/dealers are required to make records that demonstrate compliance with applicable federal regulations and SRO rules on communications with the public that require principal approval.6
      6. Record Maintenance - Amendments to Rule 17a-4 clarify the periods of time that records described in Rule 17a-3 must be maintained. The amended rules also require that broker/dealers maintain other information, including the following:
      • for the life of the entity, copies of Forms BD and all amendments thereto;


      • for three years after the date of the report, all reports which a securities regulatory authority has requested or required a firm to create and each examination report;


      • for three years after the termination of use, all manuals describing the firm's policies and practices with respect to compliance and supervision; and


      • for 18 months after the date the report was generated, reports created to review unusual activity in customer accounts.

      Endnotes

      1 NASD Conduct Rules 2310 and 2860(b)(16)(B) require that members use reasonable efforts and exercise diligence to collect customer information, including a customer's investment objective in connection with making investment recommendations or prior to opening up an options trading account for the customer, respectively.

      2 Firms that do not make investment recommendations are excluded from the customer account requirements.

      3 Members are required under NASD Conduct Rule 3110(c) maintain certain customer information.

      4 If the broker/dealer uses an electronic system to generate the order ticket, and such system does not have a field to enter the name of any person, other than the associated person responsible for the account, who accepted the order, the broker/dealer may produce upon request by a regulator a separate record to identify the person rather than identify the person on the order ticket.

      5 NASD Conduct Rule 2860(b)(17) and IM-3110(d) require each member to keep records of complaints.

      6 NASD Conduct Rule 2210(b) requires that a principal of the member must approve all items of advertising and sales literature.


      SECURITIES AND EXCHANGE COMMISSION

      View PDF File

      17 CFR Parts 240 and 242

      [Release No. 34-44992; File No. S7-26-98]

      RIN 3235-AH04

      Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule; request for comments on Paperwork Reduction Act burden estimate.

      SUMMARY: The Securities and Exchange Commission today is adopting amendments to its broker-dealer books and records rules. The amendments clarify and expand recordkeeping requirements with respect to purchase and sale documents, customer records, associated person records, customer complaints, and certain other matters. In addition, the amendments expand the types of records that broker-dealers must maintain and require brokerdealers to maintain or promptly produce certain records at each office to which those records relate. These amendments are specifically designed to assist securities regulators when conducting sales practice examinations of broker-dealers, particularly examinations of local offices.

      EFFECTIVE DATE: May 2, 2003.

      FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at (202) 942-0131; Thomas K. McGowan, Assistant Director, at (202) 942-4886; or Bonnie L. Gauch, Attorney, at (202) 942-0765; Office of Risk Management and Control, Division of Market Regulation, United States Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-1001.

      SUPPLEMENTARY INFORMATION:

      I. Introduction

      The Securities and Exchange Commission's (the "Commission") books and records rules, Rule 17a-31 and Rule 17a-42 under the Securities Exchange Act of 1934 ("Exchange Act")(hereinafter the "Books and Records Rules"), specify minimum requirements with respect to the records that broker-dealers must make, and how long those records and other documents relating to a broker-dealer's business must be kept. The Commission has required that broker-dealers create and maintain certain records so that, among other things, the Commission, selfregulatory organizations ("SROs"), and State Securities Regulators 3 (collectively "securities regulatory authorities") may conduct effective examinations of broker-dealers. The Commission originally proposed amending the Books and Records Rules in 1996 in response to concerns raised by members of the North American Securities Administrator's Association ("NASAA") regarding the adequacy of those Rules.4 On October 11, 1996, the National Securities Market Improvement Act of 1996 ("NSMIA") was enacted.5 NSMIA prohibits States from establishing books and records rules that differ from, or are in addition to, the Commission's rules. Prior to NSMIA many States had laws or rules that required broker-dealers to make and keep certain books and records that allowed the State Securities Regulators to conduct examinations and investigations to review for, among other things, sales practice violations.6 NSMIA also provides that the Commission must consult periodically with the States concerning the adequacy of the Commission's Books and Records Rules,7 particularly relating to the need by State Securities Regulators to have records readily accessible for their examinations.8

      The Commission, recognizing the vital role that State regulators play in providing for customer protection, issued the Proposing Release, in part, to enhance the ability of the State Securities Regulators to conduct effective and efficient sales practice examinations of activities within their respective States, including those involving smaller broker-dealer offices. By adopting these rules, the Commission enables the State regulators to adopt and enforce similar rules on a State level, to support their examination responsibilities, and investigatory and enforcement requirements. An important aspect of the amendments is that broker-dealers are required to produce records at offices within a State. Moreover, many of these amendments require broker-dealers to make or keep records currently kept by broker-dealers as a matter of business practice or to comply with SRO rules. However, unless these requirements are adopted as Commission rules, the State regulators are unable to apply or enforce them at the State level.

      II. Proposing and Reproposing Releases

      In response to the comments received on the Proposing Release, the Commission substantially modified the amendments, and reproposed them to allow for public comment on the modifications.9 In response to the reproposal, the Commission received approximately 115 comment letters from various groups, including brokerdealers, law firms representing brokerdealers, industry associations, and State Securities Regulators. Generally, State Securities Regulators supported the rules as reproposed, but suggested some minor changes. While broker-dealers generally supported the Commission's efforts to adopt uniform books and records rules, they opposed various sections of the reproposed rules. In particular, firms were opposed to the requirements to periodically update the customer account record and to maintain records at local offices. As discussed in the respective sections throughout this release, the Commission has substantially modified the content of the re-proposed amendments and incorporated many of the suggested changes into the final rules.

      To a significant degree, the amendments to Rules 17a-3 and 17a-4 adopted by the Commission track existing SRO requirements and certain State regulations that were in place prior to NSMIA. In addition, they largely represent a codification of prudent recordkeeping practices of many broker-dealers. Accordingly, many portions of the Books and Records Rule amendments should not present additional burdens for most broker-dealers.

      III. Amendments to Rule 17a-3

      In brief, the amendments to present Rule 17a-3 include revisions to the information that must be recorded on order tickets, and new requirements to: create certain records relating to associated persons; collect certain account record information and verify that information with customers periodically; create a record of customer complaints; create a record indicating compliance with applicable advertising rules; and create records identifying persons responsible for establishing procedures and persons able to explain the broker-dealer's records to a regulator.

      A. Memoranda of Brokerage Orders and Dealer Transactions

      Rule 17a-3 has been amended to require that a brokerage order ticket contain the identity of the associated person, if any, responsible for the account and any other person who entered or accepted the order on behalf of the customer, and whether it was entered subject to discretionary authority. In addition, a brokerage order ticket must include the time at which the broker-dealer received a customer order, even if the order is subsequently transmitted for execution.10 A dealer ticket must include information regarding any modifications to the order.11 This will allow securities regulators to better focus their examinations and investigations because they will be able to identify certain types of violative activities and the individuals responsible for those activities more easily.

      The Commission clarified that the identity of the associated person responsible for the account must be included only if the broker-dealer assigns to an associated person responsibility for certain accounts. This modification was made in response to broker-dealer comment letters that noted some firms do not assign a particular associated person to each account, and some firms allow customers to enter orders directly into a broker-dealer's systems, such as through an on-line trading account. Further, this modification addresses the concerns of some commenters that without a qualifying phrase, such as "if any," the rule may be interpreted erroneously as placing on firms an affirmative obligation to assign an associated person to each account.

      If a firm has assigned identification numbers or codes to the persons entering customer orders to comply with the requirement to record the identity of the person entering customer orders, a broker-dealer may record the identification number or code on the order ticket instead of the associated person's name. Further, if the person entering a customer order has been assigned to a computer terminal but does not have a specific identification number or code, it is acceptable for the broker-dealer to identify the number or code of a computer terminal at which an order was entered. In either case, upon request by a representative of a securities regulatory authority, the firm must provide the actual identity of the person who entered the order. Either of these alternatives may be satisfied by using a companion record to the order tickets.12

      With these amendments, paragraphs (a)(6) and (a)(7) require that brokerdealers record the identity of "any [person other than the associated person responsible for the account] who entered or accepted the order on behalf of the customer." In response to comments by the online brokerage community, the Commission included, after this requirement, the phrase, "if a customer entered the order on an electronic system, a notation of such entry." Because most firms that accept orders through an electronic system already identify, for supervisory purposes, which orders were entered directly by a customer, this requirement will not create much additional burden on the firms. Further, it will assist them in identifying for securities regulatory authorities why certain tickets do not identify the associated person who received the order from the customer. One commenter argued that firms that primarily accept "unsolicited" orders and do not pay transaction-based commissions should not be required to include on the order ticket information regarding associated persons because no sales practice concerns would be implicated in these types of transactions. However, the Commission believes that recording the identity of the associated person on a brokerdealer's order tickets is essential for adequate surveillance of, and accountability for, transactions. One commenter wrote that for some transactions the time of entry frequently is simultaneous or nearly simultaneous with the time the order is received, and suggested that under these conditions, the firm should not have to make a separate entry for each time. In those situations, it must be clear from the order ticket that the time of receipt was the same as the time of entry. However, the time recorded must be accurate and this should not be construed as an exception to allow firms to use an approximate time for one or both entries.13

      Finally, the Commission recognizes that for some types of transactions, such as purchases of mutual funds or variable annuities, the customer may simply fill out an application or a subscription agreement that the broker-dealer then forwards directly to the issuer.14 These documents would include the information that is important for and specific to the particular type of transaction. Hence, the Commission has added paragraph (a)(6)(ii) under Rule 17a-3 to allow firms to keep a copy of the application or subscription document instead of making a separate record as to transactions described in the exemption. This paragraph would also exempt transactions such as automatic dividend reinvestments. The Commission views this additional paragraph as a codification of current industry practice, and it is limited to these types of transactions.
      B. Associated Person Records
      1. New Records Concerning Associated Persons

      Rule 17a-3(a)(12) requires a firm to make records relating to associated persons of the firm, including information regarding the associated person's employment and disciplinary history. The amendments require a record listing all of a firm's associated persons showing every office where each associated person regularly conducts business, and listing all internal identification numbers and the CRD number assigned to each associated person.15 This will allow securities regulators to identify where associated persons work, and to read various records which may identify the associated persons solely through the use of identification numbers. Also, three technical changes were made from the rule as reproposed.16
      2. The Definition of Associated Person

      The Commission had proposed to eliminate from Rule 17a-3 a definition of "associated person" and instead use the definition of "associated person" as defined in sections 3(a)(18) and 3(a)(21) of the Exchange Act. However, the statutory definition of "associated person of a broker or dealer" in section 3(a)(18) specifically excludes those persons whose functions are clerical or ministerial from the definition solely for purposes of section 15(b) of the Exchange Act. Current Rule 17a-3 excludes those persons from the recordkeeping requirements. The Commission has determined that those persons should continue to be exempt from the recordkeeping requirements of Rules 17a-3 and 17a-4. Therefore, the Commission believes it is appropriate to retain a definition of the term "associated person" in the rule. This definition has been moved to paragraph (g), however, and has been modified for the sake of uniformity to incorporate the definitions of "associated person of a member" and "associated person of a broker or dealer" as set forth in sections 3(a)(21) and 3(a)(18) of the Exchange Act.17 In addition, for purposes of Rules 17a-3 and 17a-4, the Commission has excluded from the definition persons whose functions are solely clerical or ministerial. In order to avoid redundancy and achieve greater consistency in interpretation, this phrase shall be interpreted in the same manner as the phrase "solely clerical and ministerial" is interpreted under section 3(a)(18) of the Exchange Act.

      The Exchange Act provisions define an associated person to include any partner, officer, director, or branch manager of a broker-dealer (any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with a brokerdealer, or any employee of a brokerdealer. This includes order-takers. The Commission interprets the term associated person to include any independent contractor, consultant, franchisee, or other person providing services to a broker-dealer equivalent to those services provided by the persons specifically referenced in the statute.18
      C. Customer Account Record

      The Commission is adopting new Rule 17a-3(a)(17) 19 under the Exchange Act, which requires broker-dealers to create a record containing certain minimum information as to each customer. The primary purpose of Rule 17a-3(a)(17) is to provide regulators, particularly State Securities Regulators, with access to books and records which enable them to review for compliance with suitability rules.20 Rule 17a-3(a)(17) also requires broker-dealers to furnish that information to each customer on a periodic basis. The rule should not be construed to affect or supersede any Federal, State, or SRO requirement, including those relating to "know your customer," suitability, or supervisory obligations.
      1. Account Record Information

      The information required under new Rule 17a-3(a)(17)(i)(A) for each account with a natural person as a customer includes the customer's name, tax identification number, address, telephone number, date of birth, employment status (including occupation and whether the customer is an associated person of a member, broker or dealer), annual income, net worth (excluding value of primary residence), and investment objectives. Most broker-dealers already collect this information to assist them in assessing customers' suitability or to comply with other rules. For accounts with more than one owner, the record should include personal information for each owner of the account; however, the record should reflect the investment objectives for the account and not the individual investment objectives for each "joint" owner named on the account. Further, financial information for the owners can be combined. For discretionary accounts, firms also must include as part of the account record the dated signature of each customer granting the discretionary authority and the dated signature of each natural person 21 to whom discretionary authority was granted. In response to comments received, the Commission did not adopt the reproposed requirement that the account record include information regarding a customer's marital status and number of dependents.22

      Under the final rule, the account record must indicate whether it has been signed by the associated person responsible for the account, and approved or accepted by a principal of the firm.23 This will identify for regulators the persons responsible for accepting a particular account on behalf of the firm. Similar to the comments made regarding order tickets, some commenters stated that they do not always assign an associated person to each account. Therefore, the Commission has added the phrase "if any" to the requirement that the account record indicate whether it has been approved by an associated person. The account record still must indicate whether it has been approved by a principal.24

      In the Reproposal, the Commission specifically sought comment on whether, for joint accounts, the firm should obtain the account record information for each individual. Most commenters that addressed this issue did not object to maintaining personal information for each owner of joint accounts. However, some commenters pointed out that it would be unnecessary and redundant to obtain individual information for certain types of joint accounts, such as a joint account of two spouses with similar information regarding income and net worth. These commenters also contended that the investment objectives should reflect the objectives for the account and not the objectives of the individual owners. In those cases, it is sufficient under paragraph (a)(17) of Rule 17a-3 25 that the account record reflect that portions of the account record information are the same for each owner of the account. It is acceptable for firms to combine joint owners' financial information as opposed to obtaining and maintaining that information separately for each of the joint owners. Lastly, the investment objectives recorded should be those for the account, and not those of the individual owners.

      Some commenters requested clarification as to how this information must be maintained and whether all the information and signatures must be included on the same form.26 Although a broker-dealer must create a single record for each account, that record may consist of more than one document, such as two or more account applications.

      A broker-dealer is not required to furnish a copy of a customer's account record to the customer within thirty days when obtaining new information to complete the initial account record, required under Rule 17a-3(a)(17)(i)(A),27 for an account in existence on the effective date of the rule amendments. However, as stated in Rule 17a-3(a)(17)(i)(B)(1),28 brokerdealers must create a record indicating that the broker-dealer furnished these customers with a copy of the account record information within three years of the effective date of the rule.
      2. Furnishing the Account Record Information

      Rule 17a-3(a)(17) requires that the firm periodically furnish account record information to the customer.29 The new requirement allows the customer to review the information regarding the account that the firm has on file and from which the associated person or the firm is making investment recommendations or suitability determinations for the account. The requirement to furnish this record to customers is designed to reduce the number of misunderstandings between customers and broker-dealers regarding the customer's situation or investment objectives. Firms may, of course, elect to provide this information to customers more frequently in order to coincide with other mailings.

      Paragraph (a)(17) of the rule identifies four provisions that trigger the requirement that a broker-dealer furnish to a customer a copy of information contained in the account record.30 Those provisions include (i) the opening of a new account;31 (ii) the periodic updating of an account that must occur at least once every 36 months;32 (iii) a change of customer name or address;33 and (iv) a change of other customer information.34

      Although paragraph (a)(17)(i) of Rule 17a-3 requires broker-dealers to periodically update customer records, the rule does not affect a broker-dealer's obligations under any SRO "know your customer" rules. It may be appropriate in certain circumstances for brokerdealers to obtain updated information from customers more often than once every 36 months.

      Because different terms ascribed to categories of investment objectives may vary among firms, the firms must describe these terms when furnishing the account record to customers. When opening an account, the customer has the opportunity to question the meaning of the investment objective terms, but when the customer receives a copy of the account record at home, that customer may have forgotten or misunderstood the meaning of those terms. This requirement to describe investment objective terminology should help ensure that the customer and the firm have a mutual understanding of the meaning of each term.

      Paragraph (a)(17) of Rule 17a-3 also provides that a broker-dealer is not required to include the customer's tax identification number and date of birth with the information provided to the customer. Several commenters suggested that unauthorized access to such information could facilitate the perpetration of fraud against the customer.35

      The Commission did not adopt the portion of the rule as reproposed that would have required firms to send a notification of change of address to both the old and new addresses. This change was in response to comments that prudent business practice requires that this notification be sent only to the old address to prevent misdirection of account information. Therefore, as adopted, firms are required to send a notification of a change of address only to the old address.

      Some commenters sought clarification as to whether the amendment required a separate mailing of the customer account record information. This rule does not require a separate mailing, and the Commission anticipates that firms will combine this mailing with other mailings. Further, the account record information may be printed on a customer's account statement. Finally, a firm may mail the customer a copy of the customer's complete account record reflecting any change of other account record information 36 on or before the 30th day after the date the member, broker or dealer received notice of any change, or it may choose to send this notification with the next statement scheduled to be mailed to the customer.
      3. Explanation of the Neglect, Refusal, or Inability of a Customer To Provide Required Information

      As adopted, Rule 17a-3(a)(17)(i)(C) does not require broker-dealers to include an explanation of the customer's neglect, refusal, or inability to provide the required information. However, a broker-dealer is required to make a good faith effort to collect this information. If the account record does not include the required information, the broker-dealer would bear the burden of explaining why this information is not available. Rule 17a-3(a)(17)(i)(C) is specifically limited in application to paragraph (a)(17), and does not apply to any other Federal or SRO rules regarding collections of information (e.g., Rule 17a-3(a)(9)).
      4. Exemption From Account Record Information Requirements

      A number of broker-dealer firms argued that the Commission should create an exemption from the account record information requirements of Rule 17a-3(a)(17)(i), contending that this record is intended to allow examiners to review for suitability, but broker-dealers are not subject to SRO suitability requirements for all of their accounts.37 Therefore, they argue, where they have no suitability obligation, they should not be required to obtain account record information. The Commission is adopting the account record requirements with an exemption for certain accounts,38 such that a broker-dealer is not required to create an account record for an account if the firm is not required (under any Federal or SRO rules) to make a suitability determination as to the account. However, the obligation to collect and record information of the type enumerated in Rule 17a-3(a)(17)(i)(A) may arise under SRO rules and interpretations. If, after the account is opened, the firm or its associated person engage in conduct that would subject the firm to any requirement to make a suitability determination, the firm must obtain the information before making such a recommendation. The firm would have to comply thereafter with the requirement to furnish customers with a copy of their account record for verification, under paragraph (a)(17)(i)(B)(1) of Rule 17a-3, but the account could re-qualify for the exemption.

      For accounts existing on the effective date of these amendments, a broker-dealer will not be required to create or update the account record if, within the 36-month period beginning on the effective date of this rule, the firm has not been required to make a suitability determination as to that account.

      For the purposes of paragraph (a)(17)(i)(D) of Rule 17a-3, the term "suitability determination" should be interpreted broadly. A broker-dealer may have an obligation to perform a suitability determination under the Exchange Act,39 Commission rules,40 SRO rules,41 or common law.42 Rule 17a-3(a)(17) does not change or limit a broker-dealer's obligation to make a suitability determination. It is important to note that even if a broker-dealer is not required to create an account record under Rule 17a-3(a)(17) for an account, the firm must still comply with federal laws and regulations and SRO rules requiring collections of information regarding customer accounts, including paragraph (a)(9) of Rule 17a-3,43 NYSE Rule 405, and MSRB Rule G-8(a)(xi).
      5. Applicability of Account Record Requirements and 36-Month Grace Period

      The requirement to create an account record applies to both new and existing accounts. For accounts opened on or after the effective date of these amendments ("new accounts"), the firm must obtain the account record information required under Rule 17a-3(a)(17)(i)(A) when the account is opened.

      As originally proposed, the grace period to obtain the customer account record information for accounts existing on the effective date of these amendments would have been one year. However, many commenters 44 stated that with a large number of accounts it would be unduly burdensome to obtain the account record information within one year. Therefore, the Commission has provided broker-dealers with a 36-month grace period. Specifically, under paragraph (B)(1) of Rule 17a-3(a)(17)(i), for accounts existing on the effective date of these amendments, a firm will have 36 months to obtain the information required on the account record under paragraph (a)(17)(i)(A) of Rule 17a-3. The new 36-month furnishing cycle under paragraph (a)(17)(i)(B) of Rule 17a-3 will begin when the firm obtains the account record information within the initial 36-month grace period.
      6. Written Customer Agreements

      New paragraph (a)(17)(iii) of Rule 17a-3 requires each broker-dealer to create a record for each account indicating that each customer was furnished with a copy of any written agreement entered into on or after the effective date of this paragraph pertaining to that account. This will allow customers to review the terms of agreements to which they are subject, and to better understand their rights and responsibilities (and those of the brokerdealer) under these agreements. In addition, if any customer specifically requests a copy of an agreement relating to their account, this paragraph would require that the broker-dealer maintain a record that it was provided to the customer.
      D. Complaints

      New paragraph (a)(18)(i) of Rule 17a-3 45 requires firms to make a record as to each associated person that includes every written customer complaint received by the firm concerning that associated person.46 This will allow securities regulators to quickly identify any trends, and focus examinations. This record must include complaints received electronically from customers. The rule requires that the record include the complainant's name, address, and account number; the date the complaint was received; the name of each associated person identified in the complaint; a description of the nature of the complaint; and the disposition of the complaint. However, because firms already are required to keep originals of incoming written complaints,47 rather than make a separate record, firms have the option under this rule to keep the original complaint along with a record of the disposition of the complaint, if kept by name of associated person. This rule does not limit a broker-dealer's responsibilities under SRO and other regulations that may require creation and maintenance of records regarding, or reporting of, oral complaints. Paragraph (ii) of Rule 17a-3(a)(18) requires firms to make a record indicating that each customer has been provided with a notice of the address and telephone number of the department of the firm to which any complaints may be directed.48 This will assist both customers and broker-dealers to ensure that complaints reach the proper person or department so they can be recorded, reported (if necessary), and answered. Some commenters requested clarification of whether, in an introducing/clearing relationship,49 the contact information should be that of the introducing firm, the clearing firm, or both. To the extent not otherwise required, this should be a matter of negotiation between the introducing firm and the clearing firm.50 If contact information is provided for both firms, the notification should clearly indicate which firm the customer should contact and for what purposes. Two other commenters requested clarification as to whether this notification could take the form of a notice on customer statements.51 The Commission believes that firms should have flexibility as to how they may deliver this notice to customers, and inserting the notice on a customer statement is one acceptable alternative.
      E. Compensation

      Paragraph (a)(19)(i) of Rule 17a-3 requires firms to make a record as to each associated person listing each purchase and sale of a security 52 attributable, for compensation purposes, to that associated person. Again, the purpose for this requirement is to allow securities regulators to quickly identify compensation trends and focus examinations. The record must include the amount of compensation (if monetary) and a description of the compensation (if non-monetary). Under this requirement, firms must make records of all commissions, concessions, overrides, and other compensation to the extent they are earned or accrued for transactions. In addition, if the compensation is non-monetary, that description should include an estimate of its value.

      The term "non-monetary compensation" includes compensation such as sales incentives, gifts, or trips that would be provided to associated persons if certain sales goals were achieved. Such non-monetary compensation should be recorded if directly related to sales. If sales would be counted toward achieving these goals, then a notation of the sales should be made regardless of whether that goal is actually achieved. Non-monetary compensation does not include items of little value distributed by the firm.

      Paragraph (ii) of new Rule 17a-3(a)(19) 53 requires that firms maintain a record of all agreements pertaining to the relationship between each associated person and the broker-dealer, including a summary of each associated person's compensation arrangement or plan. Further, to the extent that compensation is based on factors other than remuneration on a per trade basis, the firm must make a record that describes the method by which compensation is to be determined.

      It should be noted that the requirement under paragraph (ii) that a broker-dealer maintain a record of all agreements between itself and each associated person includes verbal agreements and records, such as commission schedules, which may change on a periodic basis.

      The term "relationship," as used in paragraph (a)(19) of Rule 17a-3, solely refers to the employment or contractual relationship between the associated person and the broker-dealer. It would not relate to personal relationships unrelated to the firm's business.
      F. Compliance With Requirements for Communications With the Public

      New paragraph (a)(20) of Rule 17a-3 54 requires each firm to make a record documenting that the firm has complied with, or adopted policies and procedures reasonably designed to establish compliance with, applicable federal regulations and SRO rules which require that a principal approve any advertisements, sales literature, or other communications with the public.55 This paragraph would apply to marketing materials, sales scripts, and other paper or electronic material, such as audio or video tapes, used by broker-dealers in communicating with the public. This paragraph, which is designed to allow State Securities Regulators to examine broker-dealers for compliance with SRO rules relating to communications with the public, does not establish a new source of supervisory responsibility. In addition, a broker-dealer has many options as to how it may create this record.56

      The Commission did not adopt the portion of this rule as reproposed that referenced specific types of advertisements or sales literature. Instead, the Commission will defer to SRO rules as to which communications with the public must be approved by a principal of the firm.
      G. Persons To Explain Records and Their Content

      Paragraph (a)(21) of Rule 17a-3 requires a record listing, by name or title, all personnel at an office who, without delay, can explain the types of records the firm maintains at that office, and the information contained in those records. Commenters, particularly the States, indicated that this requirement is important because recordkeeping practices typically vary from firm to firm in ways ranging from format and presentation to the name of a record. Therefore, each firm must be able to promptly explain how it makes, keeps, and titles its records. To comply with this rule, a firm may identify more than one person and list which records each person is able to explain.

      Because it may be burdensome for firms to keep this record current if it lists each person by name, a firm may satisfy this requirement by recording the persons capable of explaining the firm's records by either name or title.
      H. Record Listing Principals of the Firm

      New paragraph (a)(22) of Rule 17a-3 requires firms to make a record listing each principal of the firm responsible for establishing policies and procedures reasonably designed to ensure compliance with any applicable securities regulatory authority requirements that require acceptance or approval of a record by a principal. This requirement is unchanged from the reproposal, and is intended to assist securities regulators by identifying individuals responsible for designing a broker-dealer's compliance procedures and managing the firm.
      I. Definition of Principal

      Paragraph 17a-3(g)(2) defines the term "principal" to include any individual registered with a registered national securities association as a principal or branch manager of a member, broker or dealer, or any other person who has been delegated supervisory responsibility for the firm or its associated persons. By including any person who has been delegated supervisory responsibility in the definition of the term "principal," the rule has been modified from the reproposal to include the definitions of "principal" used by other securities regulatory authorities.
      J. Definition of Securities Regulatory Authority

      The definition of "securities regulatory authority" in paragraph (g)(3) of Rule 17a-3 is substantially similar to that in the Reproposing Release, except that State Securities Regulators are identified as "the securities commissions (or any agency or office performing like functions) of the States * * *" 57 mirroring the language that Congress used in NSMIA.
      K. Miscellaneous

      The Commission has not adopted reproposed paragraph (a)(20) of Rule 17a-3, which would have required firms to make a record as to each associated person listing chronologically all customer purchase or sale transactions for which the associated person entered the order or was primarily responsible. Commenters stated that the information required in this record would already be maintained in other records, although not necessarily in the chronological format that this paragraph would have required. The Commission also has not adopted reproposed paragraph (a)(23) of Rule 17a-3, which would have required a firm to make a record listing each office of the firm and whether that office had been designated as a State record depository, since firms need no longer designate a State record depository for any purpose. This proposed record also would have required firms to list each associated person working out of or storing records at each office. The Commission has not adopted this requirement because firms are required to make a record of similar information under new paragraph (ii) of Rule 17a-3(a)(12).58

      IV. Office Records

      The Reproposing Release would have required that broker-dealers make certain records for each local office and maintain copies of those records at the office to which the records relate. These requirements were designed to assist securities regulators when conducting sales practice examinations at particular offices. The Commission has adopted the requirements regarding the creation of these records substantially as reproposed, but has materially altered the alternatives for maintenance of those records.

      Generally, State Securities Regulators supported a requirement that records as to a particular office be maintained at that office, even if only electronically. The State Securities Regulators stated, in their comment letters, that they had encountered excessive and costly delays when conducting examinations when records were kept at another office. In sum, they stated that although firms generally had the records available in local offices, the firms preferred to funnel all records requested by examiners through their centralized compliance departments in order to assure accuracy, anticipate any potential violations, review material for applicable privileges, and make a record of documents reviewed by regulators.59 While the State regulators have the power to impose fines and penalties on firms that fail to timely produce records, the delays still result in unnecessary, wasted examination time at firms waiting for the records production. The delay is costly for regulators, particularly when they travel to remote areas to conduct surprise examinations at an office where they may spend numerous days awaiting the records.60

      The broker-dealer commenters were strongly opposed to this requirement for two main reasons. First, they stated that the requirement to maintain copies of documents at all local offices would be costly and burdensome because they would need to create and maintain two sets of records. They stated that even with the flexibility of being able to maintain the records electronically, this requirement would be costly because many firms do not currently have computer systems capable of retaining and producing all the required records. Second, firms stated that maintaining records at all local offices would force them to decentralize their recordkeeping, which would potentially compromise their controls on recordkeeping and supervisory practices.

      Requiring records to be maintained at each local office was the requirement most seriously disputed by the firms. The reproposal has been altered to allow a firm, rather than to maintain records at an office, to produce the records promptly at the request of a representative of a securities regulatory authority at the office to which the records relate or at such other place as is agreed to by the representative. These alternative methods for complying with paragraph (k) of Rule 17a-4 were added in response to comments that the requirement, as reproposed, would have forced firms to decentralize their recordkeeping systems and would have compromised their internal controls and supervisory practices.61

      The Commission believes that the amendments to Rules 17a-3 and 17a-4 adopted today, which set forth, (i) the definition of "office," (ii) what records must be created as to each office,62 and (iii) what records must be maintained at each office,63 address the concerns of both regulators and broker-dealers.

      A. Definition of Office

      For both creation and maintenance of records, the definition of "office" adopted by the Commission includes any location where an associated person regularly conducts business.64 However, an office would not include a customer's office that an associated person may visit on a regular basis. The Commission has also addressed concerns that arise when an associated person's residence is an office. Rule 17a-4(k) states that a broker-dealer is not required to produce records at an office that is a private residence, provided that (i) only one associated person, or multiple associated persons who reside at that location and are members of the same immediate family,65 regularly conduct business at the office; (ii) the office is not held out to the public as an office; and (iii) neither customer funds nor securities are handled at that office. Instead, Rule 17a-4(k) allows a broker-dealer to either maintain those records at some other location within the same State as that office as the broker-dealer chooses, or to promptly produce those records at an agreed upon location. For purposes of paragraph (f) of Rule 17a-3 66 and paragraph (k) of Rule 17a-4,67 in circumstances where an associated person works out of multiple offices, such as bank circuit riders, a firm may treat all the locations where the associated person regularly works as a single office.68
      B. Records "As To" Each Office

      New paragraph (f) of Rule 17a-3 requires firms to make and keep current, separately for each office, certain books and records that reflect the activities of the office.69 It should be noted that 75% of broker-dealers have reported that they have no branch locations.70 The definition of "office" may be broader and more inclusive than the definition of "branch," however. The Commission removed the sentence, "This requirement may be satisfied by demonstrating that the data is maintained in a system which is capable of promptly generating records for each office upon request", because the requirement to either maintain the specified records at each location or produce them on the same day a request is made has been changed to allow firms to produce these records promptly.
      C. Records To Be Maintained at Office Locations

      There have been two major changes to new paragraph (k) of Rule 17a-4 from the reproposal. First, the requirement to maintain certain records at the office locations has been expanded from one year to two years. This was done to establish parity with the retention requirements for the separate sections as provided under paragraph (b) of Rule 17a-4.

      Second, under paragraph (k) of Rule 17a-4, if a broker-dealer does not maintain records at an office, but instead chooses to produce the records upon request, the broker-dealer must produce the records "promptly."71 The word "promptly" has deliberately not been defined in the rule. Generally, requests for records which are readily available at the office (either on-site or electronically) should be filled on the day the request is made. If a request is unusually large or complex, then the firm should discuss with the regulator a mutually agreeable time-frame for production.72

      Based on the foregoing, the Commission has not adopted the reproposed provision of Rule 17a-4(k) that would have allowed firms to maintain records at a State records depository in lieu of maintaining the records at the office to which the records relate.

      One commenter requested guidance on how this paragraph relates to a foreign office of a U.S. registered brokerdealer.73 Under paragraph (f) of Rule17a-3, a broker-dealer must make certain records for a foreign office; however, a broker-dealer is not required to maintain or produce those records at the foreign office under paragraph (k). Instead, those records would be maintained at the broker-dealer's main office.

      V. Rule 17a-4

      A. General Record Retention Requirements

      Paragraphs (a) and (b)(1) of Rule 17a-4 list certain records required under Rule 17a-3 that must be kept for six and three years, respectively. The amendments to these two paragraphs have been modified from the reproposal to remain consistent with the modifications to Rule 17a-3.
      B. Retention of Communications

      Paragraph (b)(4) of Rule 17a-4 previously required that each brokerdealer keep originals of all communications received and copies of all communications sent by the firm relating to its business as a brokerdealer, including inter-office memoranda and communications. With respect to memoranda, including e-mail messages, the Commission has stated that the content and audience of the message determine whether a copy must be preserved, regardless of whether the message was sent on paper or sent electronically.74 The amendments to this paragraph adopted today will require firms to retain communications that are subject to SRO rules regarding "communications with the public" (such as advertising) as well, a requirement reproposed separately as paragraph (b)(10) of Rule 17a-4. This requirement is designed to provide State Securities Regulators with the ability to access these public communications records so they can enforce their laws relating to the form and use of public communications.

      It should be noted that a written advertisement that is never released to the public would not be covered by this rule; however, a sales script that is used by an associated person when communicating with the public would be covered even if the script itself is not delivered to the public.

      The requirement, as reproposed, that "any written procedures [a broker-dealer] uses for reviewing the communications received or sent" has been moved to new paragraph (e)(7) of Rule 17a-4, which requires firms to keep all compliance, supervisory, and procedures manuals, including any written procedures for reviewing communications.
      C. Organizational Documents

      The Commission has modified paragraph (d) of Rule 17a-4, which require a broker-dealer to maintain certain organizational records. Specifically, the Commission has added language to clarify that organizational records of legal entities not specifically delineated in the present rule 75 are still required to be preserved under this rule. Various State statutes use different terms to describe the legal entities that may be created under their rules and the organizational documents necessary to create those entities; accordingly, the Commission has included in this paragraph generic terms to describe the types of records that firms must keep. The Commission believes that generally broker-dealers that are not formed as corporations or partnerships are already keeping these types of records and that this amendment codifies current business practices. Similar to the amendment to paragraph (g)(3) of Rule 17a-3 noted above, the Commission has replaced the phrase "state securities jurisdictions and self-regulatory organizations" in the Reproposing Release with the term "securities regulatory authorities." Under this paragraph, every broker-dealer is also required to maintain copies of its Form BD and all amendments thereto. To comply with this requirement with respect to amendments to Form BD, a broker-dealer is required to retain a copy of only those portions of the Form that were amended. The Commission believes that generally broker-dealers are already keeping these records and that this amendment codifies current business practices.
      D. Account Record Information

      New paragraph (e)(5) of Rule 17a-4 requires broker-dealers to retain account record information for six years. The six-year period begins either at the time the account is closed or when the information is replaced or updated. This provision will allow regulators to review account record information for at least the six years immediately prior to the examination or investigation. Broker-dealers generally maintain account record information for at least the life of the account to facilitate a number of business purposes, including suitability determinations and supervision of accounts and representatives.
      E. Special Reports

      New paragraph (e)(6) of Rule 17a-4 requires a firm to keep for three years a copy of all reports that a securities regulatory authority has requested or required a specific firm to create. Such special reports would include those reports that are requested or required under an order or settlement that requires the firm to produce the report as part of the terms of the order or settlement. The purpose of this paragraph is to clarify that these records must be kept and to provide guidance as to how long firms are expected to maintain these records.

      This requirement is not designed to limit the ability of securities regulatory authorities to obtain records that are otherwise required to be created and maintained, such as records of internal communications required to be maintained under paragraph (b)(4) of Rule 17a-4.
      F. Compliance, Supervisory and Procedure Manuals

      The Commission is also adopting, as reproposed, new paragraph (e)(7) of Rule 17a-4. This paragraph requires firms to retain a copy of all compliance, supervisory, and procedures manuals describing the firm's policies and practices with respect to compliance and supervision, as currently in use and for three years after the termination of the use of each manual, including any updates, modifications, and revisions to the manuals. This will ensure that securities regulators are able to obtain information as to what policies and procedures were in place at a given time.
      G. Exception Reports

      New paragraph (e)(8)(ii) of Rule 17a-4 requires firms to maintain copies of reports produced to review for unusual activity in customer accounts (commonly referred to as "exception reports"). This paragraph does not obligate broker-dealers to create exception reports. Exception reports would include reports that identify exceptional numerical occurrences, such as frequent trading in customer accounts, unusually high commissions, or an unusually high number of trade corrections or cancelled transactions. These reports will help securities regulators discover sales practice problems such as churning, unauthorized trading, or other indications of micro-cap fraud, and will also provide securities regulators with information as to what type of data may have been available to the broker-dealer. In lieu of retaining copies of the reports, a member, broker or dealer may choose to promptly re-create the reports upon request by a securities regulatory authority. If the broker-dealer elects to re-create exception reports instead of maintaining a copy of the report, but the firm has changed its systems so that it cannot re-create the same report, the broker-dealer may provide a copy of the report in the format presently available using historical data,76 but must also provide a record explaining each system change that affected each report.77 Lastly, if the firm is unable to re-create the report in any format for the most recent 18 months, due to changes, for example, in a database, software, or physical system, the rule provides that the broker-dealer may instead provide a record of the parameters that were used to generate the report for the time period specified by the representative of the securities regulatory authority. The Commission provided these alternatives in order to make this rule less burdensome on broker-dealers.

      Many firms commented that this requirement would be potentially counter-productive because, if firms are required to retain copies of all reports that they create, they would create fewer reports. However, the Commission believes that broker-dealers will continue to create those exception reports that are necessary to adequately supervise their business, and that retaining these reports will increase the efficiency of examinations by regulators and may reduce the examination burden on broker-dealers.

      VI. Effective Date

      The final rules adopted today shall become effective May 2, 2003.

      VII. Technical Amendments

      A. Electronic Storage Media

      On February 5, 1997, the Commission amended Rule 17a-4 to allow broker-dealers to employ, under certain conditions, electronic storage media to maintain its records.78 The Commission proposed and is now adopting technical amendments to that rule.79 The Electronic Storage Media Release requires a broker-dealer that employs micrographic or electronic storage media to be ready at all times to immediately provide a facsimile enlargement upon request by the Commission or its representatives.80 It also requires a broker-dealer that exclusively uses electronic storage media to fulfill some or all of its record preservation requirements to contract with a third party download provider that will file undertakings with the broker-dealer's designated examining authority indicating that the download provider will furnish promptly to the Commission, its designees or representatives, the information necessary to download information kept on the broker-dealer's electronic storage media.81 Because SROs and State Securities Regulators are neither representatives nor designees of the Commission but, to the extent that they have jurisdiction over the broker-dealer serviced by the third party download provider, are organizations that should have access to facsimile enlargements and download information, the Commission is adopting these technical amendments to provide them with access to these records. The Commission is also adopting these technical amendments so that when broker-dealers use the undertaking option under Regulation ATS, SROs and State Securities Regulators will have access to those records.82
      B. Other Technical Amendments

      The Commission is adopting amendments to Rule 17a-3(a)(12)(i) to update the list of stock exchanges for which an associated person's application for registration or approval may be used to satisfy the requirements under that paragraph. This amendment is a codification of current practices. The Commission is also adopting amendments to the language throughout Rules 17a-3 and 17a-4 that eliminate masculine references, and replace them with gender neutral references.

      VIII. Costs and Benefits of the Amendments

      In the Reproposing Release, the Commission requested comment on the costs and benefits associated with the reproposed rules and rule amendments.83 Of the comments received by the Commission, fifty-seven commenters discussed the benefits and costs associated with the reproposal. Of those commenters, thirty were broker-dealers,84 twenty-two were States,85 two were consumer groups,86 two were other groups,87 and one was an individual.88 Most of the commenters (including all of the broker-dealer commenters) argued that the costs outweighed the benefits of the reproposed amendments and that the cost estimates provided in the Reproposing Release were too low. Although most of those arguments were general in nature, twenty-three commenters specifically referenced paragraph (a)(17)(i) of Rule 17a-3,89 and fifteen commenters specifically referenced paragraph (k) of Rule 17a-4.90 All the States and the consumer groups that commented argued that most broker-dealers presently maintained most, if not all, the records required under the reproposed amendments, and that the benefits, although difficult to quantify, justified any costs which might be incurred.

      One commenter stated that wellorganized firms are less likely to experience the potentially catastrophic losses that result from serious securities violations.91 Many State Securities Regulators indicated in their comment letters that their agencies generally found that firms with inadequate books and records were more likely to have other problems, such as inadequate supervisory systems and selling-away issues. According to the NASD's Office of Dispute Resolution, $126 million and $76 million were awarded by NASD arbitrators in 1999 and 2000 respectively in customer claimant cases, of which $48 million and $21 million respectively constituted punitive damages.92 The vast majority of claims filed for arbitration with the NASD's Office of Dispute Resolution during this time period related to sales practice issues. In addition, two industry participants estimated that they presently pay outside counsel approximately $50 million and $25 million respectively each year to deal with sales practice complaints.93 Many States indicated that they believed the amendments would impose only minimal additional costs to brokerdealers because, in their experience, many broker-dealers already maintain the records required by the amendments in order to comply with SRO rules, State laws that applied prior to NSMIA, or simply to properly manage costs and supervise offices. Further, some States indicated that they believed that brokerdealers were exaggerating the potential costs of the reproposed amendments.94 In fact, the States of Connecticut 95 and Florida 96 conducted special reviews, in conjunction with their examination programs, to determine the extent to which broker-dealers already maintained the records required under the Reproposal at office locations. The State of Connecticut concluded that its review "overwhelmingly indicate[d] that all the books and records that would be required by the re-proposed rule proposal are, at the present time, being maintained in offices within Connecticut and similarly outside the state." Further, Connecticut stated, "During this review process the records were immediately available for inspection upon request," and "the types of records required by the reproposed rule would not be burdensome in that the firms retained substantially more records than required." Connecticut also stated, "[t]he retention schedules listed in the firms' compliance [manuals] were consistent with the requirements under the reproposed rule." Florida stated, "[t]he reviews indicated that based on records maintained most branch offices met or exceeded the records requirement for the [re-]proposed rule, and "[a] vast majority of the branch offices maintained the records on-site for periods of at least 2 years (and in some cases up to 6 years)." Further, Connecticut stated, "[t]he firms' recordkeeping requirements did not vary from location to location or even state to state because they were required by the firms' own compliance manuals," and "[i]n certain instances, the firms' compliance manuals indicated that these additional records were necessary to adequately supervise its branch operations." Similarly, Florida stated, "[m]anagement of several firms visited reported that record creation and retention is a nationwide requirement; the same for all offices in all states, not specific to the state of Florida * * * [t]his information was verified by the firms' Operational/Supervisory Compliance Manuals."

      A number of the States contend that investors are defrauded of millions and millions of dollars every year as a result of sales practice violations by broker-dealers.97 Further, Commission staff found through "The Large Firm Project" 98 "25% of the branch office examinations conducted in this project resulted in referrals for enforcement investigation and possible disciplinary action," and "[t]he examinations also revealed that some branch office managers were not implementing firm procedures adequately," and recommended that "the Commission should develop better means of identifying sales practice problems." 99 The enhanced recordkeeping requirements would help make available critical information necessary for securities regulatory authorities to discover and take appropriate action for various securities violations, particularly sales practice violations. The cost to securities regulatory authorities to obtain the same information and evidence that otherwise would be available by these rules from other methods would be high. In addition, the possibility exists that government regulatory authorities would be unable to obtain certain information by any other means if the information is not required to be kept. Investigatory delays often lead to additional investor losses. The State of New Jersey contended that these delays could lead to an erosion of public confidence in the industry, which can be exacerbated by the public's belief that securities regulatory authorities lack the ability to properly oversee broker-dealers and enforce securities regulations.100 NASAA commented that lack of public confidence in the marketplace can lead to an inability of issuers to raise capital.101

      Most broker-dealer commenters indicated that two of the reproposed amendments would cause them to incur substantial additional costs. These two amendments were paragraph (k) of Rule 17a-4, which required that records be maintained at local offices or that firms produce those records at the local office on the same day a request for records was made by a regulator at that local office, and paragraph (a)(17)(i) of Rule 17a-3, which required that a brokerdealer provide customers with a copy of their account record at specified times. As a result of comments received in response to the Reproposing Release, the Commission substantially modified those two amendments as described above.

      The only other paragraphs brokerdealers specifically identified as resulting in increased costs were (a)(6) and (a)(7) of Rule 17a-3, which require that brokerage order tickets include the time of receipt, and that dealer order tickets include a notation of any modifications to an order. The Commission addressed some of these comments by modifying paragraph (a)(6) to provide an exemption for mutual fund and variable contract orders processed on a subscription-way basis. Further, for certain securities, the receipt time and notation of modification are already required under SRO rules.102 The only cost to firms resulting from these paragraphs relate to assuring that processes for recording this information will record the information for all orders that are not exempt and not just those orders covered by SRO rules.

      A few commenters attempted to provide alternative cost estimates for use in calculating the costs of the amendments. Some firms provided specific numbers, but provided no explanation as to the source of their estimates or their reason for believing that they would be more accurate than the Commission's estimates. In addition, certain costs are no longer relevant because the Commission substantially modified the amendments in response to comments. Accordingly, after consideration of all of the circumstances, the Commission has altered its cost estimates to reflect the fact that changes were made to the amendments in response to the comments received. Further, where the amendments were not altered significantly, the Commission has substantially increased estimates of costs that commenters argued were significantly underestimated.

      The Commission estimates that the aggregate cost of these amendments will be approximately between $78.2 million and $84.3 million in the first year, and between $52.5 and $58.6 million per year thereafter (depending on what estimated postage cost is included in the calculations). Dollar costs relating to specific amendments are detailed below.

      For purposes of this cost-benefit analysis, the amendments to Rules 17a-3 and 17a-4 are divided into three groups: (i) Those pertaining to the maintenance of office records and alternatives to these requirements; (ii) those pertaining to the periodic updating of customer information; and (iii) all other new requirements covered by the amendments.

      A. Changes To Rule 17a-4, Including Maintenance of Office Records and Alternatives To These Requirements

      As amended, Rule 17a-4 requires broker-dealers to maintain certain records at each office. As discussed above, new Rule 17a-4(k) was modified from the reproposal to provide brokerdealers with the alternative of "promptly" producing certain records pertaining to a particular office at that office or at a mutually agreeable alternative location. This modification should significantly reduce the compliance costs associated with the amendments.

      The amendments standardize the amount of time broker-dealers must maintain certain records, and may thereby increase the amount of time these records are kept by certain firms. Broker-dealers generally maintain these records already to comply with Federal laws or regulations, SRO rules, or in the normal course of business. These records include, (i) information relating to the principals responsible for reviewing and updating policies and procedures, (ii) copies of Forms BD, BDW and amendments thereto, (iii) copies of compliance, supervisory, and procedures manuals, (iv) customer account records, (v) order ticket information, (vi) records relating to compensation of associated persons, (vii) evidence of compliance with SRO advertising and sales literature rules, (viii) exception reports, and (ix) specialized reports produced pursuant to an order or settlement. The amendments will also standardize the type of records that must be kept by broker-dealers and the manner in which those records must be produced during examinations. Before NSMIA, States had various books and records requirements. Although these requirements were similar to Commission and SRO requirements, differences existed that broker-dealers had to track and comply with. As one commenter stated, "the cost savings to industry of moving from compliance in the pre-NSMIA days with a variety of State laws to a new uniform should be equally substantial and should more than make up for any [additional] burden imposed by the [amendments]." 103 The uniformity provided by NSMIA and these amendments to Rules 17a-3 and 17a-4 should result in significant cost savings to broker-dealers that operate in multiple jurisdictions.
      1. Benefits

      The amendments should result in increased efficiency and effectiveness of broker-dealer examinations, especially with respect to small offices. Increasing the efficiency of examinations tends to decrease the costs incurred by both regulators, whose staff spends time conducting examinations, and broker-dealers, whose personnel may be inconvenienced for the period the examiners are present in their offices. One State estimated that the average cost for them to perform an office examination was $1,300 to $1,500 per day.104 Another State suggested that a local office with well organized records normally takes 2 to 3 days to complete, but that an office with incompleterecords takes an additional 2 or more days.105 While average costs and time periods may vary from State to State, their operations tend to be similar and the Commission expects the amendments to reduce the time and costs of State securities examinations. This will also allow regulators to identify abusive practices earlier during inspections and perform more targeted examinations. In addition, brokerdealers should benefit by having their operations interrupted for shorter time periods. Costs of examinations may also be further reduced due to the uniformity of the recordkeeping provided by the amendments, because regulators and broker-dealers will know what records the firms should have on hand.
      2. Costs

      The amendments were drafted to permit flexible methods for the creation and maintenance of records in order to reduce the burdens on broker-dealers. This gives broker-dealers the flexibility to choose the least costly method to comply with the rules based upon their present processes and systems capabilities.

      The Commission believes that the amendments to Rule 17a-4 will not impose significant cost burdens because, in order to comply with federal laws or regulations, SRO rules, or in the normal course of business, broker-dealers already maintain most of the records specified in the amended rule. Similarly, broker-dealers already are required to provide regulators with books and records on demand. The Commission estimates that the amendments to Rule 17a-4 could result in additional costs for some broker-dealers who do not presently maintain certain items for the prescribed periods of time or in a manner where they can be easily segregated by office. On average, the Commission estimates these additional costs incurred by each broker-dealer to ensure compliance with the amendments to Rule 17a-4 to be approximately $405.00 106 per year, resulting in an overall cost to the industry of about $2.9 million per year.107

      Also, as mentioned previously, the State of Connecticut concluded in its study that, "the types of records required by the re-proposed rule would not be burdensome in that the firms retained substantially more records than required." 108
      B. Periodic Updating of Customer Account Record Information

      Paragraph (a)(17) of Rule 17a-3 requires broker-dealers to obtain additional account record information. Present federal and SRO rules require that firms obtain and maintain that same information in many circumstances,109 and many broker-dealers presently obtain and maintain this information as a prudent business practice to avoid disputes with customers, or for other business reasons.

      The amendments also require that broker-dealers send account record information 110 to customers for verification within thirty days of account opening and at least every thirty-six months thereafter 111 and to require that broker-dealers provide customers with certain account record information when changes are made.112 Many broker-dealers already send customers notification of address changes,113 and some also send a copy of a customer's new account form to the customer when an account is opened.114 While there is presently no requirement to send a copy of the customer account record at least once every 36 months to verify the information, broker-dealers are required to keep their records current.115
      1. Benefits

      The amendments should benefit broker-dealers by assuring that they have up-to-date information when making investment recommendations and reviewing suitability of certain transactions or investment strategies. Further, both broker-dealers and their customers will benefit by assuring that there is mutual understanding of the customer's financial position and objectives for the account. Indeed, requiring broker-dealers to update customer account records may assist less well managed firms in better supervising their operations to identify potential problems before they lead to regulatory or legal exposure and monetary losses.

      Moreover, the amendments have been modified to exempt corporate accounts, inactive accounts, and accounts not requiring a determination of suitability. These changes reduce the total number of accounts covered by the updating requirements by over 25,000,000.116
      2. Costs

      The requirement to send account record information to customers will cause firms to incur costs to update their processes, and, with respect to the individual mailings, will add preparation expenses and additional postage charges. Further, firms will incur additional costs to update account information when customers notify the firm that their account record information has changed. Because broker-dealer processes, systems capabilities, and customer bases vary so widely, it is difficult to provide an estimated cost with which all parties will agree; however, the Commission estimates that for each of the 23,500,000 accounts to which a copy of the account record must be sent each year,117 broker-dealers will spend an average of approximately 3.28 minutes 118 (including time for processing and any updating) costing between $1.36 and $1.62 per piece,119 including postage.

      Thus the aggregate cost of Rule 17a-3(a)(17) is estimated to be between $32 million and $38.1 million (depending on what estimated postage cost is included in the calculations). In addition, the Commission estimates that all broker-dealers will, on average, incur a one-time cost of approximately $312.00 each 120 to update their forms, resulting in an aggregate cost of approximately $2.25 million. As described more fully below, the Commission estimates that large brokerdealers (broker-dealers having over 100,000 accounts) will, on average, incur startup costs and ongoing costs to purchase and maintain additional equipment and develop systems of $.31 per account and $.25 per account respectively. Based upon the comment letters,121 the Commission believes that the additional costs for smaller brokerdealers is included in the hourly burden costs delineated above.

      Two large broker-dealers estimated the start-up costs of purchasing equipment and modifying systems to range from $1,000,000 122 to $1,300,000.123 These two firms had a total of approximately 7,500,000 accounts which appeared to be subject to the updating requirement. The startup costs per account, based upon these figures, is approximately $0.31 (($1,000,000 + $1,300,000)/7,500,000 accounts). It is important to note that the firms' estimates were based upon the assumption that they would have to update all of their accounts. Since the amendments adopted today provide an exemption for corporate accounts, inactive accounts, and accounts for which no suitability determination must be made, the actual costs will probably be much lower. These two firms further estimate that ongoing costs for equipment and systems development would range from $300,000 124 to about $1,600,000 125 per year. The ongoing costs per account would be $0.25 per account (($300,000 + $1,600,000)/7,500,000 accounts). Therefore, the total additional start-up and ongoing costs to obtain equipment and develop systems for these two large firms would be $0.56 per account ($0.31 + $0.25). Of the 70,500,000 accounts, 68,385,000 (97%) belong to large brokerdealers that have more than 100,000 accounts, therefore the total start-up costs for large broker-dealers to purchase equipment and develop their systems is about $21.2 million (68,385,000 x $0.31). Similarly, the ongoing equipment and systems development costs for large brokerdealers would be about $17.1 million per year (68,385,000 x $0.25).
      C. Other New Requirements Covered by the Amendments

      Paragraphs (a)(12) and (a)(19) of Rule 17a-3 require broker-dealers to keep certain records regarding each associated person, including all agreements pertaining to the associated person's relationship with the brokerdealer and a summary of each associated person's compensation arrangement,126 a record delineating all identification numbers relating to each associated person,127 a record of the office at which each associated person regularly conducts business,128 and a record as to each associated person listing transactions for which that person will be compensated.129 The Commission believes that broker-dealers generally create and maintain these records already under prudent recordkeeping procedures.130 The list of transactions for which each associated person will be compensated can be created at the time of an examination.

      Paragraph (a)(18) of Rule 17a-3 requires broker-dealers to keep a record relating to written customer complaints and maintain a record of whether customers were provided with an address where they should direct complaints. Firms may, instead of creating a separate record of complaints, simply maintain a copy of each complaint, along with a record of the disposition of the complaint.

      Paragraphs (a)(6) and (a)(7) of Rule 17a-3 have been amended to require that broker-dealers also record the identity of the associated person responsible for an account and the identity of the person who accepted the order, and whether the order was entered pursuant to discretionary authority. In addition, the amendment to paragraph (a)(6) requires that firms record the time an order was received from a customer, and the amendments to paragraph (a)(7) require that firms make a record of any modifications to an order. Paragraph (a)(6) now contains an exception providing that, for transactions done on a "subscriptionway" basis, where an application or subscription agreement is sent to the issuer in place of an order ticket, brokerdealers may keep the application or subscription agreement in place of the order ticket. In addition, SRO rules already require that firms record and maintain certain of this information,131 and firms, to assist in their supervision of the activities of their associated persons and to assure that commissions are properly paid, already record the identity of persons as required under the amendments.

      The amendments also require brokerdealers to make records indicating that they have complied with applicable regulations of certain securities regulatory authorities,132 listing persons who can explain the information in the broker-dealer's records,133 and listing principals who are responsible for establishing compliance policies and procedures.134 The Commission believes that these amendments will cause broker-dealers to incur only minimal additional costs. Firms presently maintain records to evidence compliance with SRO and other rules, they presently maintain lists of principals or branch managers responsible for supervising each of their offices under other SRO rules, and they maintain lists of associated persons operating out of each office location. Firms must, as part of their supervisory system, identify principals responsible for reviewing the firm's procedures and taking action to achieve compliance with applicable securities laws, regulations and rules.135
      1. Benefits

      The records required by these sections are either presently required under other federal laws or rules or SRO rules or currently maintained by many firms as a prudent business practice. These amendments codify current recordkeeping practices and make clear what records broker-dealers may be required to provide to State and other regulators. These records are expected to assist firms in better supervising their operations and identifying potential problems before they lead to regulatory or legal exposure and monetary losses.
      2. Costs

      The Commission has endeavored to codify present broker-dealer business practices in these amendments and has adjusted the amendments based upon comments received in response to the Proposal and Reproposal, as discussed above. Thus, these amendments are not expected to change market or industry behavior significantly. For example, firms are presently required to maintain copies of all communications under Exchange Act Rule 17a-4(b)(4), and certain SRO rules require that members maintain copies of all written complaints and a record of the actions taken by the broker-dealer with respect to each complaint.136 Therefore, the Commission believes that amending Rule 17a-3 to require this information will not cause broker-dealers to incur any additional costs. Similarly, the Commission does not believe that the amendments to Rules 17a-3(a)(6) and 17a-3(a)(7) will cause any additional cost.

      Nevertheless, broker-dealers may incur costs in assuring that their present practices comply with the amendments. For example, the Commission believes that the requirement to provide customers with an address where they can send complaints will cause firms to incur a one-time cost of approximately $312.00 137 each, resulting in an aggregate cost of approximately $2.25 million. In addition, the Commission estimates that it will cost each firm an average of $50.83 per year to ensure compliance with paragraphs (a)(12) and (a)(19) of Rule 17a-3 (regarding associated person records),138 resulting in an aggregate cost of approximately $0.4 million per year. Finally, the Commission estimates that each firm will spend an average of approximately $16.88 per year to ensure compliance with other requirements,139 resulting in an aggregate cost of approximately $0.1 million per year.

      IX. Effects on Efficiency, Competition, and Capital Formation

      Section 23(a)(2) of the Exchange Act 140 requires the Commission, in adopting Exchange Act rules, to consider the impact any such rule would have on competition and to not adopt a rule that would impose a burden on competition not necessary or appropriate in furthering the purposes of the Exchange Act. Section 3(f) of the Exchange Act 141 provides that whenever the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. The Commission has considered the amendments to Rules 17a-3 and 17a-4 in light of the standards in Sections 23(a)(2) and 3(f) of the Exchange Act.

      In the Reproposing Release, the Commission requested comment on the effect of the reproposed rule amendments on competition, efficiency, and capital formation.142 The Commission received 115 substantive comment letters143 in response to the Reproposal. Approximately 44% were from broker-dealers opposing particular amendments and approximately 37% were from State Securities Regulators supporting the amendments. Few commenters provided any information on how these amendments would affect competition, efficiency, or capital formation. One commenter argued that, "[c]ompetition among broker-dealers is facilitated by the amendments to the [Books and Records Rules]" because they "[allow] firms to create and maintain records by alternative means * * *." 144 Conversely, a few of commenters argued that; (i) the requirement to maintain records at local offices would place an unfair competitive burden upon smaller broker-dealers who do not have the resources to utilize imaging technology,145 and (ii) the amendments would have a disparate impact on nontraditionally organized broker-dealers with limited businesses.146 In addition, a number of commenters, while not specifically addressing this issue, did argue that it would be duplicative to maintain records at a local office while also maintaining the same documents at a main office. In response to these concerns and others, the Commission has modified the amendments to allow firms the flexibility to promptly produce records at the offices to which they relate instead of maintaining those records at the offices,147 and has added exemptions in recognition of present business practices.148

      The Commission believes that any burden imposed by the amendments is justified by the enhanced investor protections described above. Further, as NASAA pointed out in its comment letter, when addressing Section 23(a) concerns, "the [amendments] to Rules 17a-3 and 17a-4, pursuant to a directive by Congress, must also reflect the needs of the State Securities Regulators as well as federal regulators."149 In addition, by improving examination capabilities of all securities regulatory authorities, the amendments should improve investor confidence in broker-dealer firms and help to maintain fair and orderly markets.

      Broker-dealers with larger customer bases would have correspondingly greater obligations under the amendments than smaller broker-dealers. Accordingly, any burden on competition should be slight, especially in light of the significant regulatory benefits discussed above.

      X. Summary of Final Regulatory Flexibility Analysis

      A Final Regulatory Flexibility Analysis ("FRFA") regarding the amendments to Rules 17a-3 and 17a-4 under the Exchange Act,150 which require broker-dealers to maintain certain additional records, specify that certain books and records must be maintained at each office, and set forth the length of time these records must be kept, has been prepared in accordance with the provisions of the Regulatory Flexibility Act (5 U.S.C. 604).

      A. Need for the Rules and Rule Amendments

      As discussed more fully in the FRFA, these amendments are intended to provide the Commission, SROs, and State Securities Regulators with timely access to broker-dealers' books and records to conduct effective examinations, investigations and enforcement actions. NSMIA prohibits States from establishing books and records rules that differ from, or are in addition to, the Commission's rules, and provides that the Commission must consult periodically with the States concerning the adequacy of the Commission's books and records rules,151 particularly with regard to whether the Commission's rules satisfy State Securities Regulators' need to have records readily accessible for their examinations.152

      If these amendments are not adopted, the Commission believes that the Commission staff and State Securities Regulators will be hampered in their efforts to obtain documentation, because the books and records that brokerdealers maintain may not always be sufficient or in such order as to enable regulators to conduct thorough and effective examinations, investigations, and enforcement proceedings. The Commission further believes that a failure to re-establish certain customer protection safeguards present in the marketplace prior to the enactment of NSMIA would reduce the regulatory oversight of broker-dealers. In addition, the Commission believes that this may also reduce customer confidence in the marketplace, which would be detrimental to market integrity and capital formation.
      B. Small Entities Subject to the Rule

      It is expected that these amendments will affect the approximately 1,000 broker-dealers that fall within the category of "small business" 153 ("Small Business Broker-Dealers"). The amendments would affect these Small Business' Broker-Dealers because they, like other broker-dealers, would have to create and maintain certain additional books and records and would have to provide access to specific books and records at each office. An OTC Derivatives Dealer would not be considered a small entity because of the minimum net capital requirement. A summary of the Initial Regulatory Flexibility Analysis ("IRFA") appeared in the Reproposing Release,154 where the Commission specifically requested comment with respect to the IRFA. In response to the Reproposing Release, the Commission received only one comment letter specifically concerning the IRFA.155 In addition, three other commenters addressed aspects of the reproposed rules and rule amendments that could potentially affect small businesses.156

      The commenter that did specifically discuss the IRFA stated, "The Initial Regulatory Flexibility Analysis does not give careful consideration to the economic impact on [broker-dealers that limit their business in certain ways157] of the new account cards, blotter records, and signatures of principals on account cards." However, the Commission has carefully considered the economic impact of these rules on various types of broker-dealers. Furthermore, the Commission notes that the commenter does not take into account the fact that, even with respect to broker-dealers that limit their business, existing NASD rules158 require that broker-dealers maintain certain customer account information, including the signature of a principal accepting the account, and that Rule 17a-3(a)(1) 159 presently requires that broker-dealers retain blotter records. The Commission has amended new paragraph 17a-3(a)(17) to provide an exemption from obtaining certain information where broker-dealers have no Federal or SRO suitability requirement and are therefore not otherwise required to obtain that information.

      Of the three commenters that addressed aspects of the reproposed rules and rule amendments that could potentially affect small businesses, one stated, "[t]he proposal to require blotters in local offices may cause an initial financial burden to firms which have * * * three or less broker offices." 160 Another argued that the requirement to maintain records at local offices "place[s] an unfair competitive burden on smaller broker-dealers who do not have the resources to image the required documents and place them upon a network that is available to both the firm's principal office and the local branch." 161 While the amendments as reproposed would require that firms maintain certain records in each local office or produce those records within the same business day that they are requested, the amendments have been changed in order to give firms the flexibility to produce those records promptly when they are requested by a representative of a securities regulatory authority. This change significantly reduces the cost of the amendments for most firms. In addition, recognizing that broker-dealers may not be required to maintain those records under SRO rules or other regulations, the Commission has attempted to reduce the impact of these amendments on firms that engage in certain specialized types of businesses by changing the amendments to allow those broker-dealers to utilize records they presently create and maintain in compliance with SRO or other rules and prudent business practices.

      Another firm contended that the requirement to update account records is unduly burdensome on smaller firms because such firms lack the automation to perform that task quickly and without additional personnel.162 The Commission has attempted to make these amendments sufficiently flexible to accommodate different types of operational systems, and broker-dealers may choose the operational methods that best suit their business in order to comply with the amendments. Lastly, another firm disagreed with the Commission's statement in the Reproposing Release that, "[l]arger broker-dealers would have correspondingly greater obligations under the amendments," 163 stating, "the 'wire house' firms will be virtually unaffected by this proposal," because "wire houses * * * have very few small offices." 164 To the extent that Small Business Broker-Dealers service fewer customer accounts, employ fewer associated persons, and operate fewer offices than larger broker-dealers, they will be affected by the rule in proportion to their size.
      C. Projected Reporting, Recordkeeping, and Other Compliance Requirements

      Most broker-dealers, including Small Business Broker-Dealers, already maintain many of the records specified in the amendments in the ordinary course of business. The Commission's intent has been to minimize the impact of the amendments on all broker-dealers by limiting, consistent with the objectives of the amendments, the number of instances in which broker-dealers would be obligated to create or maintain records that they do not already maintain in the ordinary course of business. In addition, the amendments were designed to be sufficiently flexible to accommodate different types of recordkeeping systems, and broker-dealers may choose the format in which they wish to maintain those records.
      D. Agency Action To Minimize Effect on Small Entities

      As discussed further in the FRFA, the Commission has attempted to minimize the economic impact these amendments might have on broker-dealers, including Small Business Broker-Dealers, while still achieving the overall objective of assuring that regulators have the ability to perform effective examinations, including examinations for sales practice issues. In response to comments elicited by the Reproposing Release, many significant changes were made to the amendments to reduce the burdens associated with these amendments.

      The Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. The Commission considered the following alternatives: (i) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (ii) the clarification, consolidation, or simplification of compliance and reporting requirements under the rules for small entities; (iii) the use of performance rather than design standards; and (iv) an exemption from coverage of the rule, or any part thereof, for small entities. The Commission also considered whether these alternatives to the reproposed rules and rule amendments would accomplish the stated objectives of improving the effectiveness of the Commission's and State regulatory agencies' ability to perform investigations, examinations and enforcement actions.

      The additional burdens placed on Small Business Broker-Dealers will vary depending upon the number of customer accounts at the firm, the number of associated persons employed by the firm, and the number of offices that the firm operates. Further, the rule provides substantial flexibility in the manner in which firms may comply with the amendments. Additionally, the Commission believes that obtaining essential information regarding the sales practices of all broker-dealers, including Small Business Broker-Dealers, is necessary to permit securities regulators to effectively oversee the securities markets and protect investors; therefore, the Commission does not believe that establishing differing compliance or reporting requirements for Small Business Broker-Dealers would be appropriate.

      The Commission believes that the proposal could not be formulated differently for Small Business Broker-Dealers and still achieve the stated objectives. The Commission has considered Small Business Broker-Dealers in developing the amendments and has determined that all types of broker-dealers, including Small Business Broker-Dealers, engage in sales practice abuses; therefore, the Commission does not believe that further clarification, consolidation, or simplification of the proposed amendments would be appropriate. As stated previously, however, the Commission has made every effort to assure that, to the extent possible, the amendments require broker-dealers to maintain the same types of records required under other federal and SRO rules or that firms usually maintain as part of their present business practices, and has highlighted instances where records that broker-dealers presently maintain may serve to fulfill the requirements under these amendments.

      The Commission does not believe that it would be appropriate to use performance standards, rather than design standards, with relation to these amendments. Because information must be collected and maintained in a uniform manner to be useful, design standards are necessary to achieve the objectives of the proposal. Any additional burden placed on broker-dealers by these amendments is dependent on the number of accounts serviced, the number of associated persons employed, and the number of offices operated. Thus, although the use of performance standards would be an inappropriate measure with relation to these amendments, the standards used do take into account the size of each firm. The Commission also notes that the recordkeeping requirements permit broker-dealers to keep records in different formats or systems as long as specified information can be sorted and produced upon request.

      Lastly, customers may be exposed to fraud and sales practice violations by Small Business Broker-Dealers as well as other firms. Exempting Small Business Broker-Dealers from coverage of the rules, or any part thereof, would create a gap in industry oversight, where regulatory authorities may be unable to obtain documentation necessary to conduct comprehensive examinations of Small Business Broker-Dealers. Therefore, the Commission believes that it should not exempt Small Business Broker-Dealers from the requirements of the amendments.

      The Commission believes that enacting the amendments in their present form is the best way to assure that regulators have the ability to perform effective examinations, including examinations for sales practice issues, and that no less burdensome alternatives are available to accomplish the objectives of the amendments. As stated previously, after NSMIA, States were constrained from "establishing books and records rules that differ from, or are in addition to the Commission's rules." 165 The States play an integral role in achieving customer protection by performing examinations on broker-dealers within their jurisdiction and reviewing for sales practice violations. Without these amendments, the States may be unable to obtain those books and records necessary to conduct comprehensive examinations. Finally, the Commission believes that most Small Business Broker-Dealers currently maintain certain of the additional records specified in the amendments.

      A copy of the FRFA may be obtained by contacting Bonnie L. Gauch, Attorney, United States Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-1001.

      XI. Paperwork Reduction Act

      Certain provisions of the amendments contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995.166 The Commission has submitted the amendments to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11 under the title "Books and Records Rule Amendments." The rules being amended contain currently approved collections of information under OMB control numbers 3235-0033 and 3235-0279 respectively. The collections and maintenance of information, and the reports made to the SEC and others that are required pursuant to Rules 17a-3 and 17a-4 are mandatory. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number.

      A. Collection of Information Under the Amendments

      As discussed previously in this release, the Books and Records Rule Amendments would require registered broker-dealers to maintain additional records with respect to purchase and sale documents, customer information, associated person information, customer complaints and certain other matters.
      B. Proposed Use of Information

      The information collected pursuant to the Books and Records Rule Amendments would be used by the Commission, SROs, and other securities regulatory authorities for examinations, investigations, and enforcement proceedings regarding broker-dealers and associated persons. No governmental agency would regularly receive any of the information described above. Instead, the information would be stored by the registered broker-dealer and made available to the various securities regulatory authorities as required to facilitate examinations, investigations, and enforcement proceedings. To comply with the amendments that require broker-dealers to update customer account records at least once every 36 months, brokerdealers would have to furnish the customers with copies of their account records. This requirement and the estimated burden associated with it are discussed in detail below.
      C. Respondents

      The Books and Records Rule Amendments would apply to all of the approximately 7,217 active brokerdealers that are registered with the Commission.167
      D. Total Annual Reporting and Recordkeeping Burden

      The hour burden of the Books and Records Rule Amendments is difficult to ascertain, because any additional burdens would vary widely due to differences in broker-dealer activity levels and current recordkeeping systems employed by the broker-dealers. Therefore, the estimates in this section are based on averages among the various types and sizes of broker-dealers. Recognizing that large broker-dealers maintaining over 100,000 customer accounts are generally more automated than small broker-dealers maintaining less than 100,000 customer accounts with relation to certain of the amendments, the Commission has attempted to provide for these differences in its calculations.

      Most of the requirements of the Books and Records Rule Amendments involve collections of information that broker-dealers already maintain pursuant to prudent business practices or to comply with existing SRO regulations. While some of the comment letters argued that the Commission's estimates set forth in the Reproposing Release were low, few contained actual alternative cost estimates, and none contained estimates which could be applied generally to broker-dealer firms. The Commission has increased its estimation of the expected burden of the amendments where, in general, commenters felt that the estimates were too low, and has provided a more detailed explanation of its estimates where it believes the amendments will impose little or no additional burden on broker-dealers. In addition, in response to the comments received relating to the Reproposing Release, the Commission modified its proposal and adopted amendments that reduce the amount of additional records that firms will be required to create and maintain.
      1. Rule 17a-3

      The amendments modify Rule 17a-3 by, among other things, requiring broker-dealers to send account information to customers for verification within 30 days of account opening and at least once every 36 months thereafter. As stated above, the total number of accounts that would need to be contacted for updating is 70,500,000.168 Approximately 70 of the 7,217 active, registered broker-dealers maintain over 100,000 accounts, and the remaining broker-dealers (7,147) maintain less than 100,000 accounts each. Of the 70,500,000 accounts which may be affected by these amendments, approximately 68,385,000 (or 97%) are maintained at these large broker-dealers, and 2,115,000 (or 3%) are maintained at broker-dealers with less than 100,000 accounts each.

      The Commission estimates that, as their processes are more automated, it will take large broker-dealers an average of 11.2 additional minutes per account every three years,169 thus requiring large broker-dealers to spend an additional 569,875 hours per year (68,385,000 account records/3 years x 1.5 minutes / 60 minutes) to send account information to customers. As small broker-dealers utilize processes which are more manual in nature,170 the Commission estimates that it will take small brokerdealers an average of 7 minutes per account 171 every three years, thus requiring small broker-dealers to spend an additional 82,250 hours per year (2,115,000 account records/3 years x 7 minutes/60 minutes) to send account records to customers. Thus the total additional burden on the industry to send account records to customers is 652,125 hours.

      The Commission estimates that approximately 20% 172 of the customers from whom information is requested will update their account record resulting in 4,700,000 updated account records each year (70,500,000/3 years x 20%). The Commission estimates that it would take, on average, 5 minutes for large broker-dealers to update each account and 10 minutes 173 for small broker-dealers to update each account, resulting in an additional burden of 403,417 hours per year ((4,559,000 account records x 5 minutes/60 minutes) + (141,000 account records x 10 minutes/60 minutes)). This estimate takes into account the amount of time it would take to receive the returned data and input any changes into the account record. While it is acknowledged that some customers will provide brokerdealers with changes to their account information outside of this update process, as those are changes brokerdealers must contend with in the present environment, the amendments create no additional burden in this regard. Broker-dealers presently maintain current account records in the ordinary course of their business because existing SRO rules require them to maintain current information about their customers.

      If a customer has provided the broker-dealer with updated account record information, under paragraphs (a)(17)(i)(B) (2) and (3) of Rule 17a-3 the broker-dealer must send a copy of the revised account record to the customer within 30 days after it received notification of the change or, under paragraph (a)(17)(i)(B)(3), the broker-dealer may send the notification with the next statement mailed to the customer. The Commission estimates that, in addition to the 70,500,000 updated account records discussed above, 3,525,000 customers (5% of the 70,500,000 accounts for which firms will be required to make the account record) will initiate changes to their account records on a yearly basis, just as they do now, with no prompting from any account record mailing. The Commission estimates, as stated above, that it will take large broker-dealers 1½ minutes and smaller broker-dealers 7 minutes to send out account information to each customer who updated their account. The Commission estimates that 8,225,000 (4,700,000 + 3,525,000) customers will update their account record, and that broker-dealers will spend an additional 228,244 hours each year ((7,978,250 account records x 1.5 minutes / 60 minutes) + (246,750 account records x 7 minutes / 60 minutes)) sending the updated account records to customers.

      The amendments also impose a requirement that broker-dealers obtain the following additional information for each account with a natural person as the customer: the customer name, tax identification number, address, telephone number, date of birth, employment status, annual income, net worth, investment objectives, and the signature of the associated person and a principal. Present Rule 17a-3(a)(9) already requires that a firm maintain a record of a customer's name and address. Further, SRO rules require that firms obtain and maintain records of: whether a customer is of legal age (firms usually obtain a customer's date of birth to satisfy this requirement), the signature of the registered representative and principal, a customer's tax identification number, the customer's occupation, and whether or not the customer is associated with another broker-dealer.174 In addition, certain SRO rules require that before making any recommendations to customers, broker-dealers obtain information, regarding the customer's annual income, net worth, and the investment objectives for the account in question in order to formulate a basis for any recommendation.175

      In addition, the amendments require that, if the account is a discretionary account, the firm must obtain (i) The signature of the customer granting discretion, (ii) the date discretion was granted, and (iii) the signature of the person to whom discretion was granted. Certain SRO rules require that for discretionary accounts, broker-dealers must obtain the signature of the person who was granted discretion, and the date discretion was granted,176 while other SRO rules require that firms obtain written authorization of the customer before exercising discretion in an account.177 Further, the Commission believes that obtaining these records is a prudent business practice followed by most broker-dealers to avoid disputes with customers.

      In addition to the account record requirements, the amendments require broker-dealers to keep certain records regarding their associated persons, including all agreements pertaining to the associated persons relationship with the broker-dealer and a summary of each associated person's compensation arrangement,178 a record delineating all identification numbers relating to each associated person,179 a record of the office at which each associated person regularly conducts business,180 and a record as to each associated person listing transactions for which that person will be compensated.181 The Commission believes that broker-dealers generally create and maintain these records under prudent recordkeeping procedures. Therefore, the Commission estimates that, on average, these records would require each broker-dealer to spend approximately 30 minutes each year to ensure that it is in compliance with these amendments, a total of about 3,609 hours ((7,217 broker-dealers x 30 minutes/60 minutes).

      The amendments also require brokerdealers to keep a record relating to written customer complaints that includes: the complainant's name, address, and account number; the date the complaint was received; the name of any associated person identified in the complaint; a description of the nature of the complaint; and, the disposition of the complaint. In order to account for differing broker-dealer practices, the Commission has provided brokerdealers with an alternative; instead of creating what may be a new record, broker-dealers can simply maintain a copy of each complaint, along with a record of the disposition of the complaint.182 Firms are presently required to maintain copies of all communications under Rule 17a-4(b)(4), and certain SRO rules require that members maintain copies of all written complaints and a record of the actions taken by the broker-dealer in specified offices, and that copies of options-related complaints be maintained in both the main office and in the branch office to which they relate.183 Most firms maintain copies of all complaints and related information and documents at their headquarters, and some already maintain both option and non-option complaints at all offices as well. While the Reproposal would have required that complaints relating to an office be maintained in that office or be produced on the business day they are requested, the amendments as adopted require only that records of complaints for an office be produced promptly at the office to which the complaints relate.

      The amendments also require broker-dealers to make records which indicatethat they have complied with applicable regulations of certain securities regulatory authorities,184 which list persons who can explain the information in the broker-dealer's records,185 and that list principals responsible for establishing compliance policies and procedures.186 Firms presently maintain records to evidence compliance with SRO and other rules; therefore, no additional burden is created by this amendment. The Commission believes that broker-dealers presently maintain lists of principals or branch managers responsible for supervising each of their offices under applicable SRO rules, and that they also have lists of associated persons operating out of each office location. Under certain SRO rules, broker-dealers must presently have supervisory systems in place that include identification of principals responsible for reviewing the firm's procedures and taking action to achieve compliance with applicable securities laws, regulations and rules.187 The Commission estimates, therefore, that on average each broker-dealer wouldspend 10 minutes each year to ensure compliance with these requirements, yielding a total additional burden of about 1,203 hours ((7,217 broker-dealers x 10 minutes/60 minutes).

      The amendments relating to order tickets require that broker-dealers note, in addition to information already required, the identity of the associated person responsible for an account and the identity of the person who accepted the order, and whether the order was entered pursuant to discretionary authority. In addition, the amendments to Rule 17a-3(a)(6) require that firms record the time an order was received from a customer, and the amendments to Rule 17a-3(a)(7) require that firms make a record of any modifications to an order. SRO rules already require that firms record, maintain, and in some cases report, the time an order was received, and information regarding modification and cancellation including instructions and the time.188 Further, firms who assign associated persons to particular accounts usually refer the customer to that person to initiate transactions. The identity of the person who accepted the order from the customer, whether or not it was the person assigned to the account, is generally recorded and maintained at the present time by firms as a prudent business practice that assists the firm in properly supervising the activities of their associated persons and assuring that commissions are properly paid. In addition, the amendment to Rule 17a-3(a)(6) contains an exception for transactions done on a "subscriptionway" basis, where an application or subscription agreement is sent to the issuer in place of an order ticket. For these types of transactions, brokerdealers may keep the application or subscription agreement in the place of the order ticket. Thus the Commission does not believe that the amendments to Rules 17a-3(a)(6) and 17a-3(a)(7) will cause any additional burden. In total, the Commission estimates that compliance with the amendments to Rule 17a-3 will require an additional 1,288,598 hours (1,283,786 189 + 3,609 190 + 1,203 191).
      2. Rule 17a-4

      The amendments modify Rule 17a-4 by requiring broker-dealers to maintain certain additional books and records, including a record listing all persons who are qualified to explain a brokerdealer's books and records. The amendments also require broker-dealers to make available certain records at each office. As discussed above, new Rule 17a-4(k) was modified to provide that, instead of requiring that firms either maintain copies of records in the office to which they pertain, broker-dealers now have the option of producing certain records which relate to a particular office "promptly." This significantly reduces the additional burden caused by the amendments to Rule 17a-4.

      The amendments also increase the amount of time broker-dealers must maintain certain records. Broker-dealers generally maintain these records to comply with other federal or SRO Rules or in the normal course of business. These records include, (i) information relating to the principals responsible for reviewing and updating policies and procedures, (ii) copies of Forms BD, BDW and amendments thereto, (iii) copies of compliance, supervisory, and procedures manuals, (iv) customer account records, (v) order ticket information, (vi) records relating to compensation of associated persons, (vii) evidence of compliance with SRO advertising and sales literature rules, (viii) exception reports, and (ix) specialized reports produced pursuant to an order or settlement. Based upon the information above, and due to the fact that the amendments to Rule 17a-4 require only that information be kept for prescribed periods of time, the Commission estimates that, on average, each brokerdealer would spend four hours each year to ensure that it is in compliance with the amendments to Rule 17a-4 and to produce required records promptly at an office when so required. Therefore, the Commission estimates that compliance with the amendments for Rule 17a-4 would require an additional 28,868 hours each year ((7,217 brokerdealers x 4 hours).
      E. Request for Comment

      Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to—(i) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (ii) Evaluate the accuracy of the agency's estimate of the burden of the proposed collections of information; (iii) Enhance the quality, utility, and clarity of the information to be collected; (iv) Minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. The Commission encourages commenters to identify and supply any relevant data, analysis and estimates concerning the burden of the proposed rules, especially where any commenter believes the Commission's estimates to be inaccurate.

      Persons desiring to submit comments on the collection of information requirements proposed above should direct them to the following persons: (1) Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503; and (2) Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609 with reference to File No. S7-26-98. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, so a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. The Commission has submitted the proposed collections of information to OMB for approval. Requests for the materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-26-98, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW., Washington, DC 20549.

      XII. Statutory Basis

      The amendments are adopted pursuant to the authority conferred on the Commission by the Exchange Act, including Sections 17(a) and 23(a).

      List of Subjects in 17 CFR Parts 240 and 242

      Brokers, Reporting and recordkeeping requirements, Securities.

      For the reasons set forth in the preamble, Title 17 Chapter II of the Code of Federal Regulation is amended as follows:

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

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

      Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

      Section 240.17a-4 also issued under secs. 2, 17, 23(a), 48 Stat. 897, as amended; 15 U.S.C. 78a, 78d-1, 78d-2; sec. 14, Pub. L. 94-29, 89 Stat. 137 (15 U.S.C. 78a); sec. 18, Pub. L. 94-29, 89 Stat. 155 (15 U.S.C. 78w);
      2. The authority citations following §§ 240.17a-3 and 240.17a-4 are removed.
      3. Section 240.17a-3 is amended by:
      a. Revising paragraphs (a)(6) and (a)(7);
      b. Revising the introductory text of paragraph (a)(12)(i);
      c. Revising paragraph (a)(12)(ii);
      d. Redesignating paragraphs (a)(12)(i)(a) through (a)(12)(i)(h) as paragraphs (a)(12)(i)(A) through (a)(12)(i)(H); and
      e. Adding paragraphs (a)(17), (a)(18), (a)(19), (a)(20), (a)(21), (a)(22), (f) and (g).

      The revisions and additions read as follows:

      § 240.17a-3 Records to be made by certain exchange members, brokers and dealers.

      (a) * * *
      (6)
      (i) A memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. The memorandum shall show the terms and conditions of the order or instructions and of any modification or cancellation thereof; the account for which entered; the time the order was received; the time of entry; the price at which executed; the identity of each associated person, if any, responsible for the account; the identity of any other person who entered or accepted the order on behalf of the customer or, if a customer entered the order on an electronic system, a notation of that entry; and, to the extent feasible, the time of execution or cancellation. The memorandum need not show the identity of any person, other than the associated person responsible for the account, who may have entered or accepted the order if the order is entered into an electronic system that generates the memorandum and if that system is not capable of receiving an entry of the identity of any person other than the responsible associated person; in that circumstance, the member, broker or dealer shall produce upon request by a representative of a securities regulatory authority a separate record which identifies each other person. An order entered pursuant to the exercise of discretionary authority by the member, broker or dealer, or associated person thereof, shall be so designated. The term instruction shall include instructions between partners and employees of a member, broker or dealer. The term time of entry shall mean the time when the member, broker or dealer transmits the order or instruction for execution.
      (ii) This memorandum need not be made as to a purchase, sale or redemption of a security on a subscription way basis directly from or to the issuer, if the member, broker or dealer maintains a copy of the customer's subscription agreement regarding a purchase, or a copy of any other document required by the issuer regarding a sale or redemption.
      (7) A memorandum of each purchase and sale for the account of the member, broker, or dealer showing the price and, to the extent feasible, the time of execution; and, in addition, where the purchase or sale is with a customer other than a broker or dealer, a memorandum of each order received, showing the time of receipt; the terms and conditions of the order and of any modification thereof; the account for which it was entered; the identity of each associated person, if any, responsible for the account; the identity of any other person who entered or accepted the order on behalf of the customer or, if a customer entered the order on an electronic system, a notation of that entry. The memorandum need not show the identity of any person other than the associated person responsible for the account who may have entered the order if the order is entered into an electronic system that generates the memorandum and if that system is not capable of receiving an entry of the identity of any person other than the responsible associated person: in that circumstance, the member, broker or dealer shall produce upon request by a representative of a securities regulatory authority a separate record which identifies each other person. An order with a customer other than a member, broker or dealer entered pursuant to the exercise of discretionary authority by the member, broker or dealer, or associated person thereof, shall be so designated.
      (12)
      (i) A questionnaire or application for employment executed by each "associated person" (as defined in paragraph (g)(4) of this section) of the member, broker or dealer, which questionnaire or application shall be approved in writing by an authorized representative of the member, broker or dealer and shall contain at least the following information with respect to the associated person:
      (ii) A record listing every associated person of the member, broker or dealer which shows, for each associated person, every office of the member, broker or dealer where the associated person regularly conducts the business of handling funds or securities or effecting any transactions in, or inducing or attempting to induce the purchase or sale of any security for the member, broker or dealer, and the Central Registration Depository number, if any, and every internal identification number or code assigned to that person by the member, broker or dealer.
      (17) For each account with a natural person as a customer or owner:
      (i)
      (A) An account record including the customer's or owner's name, tax identification number, address, telephone number, date of birth, employment status (including occupation and whether the customer is an associated person of a member, broker or dealer), annual income, net worth (excluding value of primary residence), and the account's investment objectives. In the case of a joint account, the account record must include personal information for each joint owner who is a natural person; however, financial information for the individual joint owners may be combined. The account record shall indicate whether it has been signed by the associated person responsible for the account, if any, and approved or accepted by a principal of the member, broker or dealer. For accounts in existence on the effective date of this section, the member, broker or dealer must obtain this information within three years of the effective date of the section.
      (B) A record indicating that:
      (1) The member, broker or dealer has furnished to each customer or owner within three years of the effective date of this section, and to each customer or owner who opened an account after the effective date of this section within thirty days of the opening of the account, and thereafter at intervals no greater than thirty-six months, a copy of the account record or an alternate document with all information required by paragraph (a)(17)(i)(A) of this section. The member, broker or dealer may elect to send this notification with the next statement mailed to the customer or owner after the opening of the account. The member, broker or dealer may choose to exclude any tax identification number and date of birth from the account record or alternative document furnished to the customer or owner. The member, broker or dealer shall include with the account record or alternative document provided to each customer or owner an explanation of any terms regarding investment objectives. The account record or alternate document furnished to the customer or owner shall include or be accompanied by prominent statements that the customer or owner should mark any corrections and return the account record or alternate document to the member, broker or dealer, and that the customer or owner should notify the member, broker or dealer of any future changes to information contained in the account record.
      (2) For each account record updated to reflect a change in the name or address of the customer or owner, the member, broker or dealer furnished a notification of that change to the customer's old address, or to each joint owner, and the associated person, if any, responsible for that account, on or before the 30th day after the date the member, broker or dealer received notice of the change.
      (3) For each change in the account's investment objectives the member, broker or dealer has furnished to each customer or owner, and the associated person, if any, responsible for thataccount a copy of the updated customer account record or alternative document with all information required to be furnished by paragraph (a)(17)(i)(B)(1) of this section, on or before the 30th day after the date the member, broker or dealer received notice of any change, or, if the account was updated for some reason other than the firm receiving notice of a change, after the date the account record was updated. The member, broker or dealer may elect to send this notification with the next statement scheduled to be mailed to the customer or owner.
      (C) For purposes of this paragraph (a)(17), the neglect, refusal, or inability of a customer or owner to provide or update any account record information required under paragraph (a)(17)(i)(A) of this section shall excuse the member, broker or dealer from obtaining that required information.
      (D) The account record requirements in paragraph (a)(17)(i)(A) of this section shall only apply to accounts for which the member, broker or dealer is, or has within the past 36 months been, required to make a suitability determination under the federal securities laws or under the requirements of a self-regulatory organization of which it is a member. Additionally, the furnishing requirement in paragraph (a)(17)(i)(B)(1) of this section shall not be applicable to an account for which, within the last 36 months, the member, broker or dealer has not been required to make a suitability determination under the federal securities laws or under the requirements of a self-regulatory organization of which it is a member. This paragraph (a)(17)(i)(D) does not relieve a member, broker or dealer from any obligation arising from the rules of a self-regulatory organization of which it is a member regarding the collection of information from a customer or owner.
      (ii) If an account is a discretionary account, a record containing the dated signature of each customer or owner granting the authority and the dated signature of each natural person to whom discretionary authority was granted.
      (iii) A record for each account indicating that each customer or owner was furnished with a copy of each written agreement entered into on or after the effective date of this paragraph pertaining to that account and that, if requested by the customer or owner, the customer or owner was furnished with a fully executed copy of each agreement.
      (18) A record:
      (i) As to each associated person of each written customer complaint received by the member, broker or dealer concerning that associated person. The record shall include the complainant's name, address, and account number; the date the complaint was received; the name of any other associated person identified in the complaint; a description of the nature of the complaint; and the disposition of the complaint. Instead of the record, a member, broker or dealer may maintain a copy of each original complaint in a separate file by the associated person named in the complaint along with a record of the disposition of the complaint.
      (ii) Indicating that each customer of the member, broker or dealer has been provided with a notice containing the address and telephone number of the department of the member, broker or dealer to which any complaints as to the account may be directed.
      (19) A record:
      (i) As to each associated person listing each purchase and sale of a security attributable, for compensation purposes, to that associated person. The record shall include the amount of compensation if monetary and a description of the compensation if nonmonetary. In lieu of making this record, a member, broker or dealer may elect to produce the required information promptly upon request of a representative of a securities regulatory authority.
      (ii) Of all agreements pertaining to the relationship between each associated person and the member, broker or dealer including a summary of each associated person's compensation arrangement or plan with the member, broker or dealer, including commission and concession schedules and, to the extent that compensation is based on factors other than remuneration per trade, the method by which the compensation is determined.
      (20) A record, which need not be separate from the advertisements, sales literature, or communications, documenting that the member, broker or dealer has complied with, or adopted policies and procedures reasonably designed to establish compliance with, applicable federal requirements and rules of a self-regulatory organization of which the member, broker or dealer is a member which require that advertisements, sales literature, or any other communications with the public by a member, broker or dealer or its associated persons be approved by a principal.
      (21) A record for each office listing, by name or title, each person at that office who, without delay, can explain the types of records the firm maintains at that office and the information contained in those records.
      (22) A record listing each principal of a member, broker or dealer responsible for establishing policies and procedures that are reasonably designed to ensure compliance with any applicable federal requirements or rules of a self-regulatory organization of which the member, broker or dealer is a member that require acceptance or approval of a record by a principal.
      (f) Every member, broker or dealer shall make and keep current, as to each office, the books and records described in paragraphs (a)(1), (a)(6), (a)(7), (a)(12), (a)(17), (a)(18)(i), (a)(19), (a)(20), (a)(21), and (a)(22) of this section.
      (g) When used in this section:
      (1) The term office means any location where one or more associated persons regularly conduct the business of handling funds or securities or effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security.
      (2) The term principal means any individual registered with a registered national securities association as a principal or branch manager of a member, broker or dealer or any other person who has been delegated supervisory responsibility over associated persons by the member, broker or dealer.
      (3) The term securities regulatory authority means the Commission, any self-regulatory organization, or any securities commission (or any agency or office performing like functions) of the States.
      (4) The term associated person means an "associated person of a member" or "associated person of a broker or dealer" as defined in sections 3(a)(21) and 3(a)(18) of the Act (15 U.S.C. 78c(a)(21) and (a)(18)) respectively, but shall not include persons whose functions are solely clerical or ministerial.

      § 240.17a-3 [Amended]

      4. Section 240.17a-3 is amended by:
      a. Removing from the introductory text of paragraph (a) and paragraph (a)(5) the word "his" and in its place adding "it";
      b. Removing from paragraph (a)(11)(ii) the word "he" and in its place adding "it";
      c. Removing from redesignated paragraphs (a)(12)(i)(A) and (a)(12)(i)(B) the word "His" and in its place adding "The associated person's";
      d. Removing from redesignated paragraphs (a)(12)(i)(A), (a)(12)(i)(C), and (a)(12)(i)(H) the word "his" and in its place adding "the associated person's";
      e. Removing from redesignated paragraphs (a)(12)(i)(D) and (a)(12)(i)(F) the word "him" and in its place adding "the associated person";
      f. Removing from redesignated paragraphs (a)(12)(i)(D), (a)(12)(i)(E), (a)(12)(i)(F) and (a)(12)(i)(H) the word "he" and in its place adding "the associated person" and
      g. Removing from redesignated paragraph (a)(12)(i)(H) the phrase "or the American Stock Exchange, the Boston Stock Exchange, the Midwest Stock Exchange, the New York Stock Exchange, the Pacific Coast Stock Exchange, or the Philadelphia-Baltimore Stock Exchange" and in its place adding "the American Stock Exchange LLC, the Boston Stock Exchange, Inc., the Chicago Stock Exchange, Inc., the New York Stock Exchange, Inc., the Pacific Exchange, Inc., the Philadelphia Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., the Cincinnati Stock Exchange, Inc. or the International Securities Exchange".
      5. Section 240.17a-4 is amended by:
      a. Revising paragraph (a);
      b. Revising the introductory text of paragraph (b);
      c. Revising paragraphs (b)(1), (b)(4), (c) and (d);
      d. Revising the introductory text of paragraph (e);
      e. Adding paragraphs (e)(5), (e)(6), (e)(7), (e)(8);
      f. Revising paragraph (j); and
      g. Adding paragraphs (k) and (l).

      The revisions and additions read as follows:

      § 240.17a-4 Records to be preserved by certain exchange members, brokers and dealers.

      (a) Every member, broker and dealer subject to § 240.17a-3 shall preserve for a period of not less than six years, the first two years in an easily accessible place, all records required to be made pursuant to paragraphs § 240.17a-3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21), (a)(22), and analogous records created pursuant to paragraph § 240.17a-3(f).
      (b) Every member, broker and dealer subject to § 240.17a-3 shall preserve for a period of not less than three years, the first two years in an easily accessible place:
      (1) All records required to be made pursuant to § 240.17a-3(a)(4), (a)(6), (a)(7), (a)(8), (a)(9), (a)(10), (a)(16), (a)(18), (a)(19), (a)(20), and analogous records created pursuant to § 240.17a-3(f).
      (4) Originals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public. As used in this paragraph (b)(4), the term communications includes sales scripts.
      (c) Every member, broker and dealer subject to § 240.17a-3 shall preserve for a period of not less than six years after the closing of any customer's account any account cards or records which relate to the terms and conditions with respect to the opening and maintenance of the account.
      (d) Every member, broker and dealer subject to § 240.17a-3 shall preserve during the life of the enterprise and of any successor enterprise all partnership articles or, in the case of a corporation, all articles of incorporation or charter, minute books and stock certificate books (or, in the case of any other form of legal entity, all records such as articles of organization or formation, and minute books used for a purpose similar to those records required for corporations or partnerships), all Forms BD (§ 249.501 of this chapter), all Forms BDW (§ 249.501a of this chapter), all amendments to these forms, all licenses or other documentation showing the registration of the member, broker or dealer with any securities regulatory authority.
      (e) Every member, broker and dealer subject to § 240.17a-3 shall maintain and preserve in an easily accessible place:
      (5) All account record information required pursuant to § 240.17a-3(a)(17) until at least six years after the earlier of the date the account was closed or the date on which the information was replaced or updated.
      (6) Each report which a securities regulatory authority has requested or required the member, broker or dealer to make and furnish to it pursuant to an order or settlement, and each securities regulatory authority examination report until three years after the date of the report.
      (7) Each compliance, supervisory, and procedures manual, including any updates, modifications, and revisions to the manual, describing the policies and practices of the member, broker or dealer with respect to compliance with applicable laws and rules, and supervision of the activities of each natural person associated with the member, broker or dealer until three years after the termination of the use of the manual.
      (8) All reports produced to review for unusual activity in customer accounts until eighteen months after the date the report was generated. In lieu of maintaining the reports, a member, broker or dealer may produce promptly the reports upon request by a representative of a securities regulatory authority. If a report was generated in a computer system that has been changed in the most recent eighteen month period in a manner such that the report cannot be reproduced using historical data in the same format as it was originally generated, the report may be produced by using the historical data in the current system, but must be accompanied by a record explaining each system change which affected the reports. If a report is generated in a computer system that has been changed in the most recent eighteen month period in a manner such that the report cannot be reproduced in any format using historical data, the member, broker or dealer shall promptly produce upon request a record of the parameters that were used to generate the report at the time specified by a representative of a securities regulatory authority, including a record of the frequency with which the reports were generated.
      (j) Every member, broker and dealer subject to this section shall furnish promptly to a representative of the Commission legible, true, complete, and current copies of those records of the member, broker or dealer that are required to be preserved under this section, or any other records of the member, broker or dealer subject to examination under section 17(b) of the Act (15 U.S.C. 78q(b)) that are requested by the representative of the Commission.
      (k) Records for the most recent two year period required to be made pursuant to § 240.17a-3(f) and paragraphs (b)(4) and (e)(7) of this section which relate to an office shall be maintained at the office to which they relate. If an office is a private residence where only one associated person (or multiple associated persons who reside at that location and are members of the same immediate family) regularly conducts business, and it is not held out to the public as an office nor are funds or securities of any customer of the member, broker or dealer handled there, the member, broker or dealer need not maintain records at that office, but the records must be maintained at another location within the same State as the member, broker or dealer may select. Rather than maintain the records at each office, the member, broker or dealer may choose to produce the records promptly at the request of a representative of a securities regulatory authority at the office to which they relate or at another location agreed to by the representative.
      (l) When used in this section:
      (1) The term office shall have the meaning set forth in § 240.17a-3(g)(1).
      (2) The term principal shall have the meaning set forth in § 240.17a-3(g)(2).
      (3) The term securities regulatory authority shall have the meaning set forth in § 240.17a-3(g)(3).
      (4) The term associated person shall have the meaning set forth in § 240.17a-3(g)(4).

      § 240.17a-4 [Amended]

      6. Section 240.17a-4 is amended by:
      a. Removing from paragraph (b)(7) the word "his" and in its place adding "its'; and
      b. Removing from paragraph (e)(1) the phrase "the "associated person" has terminated his employment and any other connection with the member, broker or dealer." and in its place adding "the associated person's employment and any other connection with the member, broker or dealer has terminated.".
      c. Removing from paragraph (f)(3)(ii) the phrase "the Commission or its representatives" and in its place adding "the staffs of the Commission, any selfregulatory organization of which it is a member, or any State securities regulator having jurisdiction over the member, broker or dealer".
      d. Removing from paragraph (f)(3)(vii):
      i. The phrase "the U.S. Securities and Exchange Commission ("Commission"), its designees or representatives," and in its place adding "the U.S. Securities and Exchange Commission ("Commission"), its designees or representatives, any self-regulatory organization of which it is a member, or any State securities regulator having jurisdiction over the member, broker or dealer,";
      ii. The phrase "the Commission's or designee's staff" and in its place adding "the staffs of the Commission, any self-regulatory organization of which it is a member, or any State securities regulator having jurisdiction over the member, broker or dealer"; and
      iii. From each place it appears, the phrase "the Commission's staff or its designee" and in its place adding "the staffs of the Commission, any self-regulatory organization of which it is a member, or any State securities regulator having jurisdiction over the member, broker or dealer".

      PART 242-REGULATIONS M and ATS

      7. The authority citation for part 242 continues to read as follows: Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78i(a), 78j, 78k-1(c), 78l, 78m, 78mm, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 80a-23, 80a-29, and 80a-37.
      8. In § 242.303, paragraph (d) is amended by removing the phrase "representatives or designees of the Securities and Exchange Commission, and to promptly furnish to the Commission or its designee" and in its place adding "the staff of the Securities and Exchange Commission, any selfregulatory organization of which the alternative trading system is a member, or any State securities regulator having jurisdiction over the alternative trading system, and to promptly furnish to the Commission, self-regulatory organization of which the alternative trading system is a member, or any State securities regulator having jurisdiction over the alternative trading system."

      Dated: October 26, 2001.

      By the Commission.

      Margaret H. McFarland,

      Deputy Secretary.

      [FR Doc. 01-27439 Filed 11-1-01; 8:45 am]

      BILLING CODE 8010-01-P


      1 17 CFR 240.17a-3.

      2 17 CFR 240.17a-4.

      3 For purposes of this release, "State Securities Regulators" include, as described in Section 15(h) of the Exchange Act, "the securities commissions (or any agency or office performing like functions) of the States." 15 U.S.C. 78o(h).

      4 See Exchange Act Release No. 37850 (October 22, 1996), 61 FR 55593 (Oct. 28, 1996) ("Proposing Release" and/or "Proposal") (File No. S7-27-96).

      5 Pub. L. No. 104-290, 110 Stat. 3416 (1996).

      6 E.g., violations of State suitability and fraud laws, or federal regulations.

      7 15 U.S.C. 78o(h).

      8 142 Cong.Rec.S. 12093, S12094 (October 1, 1996) (statement of Sen. Dodd) ("It is the intent of the conferees that the SEC work closely with the States to determine what records should be maintained at branch offices and to establish a mechanism so that States could require such records be kept in the branch office, rather than at a back office halfway across the Nation.").

      9 Exchange Act Release No. 40518 (Oct. 2, 1998), 63 FR 54404 (Oct. 9, 1998) (the "Reproposing Release" and/or "Reproposal"). The staff of the Division of Market Regulation has prepared a summary of the comment letters received on the reproposed rules and rule amendments (hereinafter referred to as "Comment Summary"). Copies of the comment letters and the Comment Summary have been placed in Public Reference File No. S7-26-98 and are available for inspection in the Commission's Public Reference Room.

      10 17 CFR 240.17a-3(a)(6). Most broker-dealers are currently required to record the time the order was received from a customer under the National Association of Securities Dealers' ("NASD") Order Audit Trail System ("OATS") rules (NASD rules 6950 through 6957 and 3110) (hereinafter "OATS rules") (See specifically NASD rules 6954(b)(16) and 3110(h)), and New York Stock Exchange ("NYSE") rules 123 and 410A.

      11 7 CFR 240.17a-3(a)(7).

      12 E.g., a firm may satisfy this requirement by using the record listing any internal identification number or code assigned to associated persons which is required under new Rule 17a-3(a)(12)(ii) (17 CFR 240.17a-3(a)(12)(ii)). Additionally, the Commission believes this requirement is consistent with the NASD's OATS rules.

      13 A number of firms have asked for guidance on the meaning of the term "to the extent feasible." The time of execution should be included on the order ticket except for situations in which it may be impossible to determine the precise time when the transaction was executed; however, in that case the broker-dealer must note the approximate time of execution. Exchange Act Release No. 3040 (Oct. 13, 1941), 11 FR 10984. The Commission has stated that the "phrase "to the extent feasible" was intended to be applicable only in exceptional circumstances where it might be actually impossible to determine the exact time of execution." Exchange Act Release No. 13508 (May 5, 1977) 42 FR 25318. However, in that case the broker-dealer must note the approximate time of execution.

      14 This is referred to elsewhere in the rules as a "subscription-way basis" transaction. See 17 CFR.15c3-1(a)(2)(v).

      15 17 CFR 240.17a-3(a)(12)(ii).

      16 First, reproposed paragraphs (a)(12)(ii) and (a)(12)(iii) have been moved to paragraph (a)(19) of Rule 17a-3 to keep all requirements relating to compensation records in the same section (most agreements between associated persons and broker-dealers relate to compensation in some manner). Second, reproposed paragraphs (a)(12)(iv) and (a)(12)(v) have been combined into new paragraph (a)(12)(ii). And finally, the Commission has deleted the references to local offices and state record depositories to make this paragraph consistent with the changes to the definition of "office" in paragraph (g)(1) of Rule 17a-3.

      17 15 U.S.C. 78c(a)(21) and 15 U.S.C. 78c(a)(18).

      18 The Commission has consistently taken the position that independent contractors (who are not themselves registered as broker-dealers) involved in the sale of securities on behalf of a broker-dealer are "controlled by" the broker-dealer, and, therefore, are associated persons of the broker-dealer. See, e.g., In the Matter of William V. Giordano, 61 S.E.C. Dkt. 345, Exchange Act Release No. 36742 (Jan. 19, 1996) (in finding that an officer of a broker-dealer firm failed reasonably to supervise an independent contractor, the Commission found that the independent contractor was an "associated person" of the firm within the meaning of Section 3(a)(18) of the Exchange Act). See, also, Letter from Douglas Scarff, Director, Division of Market Regulation, to Gordon S. Macklin, NASD; Charles J. Henry, Chicago Board Options Exchange; Robert J. Birnbaum, American Stock Exchange; and John J. Phelan, NYSE, [1982-1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) P77,303 at P77,116 (Jun. 18, 1982); Hollinger v. Titan Capital Corp., 974 F.2d 1564, 1572-76 (9th Cir. 1990), cert. denied, 111 S. Ct. 1621 (1991). A similar analysis would be applicable to other persons, such as consultants and franchisees, performing securities activities with or for the broker-dealer.

      19 This provision was reproposed as Rule 17a-3(a)(16).

      20 Generally, suitability rules require that broker-dealers and their associated persons refrain from recommending transactions or investment strategies to a customer that would be "unsuitable" for that customer based upon the customer's situation. Factors that may be considered in assessing a customer's situation include the customer's age, financial situation, and investment experience or knowledge of the industry.

      21 See NYSE Rule 408 and NASD Rule 2510(b).

      22 See, e.g., Comment Letters from Raymond James, p. 4; Investment Management and Research, p. 3, and Mayer, Brown & Platt, pp. 6-7.

      23 17 CFR 240.17a-3(a)(17)(i)(A). This requirement is consistent with SRO rules regarding the signatures of associated persons and principals when opening customer accounts. See NYSE Rule 405(3) and NASD Rule 3110(c)(1)(C).

      24 The Commission believes that this requirement is consistent with SRO requirements regarding customer accounts such as those discussed above in footnote 23.

      25 17 CFR 240.17a-3(a)(17).

      26 See Comment Letters from Donaldson, Lufkin and Jenrette, p. 9, and the International Association for Financial Planning, pp. 2-3.

      27 17 CFR 240.17a-3(a)(17)(i)(A).

      28 17 CFR 240.17a-3(a)(17)(i)(B)(1).

      29 Certain SRO rules already require that customer account records be sent to customers who open options accounts. See NASD Rule 2860(b)(16)(C) and IM-2860-2, and NYSE Rule 721(c) and Supplemental Material at .30 regarding options accounts.

      30 17 CFR 240.17a-3(a)(17)(i)(B)(1) through (B)(3).

      31 17 CFR 240.17a-3(a)(17)(i)(B)(1).

      32 Id.

      33 17 CFR 240.17a-3(a)(17)(i)(B)(2).

      34 17 CFR 240.17a-3(a)(17)(i)(B)(3).

      35 See Comment Letters from Fidelity Investments, p. 5, Benefits Communication Corporation, p. 1, American Express Financial Advisors, Inc., p. 4, and Comerica Securities, p. 3.

      36 17 CFR 240.17a-3(a)(17)(i)(B)(4).

      37 See, e.g., NASD Rules 2310 and 2860(b)(16)(B), NYSE Rule 723, Chicago Board Options Exchange Rule 9.9, and Municipal Securities Rulemaking Board Rule G-19.

      38 17 CFR 240.17a-3(a)(17)(i)(D).

      39 Sections 10(b) and 15(c) (15 U.S.C. 78j(b) and 15 U.S.C. 78o(c)). See e.g., Hanley v. SEC, 415 F.2d 589, 596 (2d Cir. 1969); F.J. Kaufman and Co., 50 S.E.C. 164 (1989); O'Connor v. R.F.Lafferty & Co., 965 F.2d 893 (10th Cir. 1992).

      40 17 CFR 240.10b-5 and 17 CFR 240.15c1-2.

      41 See supra note 37.

      42 If a recommendation is made, a suitability obligation arises irrespective of the medium used to deliver that recommendation. For example, a broker-dealer can make a recommendation in person, on a website, via telephone, mail, or email. A broker-dealer also can recommend a security online regardless of whether that recommendation is attributable to a specific registered representative. Whether a broker-dealer has made a recommendation is a question that can only be answered by considering all of the facts and circumstances. (See "Suitability Hypotheticals," Report of Commissioner Laura S. Unger, Online Brokerage: Keeping Apace of Cyberspace, pp. 32-4. (Nov. 1999))

      43 17 CFR 240.17a-3(a)(9).

      44 See, e.g., Comment Letter of Salomon Smith Barney, pp. 3-4.

      45 This paragraph was proposed as paragraph (a)(17) of Rule 17a-3.

      46 This requirement is in addition to other recordkeeping requirements such as Rule 17a-4(b)(4), which requires firms to keep originals of all correspondence received. For example, if a brokerdealer firm received a written complaint regarding the firm itself, the firm would be required to keep that complaint under Rule 17a-4(b)(4). If the complaint related to a particular associated person, the firm would also be required to make a record of the complaint as to that associated person under Rule 17a-3(a)(18); however, the firm may keep one copy of the complaint to satisfy both Rules 17a-3(a)(18)(i) and 17a-4(b)(4).

      47 See 17 CFR 240.17a-4(b)(4), and NASD Rule 3110(d).

      48 This requirement expands on an existing interpretation of the Commission's financial responsibility rules and the Securities Investor Protection Act of 1970, which states that, for purposes of custody of securities, for a firm to qualify as an introducing firm with a lesser net capital requirement than a clearing firm, its customers must be treated as customers of the clearing firm. In addition, under that interpretation, the clearing firm must issue account statements directly to customers, and each account statement must contain the name, address, and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries and complaints regarding the customer's account.

      49 See, e.g., Comment Letter from Lawrence M. Lowman, p. 1.

      50 See supra note 48; Exchange Act Release No. 31511 at note 21 and accompanying text, (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992).

      51 See Comment Letters from the Discount Brokers, p. 7, and Donaldson, Lufkin & Jenrette, p. 10.

      52 The phrase "and the specific security," which appeared in the Reproposing Release, was not included in the Rule as adopted because it is redundant. The record "listing all purchases and sales of securities for which the associated person was compensated" must provide enough information to identify that purchase or sale to which the compensation was attributable.

      53 This Rule was reproposed as Rule 17a-3(a)(12)(ii) and Rule 17a-3(a)(12)(iii).

      54 This paragraph was reproposed as paragraph (a)(19) of Rule 17a-3.

      55 See e.g., NASD Rule 2210(b) and NYSE Rule 472.

      56 E.g., the record may consist of a principal's signature or initials on the communication, or a signed memo from the principal granting permission for use of the communication. Further, a firm may have policies and procedures designed to establish compliance with applicable federal regulations and SRO rules which require that a principal approve any advertisements, sales literature, or other communications with the public. Thus, records presently used to evidence compliance with SRO rules may also be used to fulfill this requirement.

      57 Supra note 7.

      58 New paragraph (a)(12)(ii) of Rule 17a-3 requires firms to make a record showing, for each associated person, every office where the associated person regularly conducts a securities business and certain other information.

      59 See Comment Letter from Citicorp, p. 3, "RRs in all local offices would have to be trained to do a function outside their current job responsibilities, namely to review material for applicable privileges and make records of documents reviewed by regulators."

      60 See, e.g., Comment Letters from Arkansas Securities Department, pp. 1-3; Department of Financial Institutions, Commonwealth of Kentucky, p. 6; and Securities Division, State of Rhode Island and Providence Plantations, p. 1.

      61 This does not relieve broker-dealers from any other Federal or SRO requirements to maintain records at office locations. See, e.g., NASD Rule 3110(d) which requires firms to keep at each Office of Supervisory Jurisdiction (defined at NASD Rule 3010(g)(1)), either a separate file of all written complaints of customers and action taken by the firm, or a separate record of such complaints and a clear reference to the files containing the correspondence connected with such complaint maintained in such office.

      62 17 CFR 240.17a-3(f).

      63 17 CFR 240.17a-4(k).

      64 17 CFR 240.17a-3(g)(1).

      65 The term "immediate family," as used in paragraph (k), should be interpreted to have the same meaning as it does in NASD IM-2110-1(l)(2).

      66 New paragraph (f) of Rule 17a-3 requires firms to make and keep current separately as to each office, the books and records required under various paragraphs in Rule 17a-3.

      67 New paragraph (k) of Rule 17a-4 requires firms to either keep certain records at each office or produce them at that office or at another agreeable location.

      68 Firms need not apply to or notify securities regulators as to which office it selects as the associated person's "office." However, pursuant to paragraph (a)(12)(iii) of Rule 17a-3, the firm must identify the office as such.

      69 The specific paragraphs of Rule 17a-3 that are included in this requirement are (a)(1), (a)(6), (a)(7), (a)(12), (a)(16), (a)(17), (a)(18), (a)(19), (a)(20), (a)(21), and (a)(22).

      70 Per Schedule 1 data filed by broker-dealers as of year-ending December 31, 1998. Pursuant to 17 CFR 240.17a-10, Broker-dealers are required to file Schedule 1, which requires the reporting of general information designed to measure certain economic and financial characteristics.

      71 Supra note.

      72 Valid reasons for delays in producing the requested records do not include the need to send the records to the firm's compliance office for review prior to providing the records.

      73 See Comment Letter from A.G. Edwards & Sons, Inc., p. 8.

      74 Exchange Act Release No. 38245 (Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997).

      75 For instance, limited liability companies ("LLCs") would be covered.

      76 For example, if the original report includes customer name, account number, social security number, and transactional information, however the report that can be re-created at a later date does not include social security numbers, the firm should provide the re-created report to the regulator with an explanation that although social security numbers appeared on the original report, the firm is unable to re-create the report including that information.

      77 This includes changes to hardware, software, or changes to the database used to produce the exception reports.

      78 Exchange Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997) ("Electronic Storage Media Release").

      79 17 CFR 240.17a-4(f).

      80 See 17 CFR 240.17a-4(f)(3)(i).

      81 See 17 CFR 240.17a-4(f)(3)(vii).

      82 Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998).

      83 See supra note 9, at p. 54411.

      84 See Comment Letters from Mutual Service Corporation, p. 6; Titan Value Equities Group, Inc., pp. 2 and 4; USAA, pp. 2 and 6; MetLife, p. 4; A.G. Edwards and Sons, Inc., p. 6; MONY, p. 4; Capital West, p. 2; Comerica Securities, p. 2; Nationwide Investment Services Corporation, p. 2; Edward Jones, pp. 1 and 3; Advest, p. 1; Salomon Smith Barney, pp. 1 to 2; NyLife Securities, pp. 6 to 7; HD Vest, p. 2; American Express Financial Advisors, pp. 2 to 5; First Union, pp. 3 to 4; Charles Schwab, pp. 3 to 4; MML Investors Services, Inc., pp. 2 to 4; National Planning Corporation, p. 1; Pumphrey Securities, p. 2; Citicorp Investment Services, pp. 2 to 3; Discount Brokers, pp. 4 to 5; M & T Securities,pp. 1 and 2; Donaldson, Lufkin & Jenrette, p. 6; Investment Management & Research, Inc., p. 4; John Hancock Distributors, Inc., pp. 3 to 4; Southwest Securities, p. 2; the Securities Industry Association, p. 10; Merrill Lynch, pp. 1, 6 to 7, and 11; and Raymond James, p. 5.

      85 See Comment Letters from Michigan, pp. 1 to 2; Idaho, pp. 1 and 4; Kansas, pp. 1 to 2; Delaware, pp. 1 to 2; Colorado, p. 2; North Dakota, p. 1; Ohio, p. 1; Texas, pp. 1, 2 to 3, and 6; Hawaii, pp. 1 to 2; Rhode Island, pp. 1 to 2; New Hampshire, pp. 1 and 2; Nebraska, p. 1; Utah, pp. 1 and 3; NASAA, pp. 3 to 5 and 22; New York, pp. 1 and 3; Virginia, pp. 1 to 3; New Jersey, pp. 2 to 7; Washington, pp.2 and 6; Arkansas, pp. 1, 3, and 5; New Mexico, p. 1; North Carolina, pp. 1 to 2; and Montana, pp. 1, and 3 to 5.

      86 See Comment Letters from AARP, p. 2; and the Consumer Federation of America, pp. 2 to 3.

      87 See Comment Letters from American Council of Life Insurance, pp. 12 to 13; and International Association of Financial Planning, p. 6.

      88 See Comment Letter from Thomas Koutris, p. 1.

      89 This paragraph provides that broker-dealers must obtain certain information relating to the accounts of natural customers, and that customer account records must be updated regularly.

      90 In the reproposed rule this paragraph provided that certain records had to be maintained at the local office, or that they had to be produced at the local office to which they related on the same day a request for those records was made by a representative of a securities regulatory authority.

      91 See Comment Letter from State of Virginia, pp. 1 to 3.

      92 Per NASD Dispute Resolution, Inc. website: www.nasdradr.com/statistics.asp.

      93 It should be noted that these estimates do not include any internal compliance, operational, and/or legal costs incurred by these firms in dealing with these complaints.

      94 See, e.g., Comment Letter from the State of New Jersey, p. 5.

      95 See Second Comment Letter from State of Connecticut. The State of Connecticut performed examinations of forty-nine office locations of twenty-three broker-dealers in five States. Seventeen of these offices had two or less associated persons working there. In addition, the State reviewed the most recent 100 examinations it had performed, and as well as investigatory materials from the prior two years wherein subpoenas were issued to obtain broker-dealer records.

      96 See Second Comment Letter from NASAA. The State of Florida performed examinations on 19 broker-dealers.

      97 Four States provided specific information regarding investor losses. Illinois indicated (in its Comment Letter, p. 2) that over the past 8 years, 29 enforcement cases were brought in which Illinois investors lost over $38.9 million dollars. Kansas indicated (in the attachment to its Comment Letter) that, with respect to cases they have brought over the past ten years, Kansas customers have lost over $6.4 million dollars. Ohio indicated (in its Comment Letter, p. 3) that in one particular case Ohio investors lost over $60 million dollars. Lastly, Connecticut indicated (in its Comment letter, p. 2) that, with respect to cases they have brought where the investors' relationship was established through small offices, Connecticut investors have lost over $12 million.

      98 Report by the Division of Market Regulation and the Division of Enforcement, U.S. Securities and Exchange Commission, The Large Firm Project: A Review of Hiring, Retention and Supervisory Practices (May 1994).

      99 Id., at pp. 5 and 7.

      100 See, Comment Letter from the State of New Jersey, p. 3.

      101 See, Comment Letter from NASAA, pp. 7-8.

      102 E.g., the NASD's OATS rules, and NYSE rules 123 and 410A.

      103 See, Comment Letter from the Consumer Federation of America, p. 3, note 4.

      104 See Comment Letter from State of Michigan Department of Consumer & Industry Services, p. 1.

      105 See Comment Letter from State of Texas' State Securities Board, pp. 2-3.

      106 The Commission estimates that these amendments to Rule 17a-4 will take broker-dealers an additional four hours each per year. In the Reproposal the Commission estimated that these amendments would take an additional eight hours. Since the amendments being adopted today allow broker-dealers the option of not maintaining records at each office or producing records to the office to which they relate on the same day they are requested, the original estimate was reduced by one-half. The Commission believes that firms will have senior compliance personnel ensure compliance with these amended rules. According to the Securities Industry Association ("SIA") Management and Professional Earnings 2000 report, Table 051, the hourly cost of a Compliance Manager + 35% overhead is $101.25. ($101.25 x 4)=approximately $405.00 for each respondent, per year.

      107 ($405.00 per respondent x (7,217 broker-dealers)=approximately $2.9 million per year.

      108 Supra at note 95 .

      109 17 CFR 240.17a-3(a)(9), NASD Rules 2310(b), 3110(c) and IM-2860-2, and NYSE Rules 405, 407, 408, 410A, and 721.10.

      110 Including customer name, address, telephone number, employment status, annual income, net worth, and the investment objectives for the account.

      111 The Commission originally proposed that broker-dealers verify customer account information at least once each year (See Proposing Release), however this was modified and reproposed as once every thirty-six months in the Reproposal based upon comments received from broker-dealers who contended that it would be too costly to send account information to customers yearly.

      112 Broker-dealers must furnish notification of a change in the name or address information to the customer's old address, and must furnish a copy of new account record information to the customer if some other information component is changed.

      113 See e.g., Comment Letter from Raymond James Financial, Inc., p. 4.

      114 See e.g., Comment Letter from Investment Management & Research, Inc., p. 4.

      115 Supra note 1.

      116 See infra note 117.

      117 Broker-dealers reported, in their 12/31/00 Schedule 1 filings (required to be filed pursuant to 17 CFR 240.17a-10), that they maintained a total of 97,600,000 customer accounts. The Commission estimates that at least 27,100,000 of these accounts are excluded from the provisions of Rule 17a-3(a)(17) because they are either not accounts of natural persons, inactive, or accounts for which the broker-dealer does not have a suitability requirement (the Commission arrived at this number using estimates provided by the firms, in their comment letters and otherwise, as to how many of their accounts would fit into one or more of these categories. See Rule 17 CFR 240.17a-3(a)(17)(i)(D)). Accordingly, the total number of accounts which would need to be contacted for updating is 70,500,000 every three years. 70,500,000/3 = 23,500,000 per year.

      118 Of the 23,500,000 accounts to which a copy of the account agreement must be sent each year, 22,975,000 (or 97%) of those accounts are attributable to 70 large broker-dealers which maintain over 100,000 customer accounts. Based upon the comment letters and other communications, large broker-dealers are more automated and small broker-dealers have more manual processes. The estimated additional time to send out customer account information is 1½ minutes per account for large broker-dealers and 7 minutes per account for small broker-dealers. The estimated number of customers who will provide updated account record information is 4,700,000 (or 20% of customers to which notification is sent— this estimate is based on a comment letter sent by Merrill Lynch) (4,559,000 the 4,700,000 are estimated to be maintained at large broker-dealers). The estimated time to update these account records is 5 minutes per account record for large brokerdealers and 10 minutes per account for small broker-dealers, and the estimated time to send updated account record to customer to notify of change is 11.2 minutes for large broker-dealers and 7 minutes for small broker-dealers. The estimated number of customers who will change their account record without being prompted by a mailing is 3,525,000 (3,419,250 of which are maintained at large broker-dealers), and the estimated time to send updated account record information to those customers is 11.2 minutes per account for large broker-dealers and 7 minutes per account for small broker-dealers. Thus it would take approximately 2.25 minutes per account contacted each year to send account records (((22,795,000 x 1½) + (705,000 x 7)) + ((4,559,000 x 1½) + (141,000 x 7)) + ((3,419,250 x 1½) + (105,750 x 7)))/23,500,000 accounts contacted yearly. In addition, it would take approximately 1.03 minutes per account contacted each year to update the account records (((4,559,000 x 5) + (141,000 x 10))/23,500,000 accounts contacted yearly. In total, the Staff estimates that it would take 3.28 minutes per account contacted each year for processing and any updating.

      119 The estimated total additional hours to provide customers with account record information is 880,369 hours ((((22,795,000 x 1½) + (705,000 x 7)) + ((4,559,000 x 1½) + (141,000 x 7)) + ((3,419,250 x 1½) + (105,750 x 7)))/60 minutes). The estimated total additional hours to update customers accounts is 403,417 hours (((4,559,000 x 5) + (141,000 x 10))/60 minutes in an hour). The hourly wage of the average person who would be providing customers with account record information is $22.70 per hour (per the SIA Report on Office Salaries In the Securities Industry 2000, Table 082 (Retail Sales Assistant, Registered) and including 35% in overhead charges). The hourly wage of the average person who would be updating account record information is $25.90 per hour (per the SIA Report on Office Salaries In the Securities Industry 2000, Table 086 (Data Entry Clerk, Senior) and including 35% in overhead charges). Thus the aggregate cost of these hours is about $30.4 million ((880,369 hours x $22.70) + (403,417 hours x $25.90)). The estimated additional cost of paper, printing, and postage to provide this information to customers is between $.05 and $.244 per record sent, or between $1.6 million and $7.7 million (($.05 or $.244) x (23,500,000 + 4,700,000 + 3,525,000)). Yielding a total cost per record sent of between $1.36 and $1.62 (($30.4 million + ($1.6 million or $7.7 million))/23,500,000 records sent per year).

      120 It is estimated that it will take firms 2 hours each, on average, to update their forms to include information regarding the meaning of investment objective terms. The Commission believes that firms will have an attorney perform this task. According to the SIA Management and Professional Earnings 2000 report, Tables 107 (Attorney) and 108 (Compliance Attorney), the hourly cost of an attorney + 35% overhead is $156.00 per hour. ($156.00 x 2) = approximately $312.00 per broker-dealer.

      121 One small broker-dealer stated, "smaller firms lack the automation to do this type of action* * * without additional personnel," (See Comment Letter from Titan Value Equities Group, Inc., p. 2) another stated, "[w]e do not have electronic account records," (See Comment Letter from Capital West Securities, Inc., p. 2) and another stated, "for most firms [the] initial identification process would be manual" and "compiling the account record to send would require* * * pulling out a paper file for the account and making photo copies of the documents or pulling up the account on a computer system and printing out the required account information screens." (See Comment Letter from Comerica Securities, p. 2.) No smaller broker-dealer provided information regarding any increased equipment or systems development costs.

      122 See Comment Letter from Morgan Stanley Dean Witter, p. 4.

      123 See Comment Letter from Merrill Lynch, p. 7 ($630,000 + $370,000 + $300,000).

      124 See Comment Letter from Dean Witter, p. 4.

      125 See Comment Letter from Merrill Lynch, p. 7. Merrill Lynch's estimate that they would spend $3.8 million for ongoing costs was reduced to account for the fact that the Commission has included costs to send account records to customers, costs to update customer account records, costs to send notification of updates to customers, and postage costs, which are included in Merrill's $3.8 million figure, elsewhere.

      126 17 CFR 240.17a-3(a)(19)(ii).

      127 17 CFR 240.17a-3(a)(12)(ii).

      128 17 CFR 240.17a-3(a)(12)(iii).

      129 17 CFR 240.17a-3(a)(19)(i).

      130 See supra text accompanying notes 95 and 96.

      131 See supra 102 note.

      132 17 CFR 240.17a-3(a)(17)(ii) and 17 CFR 240.17a-4(b)(4).

      133 17 CFR 240.17a-3(a)(21).

      134 17 CFR 240.17a-3(a)(22).

      135 See e.g., NASD Rule 3010.

      136 See e.g., NASD Rule 3110(d), and for options complaints NASD Rule 2860(b)(17).

      137 The Commission estimates that it will take each broker-dealer, on average, two hours to update its forms to include the address to which complaints should be sent. This is a very conservative estimate, since it will probably take much less than 2 hours to write down the brokerdealer's address and where it should be placed on the form, but additional time was added to account for supervisory review. The Commission believes broker-dealers would have an attorney perform this task. According to the SIA Management and Professional Earnings 2000 report, Tables 107 (Attorney) and 108 (Compliance Attorney), the hourly cost of an attorney + 35% overhead is $156.00 per hour. ($156.00 x 2) = approximately $312.00 per broker-dealer.

      138 The Commission estimated in its Reproposal that, on average, this requirement will obligate a broker-dealer to spend approximately 30 minutes each year to ensure that the records are in compliance with these amendments. The Commission received no specific comments relating to this estimate. The Commission believes firms may have senior compliance personnel perform this task. According to the SIA Management and Professional Earnings 2000 report, Table 051, the hourly cost of a Compliance Manager + 35% overhead is $101.25. ($101.25 x ½ hour) = approximately $50.63 per broker-dealer.

      139 The Commission estimated in its Reproposal that it will take each firm 10 additional minutes each year to assure compliance with the amendments, and it received no specific comments relating to this estimate. The Commission believes that firms will have senior compliance personnel perform this task. According to the SIA Management and Professional Earnings 2000 report, Table 051, the hourly cost of a Compliance Manager + 35% overhead is $101.25. ($101.25 x 10 minutes/60 minutes in an hour) = approximately $16.88 per broker-dealer.

      140 15 U.S.C. 78w(a)(2).

      141 15 U.S.C. 78c(f).

      142 Supra note 9, at 54411.

      143 Of the 144 total "comment letters" on file, seventeen are memos by the staff of the Commission relating to meetings with various industry groups, and twelve simply request that the comment period be extended.

      144 See, Comment Letter from NASAA, p. 7.

      145 See, Comment Letters from Titan Value Equities Groups, Inc., p. 3; BenefitsCorp Equities, Inc., p. 2; and One Orchard Equities, Inc. p. 2.

      146 See, Comment Letter from MML Investor Services, Inc., pp. 5 to 6.

      147 Paragraph (k) of Rule 17a-4.

      148 See paragraphs (a)(6)(ii) and (a)(17)(i)(D) of Rule 17a-3. In addition, paragraph (a)(17) of Rule 17a-3 was modified to limit the requirement to accounts with a natural person as the customer.

      149 See Comment Letter from NASAA, p. 4.

      150 15 U.S.C. 78a et. seq., adopted on October 11, 1996.

      151 15 U.S.C. 78o(h).

      152 See supra note 8.

      153 Pursuant to 17 CFR 240.0-10, the term "small business" or "small organization" when used with reference to a broker or dealer means a broker or dealer that: (i) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date its audited financial statements for the prior fiscal year were prepared pursuant to 17 CFR 240.17-5(d) or, if not required to file such statements, a broker-dealer that had total net capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (ii) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in 17 CFR 240.0-10. In addition, Exchange Act Release No. 40122 (June 24, 1998) 63 FR 35508 (June 30, 1998) recently amended standard that defines what it means to be "affiliated" with any person that is not a small business.

      154 See supra note 9.

      155 See Comment Letter from American Council of Life Insurance, p. 16.

      156 See Comment Letters from Titan Value Equities Group, Inc., pp. 2-3; Lawrence Lowman, p. 1; and John Hancock Distributors, Inc., p. 3.

      157 E.g., broker-dealers which only facilitate transactions in certain types of products or broker-dealers which do not make recommendations.

      158 See e.g., NASD Rule 3110(c).

      159 17 CFR 240.17a-4(a)(1).

      160 See Comment Letter from Lawrence Lowman, p. 1.

      161 See Comment Letter from Titan Value Equities, p. 3.

      162 Id., p. 2.

      163 See Comment Letter from John Hancock Distributors, Inc., p. 3.

      164 Id.

      165 15 U.S.C. 78o(h).

      166 44 U.S.C. 3502 et seq.

      167 Of approximately 7,739 broker-dealers registered with the Commission, approximately 341 are not yet active because their registration is pending SRO approval and approximately 181 are inactive because they have ceased doing a securities business and have filed a Form BDW with the Commission. Of these 7,217 active, registered broker-dealers, three are registered OTC Derivatives Dealers. OTC Derivatives Dealers are a special class of broker-dealers that limit their business to dealer activities in eligible over-the-counter derivative instruments and that meet certain financial responsibility and other requirements.

      168 Supra note 117.

      169 The Commission, in its Reproposal, estimated that it would take broker-dealers 10 seconds to furnish the account record to customers. Because many commenters contended that this estimate was too low, the Commission raised its estimates.

      170 Supra note 121.

      171 See Comment Letter from Comerica Securities, p. 2.

      172 See Comment Letter from Merrill Lynch, p. 7.

      173 See Comment Letter from Titan Value Equities, Inc., p. 2.

      174 See NASD Rules 3110(c) and IM-2860-2}, and NYSE Rules 405, 407, 410A, and 721.10.

      175 See e.g., NASD Rule 2310(b) and IM-2860-2.

      176 Supra note 158.

      177 See e.g., NYSE Rule 408.

      178 Supra note 126.

      179 Supra note 127.

      180 Supra note 128.

      181 Supra note 129.

      182 17 CFR 240.17a-3(a)(18)(i).

      183 Supra note 136.

      184 17 CFR 240.17a-3(a)(17)(ii) and 17 CFR 240.17a-3(a)(20).

      185 Supra note 133.

      186 Supra note 134.

      187 Supra note 135.

      188 Supra note 102.

      189 17 CFR 240.17a-3(a)(17).

      190 17 CFR 240.17a-3(12) and (19).

      191 17 CFR 240.17a-3(a)(20) to (22).

    • 01-79 NASD Reminds Members Of Their Responsibilities Regarding Private Securities Transactions Involving Notes And Other Securities And Outside Business Activities

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      INFORMATIONAL

      Selling Away And Outside Business Activities

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Insurance
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management

      Outside Business Activities
      Private Securities Transactions
      Promissory Notes
      NASD Rule 3030
      NASD Rule 3040
      Supervision



      Executive Summary

      NASD Regulation, Inc. (NASD Regulation) has brought a number of formal disciplinary actions against registered representatives for selling securities without prior notice to and approval from the representative's employer member firm and for engaging in outside business activities without prior notice to the employer member firm. A registered person who sells a security away from his or her firm without first obtaining written approval from the firm violates NASD Rule 3040, and a registered person who engages in an outside business activity without prior notice to his or her firm, including the sale of non-securities products, violates NASD Rule 3030.

      Recently, NASD Regulation has seen an increase in selling away involving independent insurance agents registered solely as Series 6 Investment Company and Variable Contracts Products representatives. These Series 6 representatives are increasingly being targeted by issuers, promoters, and marketing agents to sell short-term promissory notes to their customers. Although in many instances these notes are securities, promoters of these products are marketing them to registered persons as nonsecurities products that do not have to be sold through a broker/dealer by a registered person. In a significant number of cases, associated persons have sold these notes to their customers away from their firms and without firm approval as required by Rule 3040.

      Associated persons are required, either under Rule 3030 or Rule 3040, to report, in writing, any and all types of business that they plan to conduct away from their firms, whether or not it involves a security. Rule 3040 requires associated persons to obtain written approval from their firms before they sell any security, including securities in the form of promissory notes, and Rule 3030 requires prompt written notice to a member of any outside business activity for which an associated person receives compensation, including the sale of a promissory note that is not a security. Since there has been some confusion among associated persons as to whether particular financial instruments are securities, this Notice advises associated persons to provide written notice to their firms before they engage in the sale of any financial instrument.

      This Notice also reminds members that they should: (1) review their supervisory procedures to make sure that they are reasonably designed to achieve compliance with NASD Rules 3030 and 3040 regarding outside business activities and private securities transactions; and (2) appropriately educate their associated persons regarding the requirements of Rules 3030 and 3040.

      Questions/Further Information

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

      Private Securities Transactions Involving Promissory Notes Have Significantly Increased

      There has been a significant increase in private securities transactions involving the sale of promissory notes. In 2000, NASD Regulation brought more than 100 formal disciplinary actions involving violations of NASD Rule 3040, including cases against 39 individual representatives who sold more than $12 million in notes to more than 300 investors. In 2000, the Securities and Exchange Commission (SEC), acting in conjunction with state securities regulators, also brought a series of disciplinary actions against hundreds of individuals and entities that had raised more than $300 million from the sale of fraudulent promissory notes to thousands of investors.1

      Types Of Notes Being Marketed To The Public Through Associated Persons

      Various types of schemes are being marketed to the public through associated persons, including promissory notes, payphone and ATM schemes, prime bank schemes, and Ponzi schemes.2 Promoters also are actively marketing associated persons to sell "viatical settlements" away from their firms.3 Members and associated persons should be aware that, depending on its structure, a viatical product may or may not be a security.4

      Members and associated persons should be on the lookout for the various types of fraudulent statements that are used to market these notes to associated persons. Associated persons may be falsely told that the notes are low risk, with "guaranteed," high returns, or that they are collateralized. Associated persons also are being told that the notes are not securities, and therefore, persons selling them are not required either to be registered or to report the sales to their firms. Associated persons often are urged to invest themselves and, in some instances, are being offered large commissions for selling to their customers. Associated persons can avoid the regulatory pitfalls associated with selling notes away from their firms by first obtaining written approval from their firms, as required by Rule 3040, before they sell any note.

      How Can An Associated Person Determine Whether A Note Is A Security

      There appears to be some uncertainty among associated persons as to whether notes being sold to the public are securities, especially when issuers and marketing agents may insist that they are not. Except for some commercial loans,5 most notes are securities. A promissory note is most likely a security if the seller is selling notes to the general public to raise money for the general use of a business enterprise and the buyer is lending money as an investment and is interested primarily in the profit that the note is expected to generate.6

      Thus, it is likely that promissory notes that are marketed and sold to the general public are securities, and a registered person may not sell these notes without prior notice to and the express written permission of his or her firm. Further, it is not sufficient to have a Series 6 registration to sell promissory notes. An individual who sells promissory notes to public customers must be registered as a Series 7 registered representative.

      Associated persons at times solely rely on information provided to them by issuers, issuers' counsel, or promoters, and they fail to confirm the facts. NASD Regulation strongly urges registered persons not to make the assessment of whether a particular note is a security, but to give their firms the opportunity to determine whether sale of the note is merely an outside business activity or the sale of a security that requires written notice to the firm and firm permission. Associated persons are reminded that even if the product they wish to sell is a non-securities product, they may not accept compensation away from their firms unless and until they have provided prompt written notice to their firms.

      Associated Persons' Reporting Responsibilities

      Associated persons are required, either under Rule 3040 or Rule 3030, to report any kind of business activity engaged in away from their firms. Rule 3040 prohibits an associated person from selling any security "away" from the member firm unless the firm has authorized the associated person to make the sale. Rule 3040 applies to all sales of securities, including promissory notes that are securities. Rule 3040 ensures that, if a firm approves an associated person's participation in a securities transaction,7 the firm assumes certain critical regulatory responsibilities that go with offering and selling securities to customers. In addition to requiring that the transactions be recorded on the firm's books and records, the firm must exercise appropriate supervision over the associated person in order to prevent violations of the securities laws. As recently stated by the SEC, Rule 3040 "protects investors from the hazards of unmonitored sales and protects the firm from loss and litigation."8

      Rule 3040 requires registered persons to provide notice of the proposed transaction, in writing, to his or her firm, before the sale is made. The notice must describe the proposed transaction(s) in detail and the associated person's proposed role and must also state whether the individual has received or may receive selling compensation (including any type of referral fee). Oral notice to the firm is not sufficient to meet the requirements of Rule 3040. If the associated person expects to receive compensation, the firm must advise the registered person, in writing, whether it approves or disapproves the person's participation in the proposed transaction. If the firm disapproves the person's participation, he or she may not participate in the transaction in any manner, directly or indirectly. If the member approves the person's participation in the proposed transaction, the firm must record the transaction on its books and records and supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.

      If the note in question is not a security, the registered person is required under Rule 3030 to provide prompt written notice to his/her member firm that he or she has accepted compensation outside the scope of his relationship with the firm. Because of the differences in the requirements of Rule 3030 and Rule 3040, it is important for registered persons to establish with their firms whether a particular note is a security and to follow the appropriate NASD rule requirements.

      Associated persons are reminded that it is not sufficient to verify the non-securities status of a note solely by relying on the advice of the issuer or issuer's counsel. An associated person who attempts to conduct his or her own investigation of the issuer does so at his or her own regulatory risk, because an associated person's conclusions may be erroneous and because failure to report the proposed sales to the associated person's firm deprives the firm of the opportunity to challenge the issuer's analysis and conclusion. NASD Regulation strongly urges all associated persons to notify their firms in advance of any sales, so that the legal status of the note may be determined, and the proper notice given to the firm prior to any sales.

      Members' Supervisory Obligations

      Given the significant number of fraudulent promissory note schemes that have been uncovered, members should review their supervisory and compliance procedures to make sure that their reporting requirements are clear and complete and that each associated person receives appropriate education and training regarding the sale of notes. Problems may arise, for example, when insurance sales persons, who also are registered as Series 6 representatives, are not required by their firms to report certain outside business activities, such as the sales of other insurance products. To avoid confusion, members are urged to adopt procedures that would require registered persons to report any kind of income-producing activity.

      NASD Regulation also suggests that firms review their supervisory and compliance programs to determine whether they are adequately educating their registered persons regarding the current proliferation of promissory note schemes and the importance of reporting all sales of notes under either Rule 3030 or Rule 3040. Firms should review their annual compliance checklists to make sure that their registered persons understand that all outside sales of notes, whether securities products or not, should be reported to their firms prior to any sales. Annual audits, compliance meetings, and continuing education programs also should include issues regarding the sale of notes. Firms also might consider conducting "preventive compliance conferences" that specifically address selling notes away from the firm.


      Endnotes

      1 See NASD Regulation Investor Alert, "Promissory Notes Can Be Less Than Promised," Jan. 11, 2001, which can be found on NASD Regulation Web Site (www.nasdr.com).

      2 For a description of some of these schemes, see "Top 10 Investment Scams List Released by State Securities Regulators" which can be found on the North American Securities Administrators Association (NASAA) Web Site (www.nasaa.org).

      3 Viatical settlements are interests in the death benefits of terminally ill patients. In a viatical settlement, investors acquire fractional interests in individual insurance policies. In general, the insured gets a percentage of the death benefit in cash, and the investors get a share of the death benefit when the insured dies.

      4 See SEC v. Life Partners, Inc., 87 F.3d 356 (D.C. Cir), reh'g denied, 102 F.3d 587 (D.C. Cir. 1996); Timothy James Fergus, et al., C10990025 (NAC May 5, 2001).

      5 For example, consumer financing notes, notes secured by mortgages on homes, and short-term business notes secured by the assets of the business or an assignment of accounts receivable generally are not securities.

      6 Reves v. Ernst & Young, 494 U.S. 56, 64 (1990).

      7 Associated persons are reminded that "participation" in a securities transaction includes not only making the sale, but referring customers, introducing customers to the issuer, arranging and/or participating in meetings between customers and the issuer, or receiving a referral or finder's fee from the issuer.

      8 Robin Bruce McNabb, Exchange Act Rel. No. 43411 (Oct. 4, 2000).

    • 01-78 NASD Regulation Office Of General Counsel Announces The Publication Of The Disciplinary Update

      View PDF File

      INFORMATIONAL

      Quarterly Disciplinary Update

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Registered Representatives
      Senior Management
      Training

      Disciplinary Information



      Executive Summary

      The NASD Regulation, Inc. (NASD Regulation) Office of General Counsel (OGC) announces the quarterly distribution of a new publication entitled the Disciplinary Update. The Disciplinary Update will contain straightforward summaries designed to be of instructional value for compliance officials and registered persons. It will focus on factual and legal findings and the sanctions imposed in recent disciplinary decisions and settlements involving registered representatives.

      Questions/Further Information

      Questions concerning this Notice may be directed to Carla J. Carloni, Associate General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8019.

      NASD Regulation OGC Announces Publication Of The Disciplinary Update

      The NASD Regulation OGC announces the publication of the Disciplinary Update. The purpose of the Disciplinary Update is to provide registered representatives with a summary of select, recent disciplinary actions involving misconduct by registered representatives. The sampling includes settlements and decisions in litigated matters. This document is intended to be easily read and understood by non-lawyers so that it can be most useful to compliance officers and registered persons.

      The goal is for the Disciplinary Update to serve as a teaching tool that compliance officers can share with all individuals associated with their firms. The Disciplinary Update will not report on every disciplinary decision and settlement. It will report only on selected settlements, Hearing Panel, National Adjudicatory Council, and Securities and Exchange Commission decisions (in NASD disciplinary matters) that NASD Regulation OGC believes would be useful to report in this fashion. Since the Disciplinary Update is not intended to be used for legal research, the summaries will not include references to case names or numbers or other identifying factors. Rather, the summaries will be organized by subject matter and will include a brief discussion of facts, findings, and sanctions.

      The Disciplinary Update is not intended to replace or supplement the disciplinary information and decisions found on the NASD Regulation Web Site (www.nasdr.com) or announced in NASD Notices to Members. The decisions and settlements referenced in the Disciplinary Update are subject to the restrictions regarding the release of disciplinary information contained in IM-8310-2 (Release of Disciplinary Information) in the NASD Manual.

      The Disciplinary Update will be published quarterly on the NASD Regulation Web Site under the "Brokers" section. NASD Regulation will alert member firms about the posting of this document via the weekly e-mail broadcast sent to NASD Executive Representatives.

    • For Your Information (December)

      For Your Information

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

      NASD Regulation, Inc. reminds member firms of their obligation to file the appropriate Web-Based FOCUS reports, Annual Audits, Customer Complaint information, and Short Interest Reporting by the specified due dates. The following schedules outline due dates for 2002. Questions regarding the information to be filed can be directed to the appropriate District Office. Business questions as to how to file reports, resetting passwords, and technical questions concerning system requirements, file uploads, submission problems for Web-Based FOCUS and Customer Complaints can all be directed to (800) 321-NASD. Business questions regarding the Short Interest Reporting deadlines should be directed to Yvonne Huber at (240) 386-5034 or Jocelyn Rena at (240) 386-5091.

      Web-Base FOCUS Due Dates

      Monthly And Fifth FOCUS

      Period Ending Due Date
      January 31, 2002 February 26, 2002
      February 28, 2002 March 25, 2002
      April 30, 2002 May 23, 2002
      May 31, 2002 June 25, 2002
      July 31, 2002 August 23, 2002
      August 31, 2002 September 25, 2002
      October 31, 2002 November 25, 2002
      November 30, 2002 December 24, 2002

      Quarterly FOCUS Part II/IIA

      Quarter Ending Due Date
      December 31, 2001 January 25, 2002
      March 31, 2002 April 23, 2002
      June 30, 2002 July 24, 2002
      September 30, 2002 October 23, 2002
      December 31, 2002 January 27, 2003

      Annual Schedule I Due Date

      2001 Annual FOCUS Schedule I January 25, 2002
      2002 Annual FOCUS Schedule I January 27, 2003

      2002 Annual Audit Filings Due Dates

      Period End Due Date
      January 31, 2002 April 1, 2002
      February 28, 2002 April 29, 2002
      March 31, 2002 May 30, 2002
      April 30, 2002 June 29, 2002
      May 31, 2002 July 30, 2002
      June 30, 2002 August 29, 2002
      July 31, 2002 September 29, 2002
      August 31, 2002 October 30, 2002
      September 30, 2002 November 29, 2002
      October 31, 2002 December 30, 2002
      November 30, 2002 January 29, 2002
      December 31, 2002 March 1, 2003

      2002 Customer Complaints/3070 Due Dates

      4th quarter 2001: 1/15/02 (Tuesday)
      1st quarter 2002: 4/15/02 (Monday)
      2nd quarter 2002: 7/15/02 (Monday)
      3rd quarter 2002: 10/15/02 (Tuesday)
      4th quarter 2002: 1/15/03 (Wednesday)

      2002 Short Interest Reporting Deadlines

      Trade Date Settlement Date Exchange-Listed Short Interest Due* Nasdaq Short Interest Due*
      January 10
      Thursday
      January 15
      Tuesday
      January 17
      1:00 p.m.
      Thursday
      January 17
      6:00 p.m.
      Thursday
      February 12
      Tuesday
      February 15
      Friday
      February 20
      1:00 p.m.
      Wednesday
      February 20
      6:00 p.m.
      Wednesday
      March 12
      Tuesday
      March 15
      Friday
      March 19
      1:00 p.m.
      Tuesday
      March 19
      6:00 p.m.
      Tuesday
      April 10
      Wednesday
      April 15
      Monday
      April 17
      1:00 p.m.
      Wednesday
      April 17
      6:00 p.m.
      Wednesday
      May 10
      Friday
      May 15
      Wednesday
      May 17
      1:00 p.m.
      Friday
      May 17
      6:00 p.m.
      Friday
      June 11
      Tuesday
      June 14
      Friday
      June 18
      1:00 p.m.
      Tuesday
      June 18
      6:00 p.m.
      Tuesday
      July 10
      Wednesday
      July 15
      Monday
      July 17
      1:00 p.m.
      Wednesday
      July 17
      6:00 p.m.
      Wednesday
      August 12
      Monday
      August 15
      Thursday
      August 19
      1:00 p.m.
      Monday
      August 19
      6:00 p.m.
      Monday
      September 10
      Tuesday
      September 13
      Friday
      September 17
      1:00 p.m.
      Tuesday
      September 17
      6:00 p.m.
      Tuesday
      October 9
      Wednesday
      October 15
      Tuesday
      October 17
      1:00 p.m.
      Thursday
      October 17
      6:00 p.m.
      Thursday
      November 12
      Tuesday
      November 15
      Friday
      November 19
      1:00 p.m.
      Tuesday
      November 19
      6:00 p.m.
      Tuesday
      December 10
      Tuesday
      December 13
      Friday
      December 17
      1:00 p.m.
      Tuesday
      December 17
      6:00 p.m.
      Tuesday

      *Eastern Standard Time

    • 01-77 Trade Date — Settlement Date Schedule For Veterans' Day, Thanksgiving, Christmas, And New Year's Day

      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



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

      The schedule of trade dates-settlement dates below reflects the observance of the financial community of Veterans' Day, Monday, November 12, 2001, and Thanksgiving Day, Thursday, November 22, 2001. On Monday, November 12 The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veterans' Day. All securities markets will be closed on Thursday, November 22, 2001, in observance of Thanksgiving Day.

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

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

      Transactions made on November 12 will be combined with transactions made on the previous business day, November 9, for settlement on November 15. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 12.

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

      The Nasdaq Stock Market and the securities exchanges will be closed on Tuesday, December 25, 2001, in observance of Christmas Day, and Tuesday, January 1, 2002, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Dec. 19 Dec. 24 Dec. 27
      20 26 28
      21 27 31
      24 28 Jan. 2, 2002
      25 Markets Closed -
      26 31 3
      27 Jan. 2, 2002 4
      28 3 7
      31 4 8
      Jan. 1, 2002 Markets Closed -
      2 7 9

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

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


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

    • 01-76 Fixed Income Pricing SystemSM Additions, Changes, And Deletions As Of September 24, 2001

      View PDF File

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      FIPS



      As of September 24, 2001, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

      Symbol Name Coupon Maturity
      ATK.GA Alliant Techsystems Inc 8.500 05/15/11
      BRK.GA Berkshire Hathaway 1.000 12/02/01
      BEV.GE Beverly Enterprises Inc 9.625 04/15/09
      CHCG.GJ Charter Comm Hldgs Cap Corp 9.625 11/15/19
      CHCG.GK Charter Comm Hldgs Cap Corp 10.000 05/15/11
      CHCG.GL Charter Comm Hldgs Cap Corp 11.750 05/15/11
      COD.GA Chiles Offshore LLC/Fin 10.000 05/01/08
      DAL.GI Delta Air Lines Inc 7.900 12/15/09
      DAL.GJ Delta Air Lines Inc 8.300 12/15/29
      DAL.GH Delta Air Lines Inc 7.700 12/15/05
      DIG.GA DII Group Inc 8.500 09/15/07
      DUOC.GB Dura Operating Corp 9.000 05/01/09
      ESA.GB Extended Stay America 9.875 06/15/11
      FMK.GA Fibermark Inc 10.750 04/15/11
      FST.GD Forest Oil Corp 8.000 06/15/08
      ICCI.GA Insight Communications Inc 12.250 02/15/11
      IWOH.GA IWO Holdings Inc 14.000 01/15/11
      JOYG.GA Joy Global Inc 10.750 04/30/06
      KMP.GA Kinder Morgan Energy Partners LP 0.000 03/22/02
      RTA.GA Rochester Tel 9.000 08/15/21
      RCL.GB Royal Caribbean Cruises 8.125 07/28/04
      RCL.GC Royal Caribbean Cruises 8.250 04/01/05
      RCL.GD Royal Caribbean Cruises 7.125 09/18/02
      RCL.GE Royal Caribbean Cruises 7.250 08/15/06
      RCL.GF Royal Caribbean Cruises 7.000 10/15/07
      RCL.GG Royal Caribbean Cruises 7.500 10/15/27
      RCL.GH Royal Caribbean Cruises 6.750 03/15/08
      RCL.GI Royal Caribbean Cruises 7.250 03/15/18
      RCL.GJ Royal Caribbean Cruises 8.750 02/02/11
      SFP.GB Salton Inc 12.250 04/15/08
      UAL.GU United Air Lines Inc 10.110 02/19/06
      UAL.GV United Air Lines Inc 10.850 07/05/14
      UAL.GW United Air Lines Inc 9.760 05/13/06
      UAL.GX United Air Lines Inc 9.760 05/20/06
      UAL.GY United Air Lines Inc 9.760 05/27/06
      UAL.HA United Air Lines Inc 10.360 11/27/12
      UAL.GZ Untied Air Lines Inc 10.360 11/20/12
      YBTV.GE Young Broadcasting Inc 10.000 03/01/11

      As of September 24, 2001, the following bonds were deleted from the Fixed Income Pricing System.

      Symbol Name Coupon Maturity
      ADOU.GA Adams Outdoor Advertising 10.750 03/15/06
      BRK.GA Berkshire Hathaway 1.000 12/02/01
      CRSE.GB Case Credit Corp 6.125 10/15/01
      CDGY.GA Cody Energy Inc 10.500 04/01/06
      HVY.GA Harvey Casinos Resorts 10.625 06/01/06
      ICN.GA ICN Pharmaceuticals 9.250 08/15/05
      IGL.GE IMC Global Inc 6.625 10/15/01
      IN.GB Integon Corp Del 9.500 10/15/01
      ITTO.GB ITT Corp 6.750 11/15/05
      ITTO.GC ITT Corp 7.375 11/15/15
      ITTO.GD ITT Corp 7.750 11/15/25
      LEA.GB Lear Corporation 9.500 07/15/06
      LWN.GA Loewen Group Intl Inc 7.750 10/15/01
      MSI.GA Movie Star Inc NY 12.875 10/01/01
      NEGX.GB National Energy Group 10.750 11/01/06
      NEGX.GC National Energy Group 10.750 11/01/06
      CHX.GA Pilgrim's Pride Corp 10.875 08/01/03
      RCL.GB Royal Caribbean Cruises 8.125 07/28/04
      RCL.GC Royal Caribbean Cruises 8.250 04/01/05
      RCL.GD Royal Caribbean Cruises 7.125 09/18/02
      RCL.GE Royal Caribbean Cruises 7.250 08/15/06
      RCL.GF Royal Caribbean Cruises 7.000 10/15/07
      RCL.GG Royal Caribbean Cruises 7.500 10/15/27
      RCL.GH Royal Caribbean Cruises 6.750 03/15/08
      RCL.GI Royal Caribbean Cruises 7.250 03/15/18
      RYL.GC Ryland Group Inc 10.500 07/01/06
      UIS.GG Unisys Corp 11.750 10/15/04
      WLMC.GA William Carter Co 10.375 12/01/06

      As of September 24, 2001 changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol New Name/Old Name Coupon Maturity
      There were no symbol changes for this time period.

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, NASDR Market Regulation, at (240) 386-4994.

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

    • 01-75 Broker/Dealer, Investment Adviser, And Agent Renewals For 2002

      View PDF File

      ACTION REQUIRED

      Broker/Dealer, Investment Adviser, And Agent Renewals

      Payment Deadline: December 7, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registered Representative
      Registration
      Senior Management
      Training

      Maintenance Fees
      Registration
      Renewals
      Web CRD
      Web IARD



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) Broker/Dealer, Firm, and Agent and the Investment Adviser Firm Renewal Program for the year 2002 began November 5, 2001. This annual program simplifies the registration renewal process through the payment of one amount on the member firm's Preliminary Renewal Statement. This is the first year the NASD will collect Investment Adviser Renewal fees for Investment Adviser (IA) firms for state regulators.

      Renewal Statement fees will include: NASD personnel assessments, NASD system processing fees, NASD branch offices, as well as New York Stock Exchange (NYSE), American Stock Exchange (Amex), Chicago Board Options Exchange (CBOE), International Securities Exchange (ISE), Pacific Exchange (PCX), and Philadelphia Stock Exchange (PHLX) maintenance fees. The statement will also include state agent, state broker/dealer, and if applicable, state IA firm Renewal fees.

      Members should read this Notice to Members, any instructions posted to the NASD Regulation Web Site (www.nasdr.com), the Investment Adviser Web Site (if applicable) (www.iard.com), and any other mailed information to ensure continued eligibility to conduct business in the states effective January 1, 2002. 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/Further Information

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

      Preliminary Renewal Statements

      As of November 5, 2001, Preliminary Renewal Statements are available for viewing and printing 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, ISE, PCX, and PHLX maintenance fees, state agent Renewal fees, and state broker/dealer, and if applicable, IA firm Renewal fees. The NASD must receive full payment of the November Preliminary Renewal Statement amount no later than December 7, 2001.

      Fees

      The NASD Personnel Assessment fee for 2002 will be based on the number of registered personnel with an approved NASD license (that includes Approved Pending Prints, Inactive-Prints, Temporary Registration, and Inactive-Continuing Education registration statuses) on or before December 31, 2001. The personnel assessment is currently $10 per person.

      The NASD System Processing fee of $30 will be assessed for each person who renews registration with any regulator through the NASD Renewal Program.

      The NASD Branch Office assessment fee is $75 per branch based on the number of active NASD branches as of December 31, 2001.

      Renewal fees for NYSE, Amex, CBOE, PCX, ISE, PHLX, and state affiliations are listed in the Preliminary Renewal Statement on Web CRD. NYSE, Amex, CBOE, PCX, ISE, PHLX, and state 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, ISE, PHLX, and state registered personnel employed by the member firm.

      Currently, the state of California does not participate in the Broker/Dealer Renewal Program. Firms 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 or Investment Adviser Renewal process. Members should contact each jurisdiction directly for further information on state Renewal requirements.

      For detailed information regarding Investment Adviser Renewals, you may visit the Investment Adviser Web Site (www.iard.com). A matrix that includes a list of Investment Adviser Renewal Fees for states that participate in the 2002 IARD Investment Adviser Renewal Program is posted at www.iard.com/pdf/reg_directory.pdf.

      Please Note: The NASD does not currently process the registration of Investment Adviser Representatives (IARs) and also will not process IAR Renewal Fees for 2002. All IAR Renewals for 2002 must be paid directly to, and will be processed by, the states.

      Renewal Payment

      Payment of the Preliminary Renewal Statement should be either in the form of a check made payable to NASD Regulation, Inc., or by bank wire transfer. The check should be drawn on the member firm's account, with the firm's CRD Number included on the check, along with the word "Renewals" written on the front of the check. Submit all Renewal payments, along with the first page of the online Renewal Statement, directly to:

      U.S. Mail

      NASD Regulation, Inc.
      CRD-IARD
      P.O. Box 7777-W8705
      Philadelphia, PA 19175-8705

      (Note: This P.O. Box will not accept courier or overnight deliveries.)

      or

      Express/Overnight Delivery

      NASD Regulation, Inc.
      CRD-IARD
      W8705
      c/o Mellon Bank, Rm 3490
      701 Market Street
      Philadelphia, PA 19106
      Telephone No: (301) 869-6699

      Members should use the full address, including the "W8705" designation in either address to ensure prompt processing.

      Please Note: The addresses for Renewal payments are different from the addresses for funding your firm's CRD Daily Account.

      To ensure prompt processing or your Renewal Payment by check:

      • Include the first page of your Preliminary Renewal Statement with payment.


      • Do not include any other forms or fee submissions.


      • Write your firm CRD Number and the word "Renewals" on the check memo line.


      • Be sure to send your payment either in the blue, pre-addressed envelope that was mailed to you or address the envelope exactly as noted above.

      Wire Payment Instructions

      Firms may wire full payment of the Preliminary Renewal Statement by requesting their bank to initiate the wire transfer to The Riggs National Bank in Washington, D.C. You will need to provide your bank the following information:

      Transfer funds to: Riggs National Bank in Washington, D.C.
      ABA Number: 054-000030
      Beneficiary: NASD Regulation, Inc.
      NASD Regulation Account Number: 086-761-52
      Reference Number: Firm CRD Number and the word, "Renewals"

      To ensure prompt processing of your Renewal Payment by wire transfer:

      • Remember to inform your bank the funds are to be credited to the NASD Regulation Bank Account.


      • Provide your firm's CRD Number and the word "Renewals" as reference only.


      • Record the confirmation number of the wire transfer given by your bank.

      Members are advised that failure to return full payment to the NASD by the December 7, 2001 deadline could cause a member to become ineligible to do business in the jurisdictions effective January 1, 2002.

      Renewal Reports

      Beginning November 5, 2001, the Renewal Reports are available to request, print, and/or download via Web CRD. There will be four reports available for reconciliation with the Preliminary Renewal Statement:

      • The Firm Renewal Roster (Agent) will list all agents registered with your firm, sorted alphabetically by regulator.


      • The Firm Renewal Roster Download (Agent) will list all agents registered with your firm, sorted alphabetically by regulator in downloadable format.


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


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

      Filing Form U-5

      If Forms U-5 (either full or partial) were filed electronically via Web CRD for agents terminating one or more jurisdiction affiliations by 11:00 p.m., Eastern Time (ET), November 2, 2001, those agent Renewal fees were not included on the Preliminary Renewal Statement.

      The deadline for electronic filing of Forms U-5 for firms that want to terminate an agent affiliation before year-end 2001 is 11:00 p.m., ET, on December 21, 2001. Firms may process both partial and full Forms U-5 with a postdated termination date of December 31, 2001. (This is the only date that can be used for a post-dated Form U-5.) For more detailed information on post-dated Forms U-5, see the section titled "Post-Dated Form Filings."

      Filing Forms BDW

      The CRD Phase II Program allows firms requesting broker/dealer termination (either full or partial) to electronically file their Forms BDW via Web CRD. Firms that filed either a full or partial Form BDW by 11:00 p.m., ET, November 2, 2001 avoided the assessment of Renewal Fees on the Preliminary Renewal Statement, provided that the regulator is a CRD Phase II participant. Currently, there are four regulators that participate in Web CRD Renewals for agent fees but do not participate in CRD Phase II:

      • American Stock Exchange


      • New York Stock Exchange


      • Pacific Exchange


      • Philadelphia Stock Exchange

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

      The deadline for electronic filing of Forms BDW for firms that want to terminate an affiliation before year-end 2001 is 11:00 p.m., ET, on December 21, 2001. This same date applies to the filing of Forms BDW with regulators that are not Phase II participants. For information regarding the post-dating of Forms BDW with the termination date of December 31, 2001, see the section titled, "Post-Dated Form Filings."

      Filing Forms ADV To Cancel Notice Filings Or Forms ADV-W To Terminate Registrations

      Firms that filed either a Form ADV Amendment, unmarking a state (generating the Status Detail of "Removal Requested at End of Year"), or a full or partial Form ADV-W by 11:00 p.m., ET, November 2, 2001 avoided the assessment of Renewal Fees on the Preliminary Renewal Statement.

      The deadline for electronic filing of Form ADV Amendments or Forms ADV-W for firms that want to cancel a Notice Filing or terminate a state registration before year-end 2001 is 11:00 p.m., ET, on December 21, 2001. For information regarding post-dating Forms ADV-W with the termination date of December 31, 2001 for state registrations, see the section below.

      Post-Dated Form Filings

      Web CRD and IARD started accepting post-dated electronic filing of Forms U-5, BDW, Schedule E, and ADV-W on November 1, 2001. This program allows firms to file a termination form on, or after, November 1 with a termination date of December 31, 2001. These firms will not be assessed Renewal Fees on the Final Renewal Statement in January.

      Between November 1 and December 21, 2001, firms may process Forms U-5, BDW, Schedule E, and ADV-W (both partial and full terminations) with a post-dated termination date of December 31, 2001. (This is the only date that can be used for a post-dated form filing.) If a Form U-5, BDW, Schedule E, or ADV-W indicates a termination date of December 31, 2001, an agent, broker/dealer, and/or IA firm may continue doing business in the jurisdiction until the end of the calendar year without being assessed Renewal Fees. Please ensure that Forms U-5, BDW, Schedule E, and ADV-W are filed by the Renewal deadline date of 11:00 p.m., ET, on December 21, 2001.

      Members should exercise care when submitting post-dated Forms U-5, BDW, Schedule E, and ADV-W. The NASD will systematically process these forms as they are received but cannot withdraw a post-dated termination once submitted and processed. A member would have to electronically file a new Form U-4, BD Amendment, or ADV when Web CRD and/or IARD resumes filing processing on January 2, 2002.

      Removing Open Registrations

      Beginning November 5, 2001, member firms will be able to request via Web CRD the Non-NASD Registered Individual Roster. This roster identifies agents whose NASD registration is either terminated or purged due to the existence of a deficient condition (i.e., exams or fingerprints) but maintain an approved registration with a state. Member firms should use this roster to terminate obsolete state registrations through the submission of Forms U-5 or reinstate the NASD licenses through the filing of a Form U-4 Amendment. This roster should aid in the reconciliation of personnel registrations prior to year's end. The Non-NASD Registered Individuals Roster will also advise a firm if there are no agents within this category.

      Final Renewal Statements

      Beginning January 2, 2002 the NASD will make available FinalRenewal Statements via Web CRD. These statements will reflect the final status of agent and firm registrations and/or Notice Filings as of December 31, 2001. Any adjustments in fees owed as a result of registration terminations, approvals, Notice Filings, or transitions subsequent to the Preliminary Renewal Statement will be made in this final reconciled statement on Web CRD. If a firm has more agents, branch offices, or jurisdictions registered and/or Notice Filed on Web CRD and IARD at year-end (than it did when the Preliminary Renewal Statement was generated), additional fees will be assessed. If a firm has fewer agents, branch offices, or jurisdictions registered and/or Notice Filed at year-end (than it did when the Preliminary Renewal Statement was generated), a credit/refund will be issued.

      NASD member firms should access the Web CRD Reports function for the Firm Renewal Roster, which will list all renewed personnel with the NASD, NYSE, Amex, CBOE, PCX, ISE, PHLX, and each jurisdiction. Agents 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-end will not be included in the Renewal Process. A download version of this report is also available. Member firms will also be able to request the NASD Renewal Branch Office Roster that lists all NASD branches for which they have been assessed.

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

      Firms will have until March 15, 2002 to report any discrepancies on the Renewal Reports. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the Final Renewal Statements and Renewal Reports will appear in the January 2002 issue of Notices to Members. Firms may also refer to the November CRD/PD Bulletin, which is devoted entirely to Renewals and was mailed to all firms in October. It is also available for viewing on the CRD Page of the NASD Regulation Web Site (www.nasdr.com).

    • 01-74 Securities Industry/Regulatory Council On Continuing Education Announces Continuing Education Web Site

      View PDF File

      INFORMATIONAL

      Continuing Education

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Legal & Compliance
      Registration
      Senior Management

      Continuing Education
      Firm Element
      Regulatory Element



      Executive Summary

      The Securities Industry/Regulatory Council on Continuing Education (Council), on which the National Association of Securities Dealers, Inc. (NASD®) participates, has developed a Web Site containing information, publications, and reference materials relative to the Securities Industry Continuing Education Program. The Web Site's address is www.securitiescep.com and was launched on October 26, 2001.

      In addition to its value as an archive of continuing education information, the Council Web Site contains the following features.

      • An easy-to-use software application, the Firm Element Organizer, can aid member firms in the development of their Firm Element training plans. The Firm Element Organizer prompts the user to identify specific investment products or services and select training topics from a defined list. The Firm Element Organizer then searches an extensive database andprovides a report listing relevant resources sorted by investment product or service. A user can then edit the report with a word processing program to help create a written Firm Element plan.


      • Retired scenarios from the Regulatory Element may be ordered for a nominal fee from a catalogue on the Web Site. Available on CDs, these scenarios can be used for development of training for the Firm Element or for other compliance needs. Registered persons taking the Regulatory Element for the first time may also find them helpful. At this time only scenarios from the Regulatory Element General Program (S101) are available, but scenarios from the Supervisor's Program (S201) will be available in the near future.


      • A user can register for e-mail alerts of new rules, regulations, and other subjects of interest related to securities industry continuing education.


      • A "Contact Us" feature allows the user to submit questions regarding the Regulatory and Firm Elements.

      Questions/Further Information

      Questions about this Notice may be directed to John Linnehan, Director, Continuing Education, NASD Regulation, Inc., at (240) 386-4684; or Heather Bevans, Continuing Education Communications Coordinator, NASD Regulation, Inc., at (240) 386-4685.

      Background

      The Council includes 14 members representing a cross-section of securities firms and six SROs.1 The Council facilitates industry/regulatory coordination of the administration and future development of the Continuing Education Program. The Council recommends and helps develop specific content and questions for the Regulatory Element programs and minimum core curricula for the Firm Element.


      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., are members of the Council.

    • 01-73 Amendment To The Policy For Granting Foreign Deferrals Of The Regulatory Element - New VUE Center In Singapore

      View PDF File

      INFORMATIONAL

      Continuing Education

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Registration

      Continuing Education
      Regulatory Element



      Executive Summary

      With the opening in October of a VUE-authorized testing and training center (VUE center) in Singapore, NASD Regulation, Inc. will no longer grant foreign deferrals to registered persons residing approximately 350 miles or less from the site. This area includes Kuala Lumpur, Malaysia.

      Questions/Further Information

      Questions concerning this Notice may be directed to John Linnehan, Director, Continuing Education, NASD Regulation, Inc., at (240) 386-4684; or Heather Bevans, Continuing Education Communications Coordinator, NASD Regulation, Inc., at (240) 386-4685.

      Background

      A foreign deferral from the Continuing Education Regulatory Element prevents a registered person from becoming CE Inactive for failing to satisfy his or her Regulatory Element requirement, and is valid until the person's next anniversary requirement. NASD Notice to Members 01-50 (August 2001) amended NASD Regulation's policy on granting foreign deferrals in light of the VUE centers opened outside the United States and Canada.

      Now that there is a VUE center operating in Singapore, NASD Regulation will no longer grant foreign deferrals of Regulatory Element requirements for registered persons residing within approximately 350 miles of the VUE center.1

      Importantly, principals and supervisors who reside within 350 miles of Singapore will be given 120-day extensions to their anniversary requirement windows until the S201 Principal Session becomes available internationally. Firms must alert NASD Regulation's Field Support Services to request extensions for their principals residing within 350 miles of Singapore. To reach Field Support Services, call (800) 999-6647 and select Option 1.

      Below is a listing of the locations where foreign deferrals will no longer be granted for S101 Registered Representative Sessions or S106 Series 6 Investment Representative Sessions.

      Locations Not Eligible For A Foreign Deferral Of The Regulatory Element

      Asia:

      • Hong Kong


      • Japan


      • Singapore and Kuala Lumpur, Malaysia


      • South Korea

      Australia:

      • Sydney
        (and all locations within 350 miles of Sydney)

      Europe:

      • Belgium


      • France
        (all locations within 350 miles of Paris)


      • Germany


      • Holland


      • Ireland


      • Luxembourg


      • Switzerland


      • United Kingdom

      North America:

      • Canada


      • United States

      Any questions about distances to a VUE center or whether a particular location entitles a registered person to a foreign deferral of the Regulatory Element should be referred to Heather Bevans at (240) 386-4685. To view an updated list of VUE centers and phone numbers, please see the Exam Location Web Page located on the NASD Regulation Web Site at www.nasdr.com/exam/userlistlocations.asp.


      Endnote

      1 The center is located at: NTUC Computer Training Centre 10 Anson Road 06-18 International Plaza Singapore 079903

    • 01-72 Securities Industry/Regulatory Council On Continuing Education Issues Firm Element Advisory

      View PDF File

      INFORMATIONAL

      Continuing Education

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Legal & Compliance
      Registration
      Senior Management

      Continuing Education
      Firm Element



      Executive Summary

      The Securities Industry/Regulatory Council on Continuing Education (Council) has issued a Firm Element Advisory, a guide for firms to use when developing their continuing education Firm Element training plans. The attached Firm Element Advisory lists topics that the Council considers to be particularly relevant to the industry at this time. The list is based on a review of recent regulatory events, as well as advisories issued by self-regulatory organizations (SROs) since the last Firm Element Advisory of October 2000. Firms should review the training topics listed in the Firm Element Advisory in conjunction with their annual Firm Element Needs Analysis in which firms identify training issues to be addressed by their written Firm Element training plan(s).

      Also, please note that the Council has two additional resources available on its Web Site to assist firms with Firm Element requirements. The first is the Firm Element Organizer, an easy-to-use software application in which a firm identifies specific investment products or services and selects training topics from a defined list. The Firm Element Organizer then searches an extensive database of training resources like those listed in the Firm Element Advisory, and provides a report listing relevant resources sorted by investment product or service. A firm can use a word processing program to edit the report that can help create a written Firm Element plan. The second resource comprises scenarios from the Regulatory Element computer-based training, which may be suitable for Firm Element training. For more information, to use the Firm Element Organizer, or to order Regulatory Element scenarios, log on to www.securitiescep.com.

      Questions/Further Information

      Questions concerning this Notice may be directed to John Linnehan, Director, Continuing Education, NASD Regulation, Inc., at (240) 386-4684.

      Background

      The Council includes 14 members representing a cross-section of securities firms and six SROs.1 Both the Securities and Exchange Commission and the North American Securities Administrators Association have appointed liaisons to the Council.

      The Council facilitates industry/regulatory coordination of the administration and future development of the Continuing Education Program. Council responsibilities also include recommending and helping to develop specific content and questions for the Regulatory Element programs and minimum core curricula for the Firm Element.


      Endnotes

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


      CEP The Securities Industry Continuing Education Program

      The Securities Industry Continuing Education Program
      Firm Element Advisory

      Each year the Securities Industry/Regulatory Council on Continuing Education (Council) publishes the Firm Element Advisory to identify pertinent regulatory and sales practice issues for possible inclusion in Firm Element training plans. This year's topics have been taken from a review of industry regulatory and self-regulatory organization (SRO) publications issued since the last Firm Element Advisory of October 2000.

      The Council recommends that firms use the Firm Element Advisory when they undertake their annual Firm Element Needs Analysis. Begin by reviewing the training topics listed in the Firm Element Advisory that are most relevant to the firm's business as it exists today, including training for supervisors. Then, consider training topics prompted by new products or services the firm plans to offer, such as security futures, where Firm Element training is mandated before a registered person can conduct business in this area. Other training topics may address issues raised by new rules, customer complaints, or regulatory examination findings. Once the firm has identified and prioritized training topics, it should review the training resources listed in the Firm Element Advisory. Remember that any training topics included in the firm's written training plan should be relevant to the firm's unique situation and implementation of the plan should be appropriate to the firm's size and structure.

      The Council now has two additional resources available on its Web Site to assist firms with Firm Element requirements. The first is the Firm Element Organizer, an easy-to-use software application in which a firm identifies specific investment products or services and selects training topics from a defined list. The Firm Element Organizer then searches an extensive database of training resources like those listed in the Firm Element Advisory, and provides a report listing relevant resources sorted by investment product or service. A firm can use a word processing program to edit the report that can help create a written Firm Element plan. The second resource comprises scenarios from the Regulatory Element computer-based training, which may be suitable for Firm Element training. For more information, to use the Firm Element Organizer, or to order Regulatory Element scenarios, log on to www.securitiescep.com, or phone Roni Miekle, Continuing Education Manager, the New York Stock Exchange (212-656-2156), or John Linnehan, Director, Continuing Education, NASD Regulation, Inc. (240-386-4684).

      Training Topic Relevant Training Points and References
      Certificates of Deposit (CDs) The New York Stock Exchange (NYSE) reminded its member organizations that the risks associated with Long-Term CDs must be disclosed to prospective purchasers. In addition, the NYSE advised its members that after September 2001, par pricing may not be utilized on statements for Long-Term CDs and if market value is not provided, Long-Term CD positions must be reflected on customer statements as unpriced.

      See NYSE Information Memo Nos. 01-05 and 01-19, "Long-Term Certificates of Deposit Sales Practice," March 7, 2001 and July 20, 2001, respectively.
      Communications with the Public

      Electronic Communications—Stock Spams and Scams
      NASD Regulation has published Stock Spams and Scams, an Investor Alert on junk e-mail communications about investing in stock. See www.nasdr.com/alert_05-01.htm.
      Communications with the Public

      Electronic Communications—Suitability and Online Communications
      In light of the dramatic increase in the use of the Internet for communication between broker/dealers and their customers, NASD Regulation issued a Policy Statement to provide guidance concerning a firm's obligations under the NASD general suitability rule, Rule 2310, in this electronic environment.

      The Policy Statement briefly discusses some of the issues created by the intersection of online activity and the suitability rule, and it provides examples of electronic communications that NASD Regulation considers to be either within or outside the definition of "recommendation" for purposes of the suitability rule. In addition, the Policy Statement sets forth guidelines to assist members in evaluating whether a particular communication could be viewed as a "recommendation," thereby triggering application of the suitability rule.

      See NASD Notice to Members 01-23, Suitability Rule And Online Communications, April 2001.
      Customer Accounts, Trade and Settlement Practices

      Customer Account Transfer Contracts
      Recent modifications to the Automated Customer Account Transfer Service (ACATS) provide the capability to facilitate the transfer of accounts containing third-party and "in-house" proprietary products, including mutual funds. The NYSE approved amendments to an Interpretation of NYSE Rule 412 (Customer Account Transfer Contracts). The amendments are intended to expedite the transfer of accounts containing such products, as well as clarifying the responsibilities of a carrying organization when transferring accounts that have been internally reassigned, with new account numbers, to another registered representative. The amendments become effective January 28, 2002.

      See NYSE Information Memo No. 01-23, Amendments to the Interpretation of Rule 412 ("Customer Account Transfer Contracts"), August 16, 2001.
      Customer Accounts, Trade and Settlement Practices

      Direct Registration System (DRS)
      The Securities and Exchange Commission (SEC) views DRS as a very important component of the move to T+1 and of the continuing effort to immobilize the movement of physical certificates. DRS allows a shareholder to have securities registered electronically in the shareholder's name directly on the books of the issuer or its transfer agent without the need for a physical certificate to evidence ownership. The use of DRS also enables a shareholder to electronically move a shareholder's securities from a directly registered position on the books of an issuer or its transfer agent to a street-name position in the shareholder's broker/dealer's account at the Depository Trust Company, and vice-versa. As more issuers choose to make their securities eligible for DRS and more investors seek to take advantage of it, it is imperative that affected registered persons be aware of DRS.

      For more information on DRS, see SEC Release No. 34-44696, "Order Relating to the Movement of All DRS Issues into Profile," dated August 14, 2001, and also the Web Sites for the SEC Division of Market Regulation (www.sec.gov/divisions/marketreg.shtml), the Depository Trust Company (www.dtc.org), and the Securities Industry Association (www.sia.com).
      Customer Accounts, Trade and Settlement Practices

      NASD Three Quote Rule
      On September 21, 2000, the SEC approved amendments to NASD Rules 2320(g) (Best Execution and Interpositioning) and 3110(b) (Books and Records - Marking of Order Tickets).

      The amendments to Rule 2320(g) require members to obtain quotations from three dealers (or all dealers if three or fewer) only when there are fewer than two priced quotations displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis (such as the OTCBB or the electronic pink sheets).

      Under the amendments to Rule 3110(b)(2), members are no longer required to indicate on the order ticket for each transaction in a non-Nasdaq security the name of each dealer contacted and the quotations received to determine the best inter-dealer market whenever two or more priced quotations are displayed in an inter-dealer quotation system and NASD Regulation has access to the quotation data.

      See NASD Notice to Members 00-78, SEC Approves Proposed Changes To The NASD Three Quote Rule And Related
      Recordkeeping Requirements
      , November 2000.
      Customer Accounts, Trade and Settlement Practices

      NYSE Rule 80A Collars and NYSE Rule 80B Circuit Breaker Levels
      NYSE Rule 80A (Index Arbitrage Trading Restrictions) addresses the change in the Dow Jones Industrial Average that triggers the rule's tick restrictions.

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

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

      See NYSE Information Memo Nos. 00-32, 01-08, and 01-15, "New Rule 80A Collars and Rule 80B Circuit Breaker Levels", December 29, 2000, April 2, 2001, and July 2, 2001.
      Customer Accounts, Trade and Settlement Practices

      Options

      Order Entry

      Prohibition Against Electronically Generated Orders
      The SEC on September 12, 2000, approved Chicago Board Options Exchange (CBOE) Rule 6.8A, Electronically Generated and Communicated Orders. Rule 6.8A restricts the entry of certain options orders that are created and communicated electronically without having been reviewed by the firm.

      See CBOE Regulatory Circular RG00-139.
      Customer Accounts, Trade and Settlement Practices

      Options

      Prohibition Against Entering RAES Orders within 15 Seconds in the Same Option Class
      The SEC on March 26, 2001, approved changes to CBOE Rule 6.8, RAES Operations. Changes to Rule 6.8 include the requirements imposed by paragraph (e) which require member organizations that are able to route orders to the Exchange's Order Routing System to:

      • provide written notice to all users regarding the proper use of RAES, and


      • not enter or cause the entry of multiple orders in the same option class within any 15-second period for an account or the accounts of the same beneficial owner.

      See CBOE Regulatory Circular RG01-41.
      Customer Accounts, Trade and Settlement Practices

      Regulation S-P
      Regulation S-P (effective July 1, 2001) requires financial institutions to provide notice to consumers about the institution's privacy policy and practice, restricts the ability of financial institutions to share non-public personal information about consumers with non-affiliated third parties, and allows consumers to prevent such information sharing by "opting out." It also requires the safeguarding of customer information by firms.

      See NASD Regulatory & Compliance Alert, Summer 2001 (www.nasdr.com/rca_summer01.htm), and NYSE Information Memo No. 01-10, "Regulation S-P, " June 19, 2001.
      Individual Retirement Accounts

      "Stretch" IRAs
      In response to Internal Revenue Service rule changes that created a variation on traditional IRAs, NASD Regulation published an Investor Alert on "Stretch" IRAs. Sales presentations for stretch IRAs usually include value tables that give hypothetical examples showing how much the IRA account will be worth over time, sometimes for periods up to 90 years. Investors should realize that the huge values contained in the sales presentations depend on assumptions that can change and greatly reduce the projected value of the IRA.

      See "Stretch IRAs - Too Much of a Stretch for You?," www.nasdr.com/alert_07-01.htm.
      Margin NASD Regulation has published a number of communications for members, investors, and others about margin-related topics. Please see www.nasdr.com/5700.htm for more information.
      Margin
      Day-Trading Margin Requirements
      The SEC approved amendments establishing new minimum equity requirements to address the risks associated with day trading in customer accounts. Among other things, the amendments require that equity and maintenance margin be deposited and maintained in customer accounts that engage in a pattern of day trading. In addition, the amendments define the term "pattern day-trader" and establish minimum equity requirements of $25,000 for pattern day-traders.

      See NASD Notice to Members 01-26, SEC Approves Proposed Rule Change Relating To Day-Trading Margin Requirements, April 2001, and NYSE Information Memo 01-09, Amendments to Rule 431 ("Margin Requirements"), April 2, 2001.
      Margin

      Margin Disclosure Statement to Non-Institutional Customers
      On April 26, 2001, the SEC approved NASD Rule 2341, which requires all NASD members to deliver to retail customers a specified disclosure statement that discusses the operation of margin accounts and the risks associated with trading on margin.

      See NASD Notice to Members 01-31, SEC Approves NASD Rule Proposal Requiring Delivery Of Margin Disclosure Statement To Non-Institutional Customers, May 2001, and NASD Notice to Members 01-37, NASD Regulation Extends Deadline For Delivery
      Of Margin Disclosure Statement To Existing Non-Institutional Customers To January 31, 2002
      , June 2001.
      Municipal Securities

      Municipal Fund Securities, Including 529 Plans
      A municipal fund security (e.g., 529 Plans and local government investment pools) is defined in Municipal Securities Rulemaking Board (MSRB) Rule D-12 as a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company thereunder.

      The MSRB has amended Rule G-3, on professional qualifications, to provide a temporary alternative method for qualification of municipal securities principals in connection with municipal fund securities. Until July 31, 2002, a dealer may designate an investment company/variable contracts limited principal or a general securities principal to act as a municipal fund securities limited principal. A designated municipal fund securities limited principal will have all of the powers and responsibilities of a municipal securities principal under MSRB rules with respect to transactions in municipal fund securities and, under certain circumstances, may be counted toward the dealer's numerical requirement with regard to municipal securities principals.

      See "Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market," January 18, 2001, MSRB Rule Book (July 1, 2001) at 14; "Municipal Fund Securities-Qualification of Municipal Securities Principals and Application of MSRB Rules to Fees, Disclosure and Other Market Practices," MSRB Reports, Vol. 21, No. 2 (July 2001) (www.msrb.org/msrb1/reports/0701v212/MFS.htm).
      Municipal Securities

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

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

      Delivery of Official Statements and Advance Refunding Documents to the MSRB
      Managing underwriters are required to deliver to the MSRB, among other things, copies of final official statements for most primary offerings of municipal securities, if such documents are prepared by or on behalf of the municipal securities issuer. For refunding issues, dealers must send to the MSRB two copies of the refunding escrow agreement, or its equivalent, if prepared by or on behalf of the municipal securities issuer. Dealers must send these documents to the MSRB using the appropriate form.

      Effective January 1, 2002, underwriters may begin making submissions in electronic form. See MSRB Rule G-36: Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee, MSRB Rule Book; Form G-36 Manual published by the MSRB; "SEC Approval of Electronic Submission System under Rule G 36" (www.msrb.org/msrb1/whatsnew/Esubmissionapproval.htm).
      Municipal Securities

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

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

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

      See MSRB Rule G-38: Consultants, MSRB Rule Book; "Bank Affiliates as Municipal Finance Professionals or Consultants," MSRB Rule Book (July 1, 2001) at 239.
      Municipal Securities

      Flat Transaction Fees
      The MSRB has issued a notice concerning dealers that will charge a flat transaction fee of $15.00 for trades executed through an automated trading system. Since this fee is relatively small and unrelated to the par value of the transaction, the MSRB believes that the transaction fee should be considered a miscellaneous transaction fee. Therefore, the fee would not have to be incorporated into the stated yield, but would need to be separately disclosed on the confirmation.

      See "Notice Concerning Flat Transaction Fees," June 13, 2001, MSRB Rule Book (July 1, 2001) at 114.
      Mutual Funds

      Understanding Mutual Fund Classes
      NASD Regulation has published an Investor Alert on the subject of mutual fund classes. See www.nasdr.com/alert_12-02.htm.
      Performance Fees On February 15, 2001, the SEC approved amendments to NASD Rule 2330(f)(2) to permit NASD members and associated persons that act as investment advisers to share in the customer account profits and gains, subject to the provisions of Rule 205-3 under the Investment Advisers Act of 1940.

      See NASD Notice to Members 01-24, SEC Approves Proposed Changes To Rule 2330(f)(2) Relating To Performance Fees, April 2001.
      Promissory Notes A brochure, produced jointly by the North American Securities Administrators Association (NASAA), NASD, SEC, and SIA outlines the risks and rewards of investing in promissory notes. Investors learn what to consider in evaluating whether promissory notes are sound investments. Concrete examples illustrate the kinds of scams that have cost some investors their life savings. See www.sia.com/publications/html/promissory_notes_brochure.html, and also Promissory Notes Can Be Less Than Promised, an Investor Alert published by NASD Regulation at www.nasdr.com/alert_12-01.htm.
      Security Futures (also know as Single Stock Futures) The Commodity Futures Modernization Act of 2000 amended the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Commodity Exchange Act of 1936 to permit the trading of "security futures (also known as Single Stock Futures)": futures on individual stocks and narrow-based indexes. This statutory change removes the ban on U.S. futures trading on an array of equity securities and securities indexes that has been in place since 1982. The introduction of security futures is expected to begin December 21, 2001.

      Because security futures will have different characteristics and requirements than existing securities, industry SROs are requiring that each registered person complete a Firm Element continuing education program on security futures before he or she can conduct a public business in security futures.

      Please monitor the following SRO Web Sites for information about security futures and training requirements.

      Supervision

      Compensation of Members and Dual Employment as Relates to Floor Activities
      The NYSE identified, clarified, and emphasized three areas for its members and member organizations: (1) employment, compensation, and dual employment of members, (2) the appropriate type of agreement for a member executing transactions with public customers, and (3) direct access business.

      See NYSE Information Memo No. 01-18, "I.Compensation of Members and Dual Employment, II. Executing Broker
      Arrangements, III. Direct Access
      ," July 11, 2001.

      Also see PHLX Memorandum 93-14 and related Equity Floor Procedures Advice.
      Variable Contracts

      Exchanges of Variable Annuities
      NASD Regulation has published an Investor Alert on exchanging variable annuities. See www.nasdr.com/alert_02-01.htm

      See also:

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


      • Variable Annuities: What You Should Know at www.sec.gov/consumer/varannty.htm


      • NASD Regulatory & Compliance Alert, Advertising Of Bonus Variable Annuities, Summer 2000. (www.nasdr.com/rca_summer00.htm).

      Variable Contracts

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

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


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

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

      TO OBTAIN MORE INFORMATION

      Organization Address Phone Number Online Address
      American Stock Exchange American Stock Exchange
      Marketing Department
      86 Trinity Place
      New York, NY 10006
      800-THE-AMEX
      www.amex.com
      www.amextrader.com
      Chicago Board Options Exchange Investor Services
      Chicago Board Options Exchange
      400 S. LaSalle Street
      Chicago, IL 60605
      800-OPTIONS
      www.cboe.com
      Municipal Securities Rulemaking Board MSRB Publications
      Department
      1900 Duke Street
      Suite 600
      Alexandria, VA 22314
      703-797-6600
      www.msrb.org
      National Association of Securities Dealers NASD MediaSource
      P.O. Box 9403
      Gaithersburg, MD
      20898-9403
      240-386-4200
      www.nasdr.com
      New York Stock Exchange New York Stock Exchange
      Publications Department
      11 Wall Street, 18th Floor
      New York, NY 10005
      212-656-5273
      212-656-2089
      www.nyse.com
      Philadelphia Stock Exchange Philadelphia Stock Exchange
      Marketing Department
      1900 Market Street
      Philadelphia, PA 19103
      800-THE PHLX
      215-496-5158
      www.phlx.com
      info@phlx.com
      Securities Industry/
      Regulatory Council on Continuing Education
        www.securitiescep.com

    • 01-71 Content Outline For New Series 6 Program Regulatory Element (S106) For Investment Representatives

      View PDF File

      INFORMATIONAL

      Continuing Education

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Legal & Compliance
      Registration Department
      Senior Management

      Regulatory Element
      General Program (S101)
      Series 6 Program (S106)



      Executive Summary

      NASD Rule 1120 (Continuing Education Requirements) permits the NASD, as appropriate, to designate specific Continuing Education Regulatory Element programs for various registration categories. The first initiative under Rule 1120 was the General Program (S101) in 1995, followed by the Supervisor's Program (S201) in 1998. We are now preparing to introduce the Series 6 Program (S106), which has been developed specifically for Series 6 registered persons.

      The S106 will differ in three respects from the existing General Program (S101).

      1) The Series 6 Program will feature audio in addition to text on screen.
      2) Module 7 of the Series 6 Program is called Application Of Product Knowledge To Sales Practice. It replaces New and Secondary Offerings, Module 7 of the General Program.
      3) The scenarios in all seven modules of the S106 will only deal with mutual funds or variable contracts.

      Upon implementation of the new program, Series 6 registered persons will take the S106 Program. Supervisors/Principals of Series 6 registered persons will continue to take the Supervisor's Program (S201). Other registration categories will continue to take the General Program (S101).

      Attached is the combined Content Outline for both the S101 and S106 programs. Please note that there is some overlap in subject matter between the two programs. However, those areas specific to the individual programs are indicated.

      A future Notice to Members will be published with the specific date of the implementation of the Series 6 Program as soon as that date is determined. In the interim period, Series 6 registered persons will continue to take the General Program.

      To obtain copies of the Content Outline For The Regulatory Element, phone either of the parties listed below, or download it from www.securitiescep.com, the Web Site of the Securities Industry/Regulatory Council on Continuing Education.

      Questions/Further Information

      Questions about this Notice should be directed to John Linnehan, Director, Continuing Education, NASD Regulation, at (240) 386-4684; or Heather Bevans, Continuing Education Communications Coordinator, NASD Regulation, at (240) 386-4685.


      CEP — Securities Industry/Regulatory Council on Continuing Education

      Content Outline For The Regulatory Element

      Introduction

      Six self-regulatory organizations (SROs) - 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. - have enacted rules establishing a continuing education program for the securities industry. The rules call for a formal, two-part program, comprising a Firm Element and a Regulatory Element.

      The Firm Element requires broker/dealers to keep employees up to date on job-and product-related subjects by means of a formal, ongoing training program. Each broker/dealer is required to establish a training process meeting certain minimum criteria and standards. In planning, developing, and implementing the Firm Element, each broker/dealer must take into consideration its size, structure, scope of business, and regulatory concerns.

      The Regulatory Element requires all registered persons to participate in a prescribed computer-based training session within 120 days of their second registration anniversary date and every three years thereafter. The Regulatory Element is designed to cover significant subject matter which is broadly applicable to all registered persons. Programs have been specifically developed for registered Supervisors/Principals and Series 6 (Investment Company Products/Variable Contracts Representative), in addition to the General Program for persons in other registration categories (Series 7 General Securities Representative and other registration categories not covered in the Supervisor and Series 6 programs). The content is developed by industry committees representing a diverse range of broker/dealers, in conjunction with the Securities Industry/Regulatory Council on Continuing Education, industry regulatory agencies, and SROs.

      The Securities Industry Continuing Education Program is intended to keep registered securities industry personnel current regarding rules and other issues important to performing their jobs appropriately.

      The Regulatory Element

      The Regulatory Element focuses on compliance, regulatory, ethical, and sales-practice standards. Its content is derived from rules and regulations, as well as standards and practices widely accepted within the industry. Although the specific requirements of certain rules may differ slightly among the various SROs, the program is based on standards and principles applicable to all. In certain instances, particular SRO requirements may be more restrictive than those represented in the program. Additionally, many broker/dealers limit the types of activities in which their registered employees may engage and/or the investment products they may represent, or they may require specific approvals for certain functions. Registered persons and their supervisors are responsible for ensuring that their activities are within the scope permitted by their employing broker/dealers and conducted in accordance with the rule requirements of all the SROs and jurisdictions regulating them.

      The content for the General (101) and Series 6 (106) programs is organized into seven modules. While the content is specific to the respective registration categories covered by each program, the subject titles for modules 1 through 6 in both the General (101) and Series 6 (106) programs are the same. The content of Module 7 will vary according to the program. Each of these topics is covered thoroughly in the corresponding module, and some may be covered in more than one module. The content of these modules is outlined starting on page 3. Unless otherwise specified, the topics are covered at basic levels of knowledge and understanding.

      Please note that there is no specific content outline for the Supervisor/Principal program (201). This program is designed to draw on the experience of the supervisor/principal involving such topics as supervision, suitability, insider trading, money laundering, and interviewing and hiring.

      There are no study materials available from the Council or the SROs as the Regulatory Element programs are based on industry experience. Please consult your training or compliance department if you need additional information on any of the topics listed in this outline.

      General Program (101) Series 6 Program (106)
      Module 1 Registration & Reporting Issues Module 1 Registration & Reporting Issues
      Module 2 Communications with the Public Module 2 Communications with the Public
      Module 3 Suitability Module 3 Suitability
      Module 4 Handling Customer Accounts Module 4 Handling Customer Accounts
      Module 5 Business Conduct Module 5 Business Conduct
      Module 6 Customer Accounts, Trade & Settlement Practices Module 6 Customer Accounts, Trade & Settlement Practices
      Module 7 New & Secondary Offerings Module 7 Application of Product Knowledge to Sales Practices

      How The Training Is Presented In Each Program

      In each module of the General Program and the Series 6 Program, participants are led through scenarios depicting situations faced by registered persons in the course of their business. The format of the scenarios in the General Program (101) is computer interactive text based, while the Series 6 Program (106) will also feature audio segments. After reading the scenario, the participant must demonstrate his or her understanding of the issues by choosing the most appropriate response(s) to questions concerning the facts in the scenario. The program will assess the individual's understanding of the topic. If the individual does not answer a sufficient number of questions correctly, the program delivers tutorials about the topics in the module and the participant must try again with another scenario on the same general topic. The participant must successfully complete one scenario in the module before he or she can advance to the next module.

      The Supervisor/Principal Program (201) is specifically designed to enhance a supervisor's problem-detection and resolution skills. The program comprises lifelike situations in the form of cases covering such topics as suitability, supervision, insider trading, money laundering, and interviewing and hiring.

      A participant in the Regulatory Element must complete the entire program to satisfy the Regulatory Element requirement. Each program is designed to provide ample time to complete all scenarios within the timeframe allotted. Failure to complete the Regulatory Element within 120 days after the prescribed anniversary dates will result in a person's registration becoming inactive. This means that he or she may not engage in, or be compensated for, activities requiring a securities registration until he or she satisfies the requirements.

      This is the content outline for both the General (101) and the Series 6 (106) programs. Topics that are specific to the 101 General Program appear in text boxes.

      Module 1: Registration And Reporting Issues

      1.1   Registration/Licensing Requirements

      Requirements of the self-regulatory organizations (SROs)

      State authority and jurisdiction, general requirements for registered representative (RR) and broker/dealer registration/licensing in states

      Conditions, restrictions, and requirements for amending Form U-4

      Restrictions on activities of RRs

      General registration/licensing requirements for and limitations on activities of Investment Advisers

      Restrictions on activities of nonregistered persons

      Consequences of violating registration/licensing requirements

      Continuing Education requirements

      1.2   Securities And Exchange Commission (SEC) And SRO Authority And Investigations

      Jurisdiction of SEC, SROs, and state regulators

      Obligations for response to regulatory inquiries

      Definition and consequences of statutory disqualification [Section 3(a)(39) of the Securities Exchange Act of 1934]

      Settlement of employer-employee disputes

      1.3   Blue-Sky Laws, Registration Of Securities

      Requirements for securities to be registered or exempt in states in which they are being sold

      Distinction between exempt/nonexempt securities

      General exemptions from registration

      1.4   Differences In Insurance Appointments And Securities Licensing

      Variable Annuity/Variable Universal Life

      Module 2: Communications With The Public

      2.1   Communications With The Public

      Definitions, general standards, and required approvals for public communications:

      Telephone solicitations, correspondence, advertisements, market letters, research reports, sales literature, educational material, electronic communications, communications in and with the press, seminars, lectures, shareholder services, broker/dealer use only, summary statements

      Restrictions on telephone solicitations/cold calling

      2.2   Customer Complaints And Inquiries

      Requirements for reporting, investigation, and documentation

      Handling of disputes with customers; arbitration procedures and awards

      CRD toll-free number and type of information publicly disclosed in disciplinary records

      Module 3: Suitability

      3.1   Specific Elements In Evaluating Current Status Of Customer

      Financial profile - Balance sheet, income statement, other financial considerations

      Life profile - Non-financial investment considerations

      Risk tolerance and investment experience

      Investment objectives and considerations

      Solicited versus unsolicited accounts and transactions

      Tax considerations

      3.2   Concepts And Implications Related To Risk

      Diversification and risk reduction - Concepts and specific responsibilities of the RR

      Definitions and examples of types of risk - Liquidity risk, interest rate risk, call risk, credit risk, legislative risk, purchasing power risk (inflation risk), reinvestment risk, principal risk, currency risk, political risk, sector risk

      Risk characteristics of categories of investments (e.g., equity, debt, asset-backed, mutual funds, insurance products)

      Business cycle - Definition and effects

      Effects of international events, interest rate fluctuations

      3.3   Monitoring Customer Needs, Objectives, And Portfolio

      Obligation and procedures for routine monitoring and updating of customer's financial and life profile, investment objectives, and portfolio.

      Module 4: Handling Customer Accounts

      4.1   Prohibited/Fraudulent Practices

      Definitions and examples of prohibited and improper activities such as insider trading, entering false orders, misappropriation of funds, stealing/conversion, forgery, unauthorized trading, guarantees to customers, selling away, piggy-backing/shadowing, selling dividends, commingling funds, selling to breakpoints, churning, switching, and twisting.

      In addition to the above stated practices, the following also pertains to the 101 Program only: market manipulations, unfair and excessive pricing, front running, free-riding, parking, trading at the close/marking the close.

      4.2   Third-Party Orders And Authority To Transact

      Required instructions, requirements for third-party checks, requirements for written authorization for orders

      4.3   Account Transfers And Customer Records

      General requirements and procedures for transferring account (e.g., dealer-to-dealer, representative-to-representative)

      Confidentiality issues and responsibilities related to customer accounts and records; firm ownership of records

      4.4   Gifts And Gratuities

      Restrictions on giving and receiving; requirements for approvals

      Noncash compensation, sales contests

      Prohibition on compensating nonmembers

      4.5   Sharing Profits And Losses

      Restrictions on and allowable circumstances

      4.6   "Prudent Man" Rule

      Basic principle

      4.7   "Chinese Wall" Requirements (Pertains to the 101 Program only)

      Module 5: Business Conduct

      5.1   Private Securities Transactions

      Restrictions, required authorizations, legal risks

      5.2   Outside Business Activities

      Permitted and prohibited activities - Dual licensing, part-time employment, conflicts of interest

      Required notifications/approvals (regulatory and broker/dealer)

      5.3   Compensation

      Rules, regulations, and standards governing sharing commissions or part of compensation

      5.4   Payment Of Referral Fees (To Nonaffiliated Persons)

      Restrictions; approval and disclosure requirements

      5.5   Restrictions On Loans To/From Customers

      5.6   Conflicts Of Interest And Potentially Illegal Situations

      RR awareness, things to watch for, recognition, prohibitions

      5.7   Cash Transaction Reporting Requirements (e.g., money laundering)

      Module 6: Customer Accounts, Trade And Settlement Practices

      6.1   Customer Accounts, Documents, Approvals, And Restrictions

      Procedures for opening customer accounts, including required approvals, and recordkeeping

      Definitions and requirements related to:

      Accounts for Clients of Investment Advisers - Additional trading authorization required, written evidence of power of attorney

      Discretionary Accounts - Requirements for written authorization and broker/dealer approval; prohibition by many broker/dealers

      Legally Restricted Accounts - Restrictions/prohibitions on accounts for minors, persons incompetent, entities, death of customer, fiduciary accounts

      Custodial Accounts (UGMA/UTMA) - General requirements and characteristics

      Qualified Accounts [such as 401(k), IRA, IRA Rollover, 403(b), & 457] - Tax advantages, restrictions

      Joint Accounts - Characteristics and purpose of accounts such as joint tenants with right of survivorship, joint tenants in common.

      Broker/Dealer Employee Accounts - Approval of and disclosures, procedures for opening

      Obligations of and limits on fiduciaries, limits on the use of powers of attorney

      Authorization to transact

      6.2   Regulation T, SRO Margin And Short Sales Rules (Pertains to the 101 Program only)

      Basic distinctions between cash and margin accounts.
      Appropriate use of margin accounts and associated risks - Initial and maintenance concepts
      Obligations for informing customers of risks and benefits.
      Margin accounts for fiduciaries.

      6.3   Securities Investor Protection Corporation (SIPC)

      Purpose of SIPC, coverage limits and amounts, disclosures to customers

      6.4   Payment And Delivery For Securities Transactions

      General requirements, consequences of nonpayment/nondelivery

      6.5   Payment For Investment Company/Variable Contract Products

      Regulation T requirements for payment

      Free-look provisions

      Forward pricing of shares

      6.6   Correction Of Errors

      Procedures, approvals, and prohibitions

      Module 7: New And Secondary Offerings (Pertains to the 101 Program only)

      7.1   SEC Registration and Prospectus Requirements (Securities Act of 1933)

      General Requirements - Definition of offer; prospectus delivery requirements; limits on advertising and other written materials; prohibition of sales before effective date; use of preliminary prospectus (red herring); restrictions before, during, and after a distribution; exemptions from registrations; restrictions on hot issues

      New Issues and Securities Trading - Registration requirements, restricted accounts, prospectus requirements, exemptions from registration

      7.1   Penny Stock Rules

      General knowledge of written suitability and disclosure requirements

      Module 7: Application Of Product Knowledge To Sales Practices

      Note: Module 7 content for the 106 Program will consist of subject matter described below. The same subject areas may also be covered in Modules 1 through 6 of the 101 Program.

      7.1   Investment Companies

      Characteristics of Unit Investment Trusts (UIT); Closed-end investment companies; open-ended investment companies; diversified and non-diversified companies

      7.1.1   Mutual Funds

      Structure and Operation of funds - costs of operation; functions/responsibilities of board of directors, investment advisers, underwriters (distributor), custodians, and transfer agents; rights of shareholders; conveniences and services provided to shareholders

      7.1.2   Types Of Distributions

      Net investment income, capital gains, returns of capital, distribution alternatives

      7.1.3   Types Of Mutual Funds

      Characteristics and investment policies by objective and underlying investment (e.g., aggressive growth funds, income funds, money market funds, municipal bond funds)

      7.1.4   Important Factors In Comparing Funds

      Basis of comparison; performance statistics and other factors (e.g., sales and distribution charges, minimum purchase requirements)

      7.1.5   Prices Of Mutual Fund Shares

      Determination and consequences of Net Asset Value (NAV)

      Sales Charges - computation of; types (e.g., front end load, level load, contingent deferred and no load); qualification for reduction (e.g., breakpoints, letter of intent), expenses and 12b-1 fees

      Definition of Dollar Cost Averaging (DCA)

      7.1.6   Redemption Of Mutual Fund Shares

      Redemption prices and systematic withdrawals

      7.1.7   Prospectus And Statement Of Additional Information (SAI)

      Delivery requirements

      7.1.8   Federal Income Tax Regulations For Mutual Funds

      Tax consequences of activities by the Investment Company or investor.

      Cost basis, holding period, wash sales, inheritance of securities

      7.1.9   Contractual Plan/Periodic Payment Plan

      Characteristics; prospectus requirements; operation of contractual plan

      7.2   Variable Contracts

      Separate Accounts

      7.2.1   Variable Annuity Contracts

      Characteristics and types of variable and fixed annuities, related sales charges and expenses, valuation of a variable annuity contract, and tax treatment of individual non-tax qualified variable annuity contracts

      7.2.2   Variable Life Insurance (Fixed And Flexible Premium Types)

      Characteristics of universal and variable life insurance (e.g., death benefits, cash value, risk premium payments, conversion privileges)

      Fees and related expenses (e.g., mortality costs, cost of insurance, investment management fee)

      Valuation of a variable life insurance policy

      Tax treatment of variable life insurance to the policyholder

      7.3   Retirement Plans

      Characteristics including purpose, funding, eligibility, employee coverage, contribution limits, taxation, rollover/transfer rules, distribution rules, taxation:

      Individual Retirement Accounts (IRAs), Simplified Employee Pension (SEP) Plans, Keogh/HR 10 Plans, Corporate Pension Plans - Defined contribution plan and Defined benefit plan, Profit sharing plans, 401(k) plans, 403(b) Tax-Deferred Annuity Plans/Custodial Accounts

    • 01-70 SEC Approves Increases To Member Surcharges And Process Fees In NASD Arbitration Proceedings, And Other Amendments To Fee-Related Provisions Of The NASD Code of Arbitration Procedure

      View PDF File

      INFORMATIONAL

      Member Surcharges And Process Fees In Arbitrations

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Senior Management

      Arbitration Fees
      Code of Arbitration Procedure



      Executive Summary

      The Securities and Exchange Commission (SEC or Commission) has approved increases to the member surcharges and process fees paid by member firms in National Association of Securities Dealers, Inc. (NASD®) arbitration proceedings. For claims filed on or after November 19, 2001, member surcharges and hearing process fees will increase by an aggregate of 10 percent. In addition, the incremental prehearing process fee payments currently paid by member firms will be combined into a single payment of $750, an overall increase of $150, which will be payable at the time arbitrator lists are sent to the parties pursuant to Rule 10308(c)(5) of the NASD Code of Arbitration Procedure (Code).1 These increases will be used to fund NASD Dispute Resolution's share of the cost of developing and implementing a new computer system, which will greatly enhance the administration of cases in the forum, and to cover inflationary cost increases.

      In addition, the SEC has approved several other amendments to provisions of the Code relating to the assessment and payment of fees in NASD arbitration proceedings that will also go into effect on November 19, 2001.2

      Specifically:

      • Rule 10306 of the Code has been amended to provide that any forum fees unpaid at the time of settlement will be divided equally among the parties when settling parties fail to allocate the fees in their settlement agreements;


      • Rule 10319 of the Code has been amended to provide that payment of the adjournment fee is required only if an adjournment is granted, rather than when a request for adjournment is made, and to raise the current cap on adjournment fees from $1,000 to $1,500; and


      • Rule 10328 of the Code has been amended to clarify that when a claim is amended to increase the amount in dispute, NASD Dispute Resolution will recalculate filing fees, hearing session deposits, process fees, and surcharges based on the new, increased claim.

      The text of the amendments described in this Notice is included as Attachment A.

      Questions/Further Information

      Questions regarding this Notice may be directed to Laura Leedy Gansler, Counsel, NASD Dispute Resolution, Inc., at (202) 728-8275.

      Discussion

      Increases In Member Surcharge And Prehearing And Hearing Process Fees

      Member Surcharge Increase

      Rule 10333 of the Code requires that each member that is a party to an arbitration proceeding, or that employed an associated person who is a party to an arbitration proceeding at the time of the events that gave rise to the dispute, pay a non-refundable member surcharge. The amount of the surcharge varies depending on the amount in dispute. For all claims filed on or after November 19, 2001, member surcharges, which were last raised in 1997, will increase by an aggregate of 10 percent. Actual increases in each case will vary depending on the amount in dispute. The highest per-case increase will be $350.

      Prehearing Process Fees

      Rule 10333 also provides that, in cases in which the amount in controversy exceeds $25,000, each member that is a party, or that employed an associated person named as a party at the time of the events that gave rise to the arbitration proceeding, must pay a prehearing process fee. Until now, the prehearing process fee was divided into three segments, which accrued as follows: $50 at the time of the service of claim; $150 when the first answer to the claim was received or due, and discovery and motions proceedings begin; and $400 when the parties were first notified of the names of any of the arbitrators selected to hear the matter, or given the names of arbitrators to select.

      For all claims filed on or after November 19, 2001, these three prehearing process fee payments will be combined into a single payment of $750, due at the time the parties receive the arbitrator lists.

      Hearing Process Fee Increase

      Rule 10333 also requires that each member that is a party to an arbitration proceeding, or that employed an associated person who is a party to an arbitration proceeding at the time of the events that gave rise to the dispute, pay a hearing process fee, which accrues when the parties are notified of the date and location of the first hearing session. The amount of the hearing process fee varies depending on the amount of damages requested. For all claims filed on or after November 19, 2001, hearing process fees will go up an aggregate of 10 percent. Actual increases in each case will range from zero to 14 percent, depending on the amount in dispute. The highest per-case increase will be $500.

      Other Changes To Rule 10333

      Rule 10333 also has been reorganized to make it simpler to use, and to conform the rest of the rule to the consolidation of the prehearing process fee payments. The rule has been broken into two sections: Member Surcharges, and Prehearing and Hearing Process Fees. In addition, language in Rule 10333(d) relating to the disposition of accrued but unpaid member fees has been deleted. This language is no longer necessary in light of the amendment to Rule 10306 of the Code described in this Notice, which clarifies that, in the event of a settlement, parties remain responsible for all fees incurred under the Code.

      Other Amendments To The Fee Provisions

      Settlement Default For The Allocation Of Forum Fees

      Rule 10306 of the Code provides that parties to arbitrations may settle their dispute at any time. The terms of any settlement agreement need not be disclosed to NASD Dispute Resolution. However, settling parties remain responsible for payment of outstanding fees incurred under the Code. NASD Dispute Resolution encourages parties to agree on how any outstanding fees shall be divided among the parties as part of the settlement agreement. Unfortunately, this often does not happen. When the parties fail to allocate fees in settlements, the staff must present this issue to the arbitrator(s) for resolution. This is a time-consuming process that is an unnecessary burden to the arbitrator(s), and can result in surprises to the parties. To eliminate any ambiguity in this area, Rule 10306 has been amended to provide that if settling parties fail to agree on the allocation of outstanding fees, the fees will be divided equally among all parties by default. This rule change will apply to all settlements entered into on or after November 19, 2001.

      Adjournment Fees

      Rule 10319 of the Code previously required parties requesting adjournment of an arbitration hearing to deposit a fee at the time the adjournment is requested. If the adjournment was not granted, the deposit was returned; if it was granted, the arbitrators could return the deposit in their discretion. Rule 10319 has been amended to minimize the burden this rule placed on parties, arbitrators, and staff by providing that payment of the adjournment fee is required only if an adjournment is granted, rather than when a request for adjournment is made. This will eliminate the need for parties to deposit funds that may be returned to them, as well as the need for the staff to track the deposits and issue refunds if necessary. It will also help to expedite the resolution of adjournment requests. The rule also has been amended to increase the current $1,000 cap on adjournment fees to $1,500. This rule change will apply to all adjournment requests made on or after November 19, 2001.

      Recalculating Fees When Amount In Dispute Is Amended

      Rule 10328 of the Code, governing amendments to pleadings, has been amended to clarify that when a claim is amended to increase the amount in dispute, NASD Dispute Resolution will recalculate filing fees, hearing session deposits, process fees, and surcharges based on the new, increased claim. This will eliminate confusion regarding the effect on such fees when the amount of dispute is increased. This rule change will apply to all amended pleadings filed on or after November 19, 2001.

      Effective Date

      The amendments to Rule 10333 will apply to all claims filed on or after November 19, 2001. The amendments to Rule 10306 will apply to all settlements entered into on or after November 19, 2001. The amendments to Rule 10319 will apply to all adjournment requests made on or after November 19, 2001. The amendments to Rule 10328 will apply to all amended pleadings filed on or after November 19, 2001.


      Endnotes

      1 Exchange Act Release No. 44897 (October 2, 2001) (File No. SR-NASD-2001-62), 66 Federal Register 51711 (October 10, 2001).

      2 Exchange Act Release No. 44573 (July 18, 2001) (File No. SR-NASD-2001-21), 66 Federal Register 38773 (July 25, 2001).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      10000. Code of Arbitration Procedure

      10306. Settlements

      [All settlements upon any matter shall be at the election of the parties.]

      (a) Parties to an arbitration may agree to settle their dispute at any time.
      (b) The terms of a settlement agreement do not need to be disclosed to NASD Dispute Resolution. However, the parties will remain responsible for payment of fees incurred under the Code. If the parties fail to agree on the allocation of outstanding fees, the fees shall be divided equally among all parties.

      10319. Adjournments

      (a) The arbitrator(s) may, in their discretion, adjourn any hearing(s) either upon their own initiative or upon the request of any party to the arbitration.
      (b) [Unless waived by the Director of Arbitration upon a showing of financial need,] If an adjournment requested by a party is granted after arbitrators have been appointed, the [a] party requesting the adjournment [after arbitrators have been appointed shall deposit with the request for an adjournment,] must pay a fee equal to the initial deposit of hearing session fees for the first adjournment and twice the initial deposit of hearing session fees, not to exceed $1,500 [$1,000] for a second or subsequent adjournment requested by that party. [If the adjournment is granted, the arbitrator(s) may direct the return of the adjournment fee.] The arbitrators may waive these fees in their discretion. If more than one party requests the adjournment, the fees shall be allocated among the requesting parties by the arbitrators.
      (c) Upon receiving a third request consented to by all parties for an adjournment, the arbitrator(s) may dismiss the arbitration without prejudice to the Claimant filing a new arbitration.

      10328. Amendments

      (a) After the filing of any pleadings, if a party desires to file a new or different pleading, such change must be made in writing and filed with the Director of Arbitration with sufficient additional copies for each arbitrator. The party filing a new or different pleading shall serve on all other parties, a copy of the new or different pleading in accordance with the provisions set forth in Rule 10314(b). The other parties may, within ten (10) business days from the receipt of service, file a response with all other parties and the Director of Arbitration in accordance with Rule 10314(b).
      (b) If a new or amended pleading increases the amount in dispute, all filing fees, hearing session deposits, surcharges, and process fees required under Rules 10332 and 10333 will be recalculated based on the amended amount in dispute.
      (c) After a panel has been appointed, no new or different pleading may be filed except for a responsive pleading as provided for in (a) above or with the panel's consent.

      10333. Member Surcharge and Process Fees

      (a) Member Surcharge
      (1) Each member that is named as a party to an arbitration proceeding, whether in a Claim, Counterclaim, Cross-Claim or Third-Party Claim, shall be assessed a non-refundable surcharge pursuant to the schedule below when the Director of Arbitration perfects service of the claim naming the member on any party to the proceeding.
      (2) For each associated person who is named, the surcharge shall be assessed against the member or members that employed the associated person at the time of the events which gave rise to the dispute, claim or controversy. No member shall be assessed more than a single surcharge in any arbitration proceeding.
      (3) The surcharge shall not be chargeable to any other party under Rules 10332(c) and 10205(c) of the Code.

      Member Surcharge Schedule

      Amount in Dispute Surcharge
      $.01 - $2,500 $150
      $2,500.01 - $5,000 $200
      $5,000.01 - $10,000 [$300] $325
      $10,000.01 - $25,000 [$400] $425
      $25,000.01 - $30,000 $600
      $30,000.01 - $50,000 [$800] $875
      $50,000.01 - $100,000 [$1,000] $1,100
      $100,000.01 - $500,000 [$1,500] $1,700
      $500,000.01 - $1,000,000 [$2,000] $2,250
      $1,000,000.01 - $5,000,000 [$2,500] $2,800
      $5,000,000.01 - $10,000,000 [$3,000] $3,350
      Over 10,000,000 [$3,600] $3,750
      ([b]4) Unchanged.
      ([c]5) If the dispute, claim, or controversy does not involve, disclose, or specify a money claim, the non-refundable surcharge shall be [$1,200] $1,500 or such greater or lesser amount as the Director of Arbitration or the panel of arbitrators may require, but shall not exceed the maximum amount specified in the schedule.
      ([d]b) Prehearing and Hearing Process Fees
      (1) Each member that is a party to an arbitration proceeding in which more than $25,000 is in dispute will pay:
      (A) [a non-refundable process fee as set forth in the schedule below for each stage of the proceeding] a non-refundable prehearing process fee of $750, due at the time the parties are sent arbitrator lists in accordance with Rule 10308(b)(5); and
      (B) a non-refundable hearing process fee, due when the parties are notified of the date and location of the first hearing session, as set forth in the schedule below.
      (2) [The prehearing and hearing process fees shall not be chargeable to any other party under Rules 10332(c) and 10205(c) of the Code.] If an associated person of a member is a party, the member that employed the associated person at the time of the events which gave rise to the dispute, claim or controversy will be charged the process fees[.], even if the member is not a party. No member shall be assessed more than one prehearing and one hearing process fee in any arbitration proceeding.
      (3) The prehearing and hearing process fees shall not be chargeable to any other party under Rules 10332(c) and 10205(c) of the Code.

      [The prehearing process fee will accrue according to the schedule set forth below, but will not become due until (1) the parties are notified of the prehearing conference, or (2) if no prehearing conference is scheduled, the parties are notified of the date and location of the first hearing session. The hearing fee will accrue and be due and payable when the parties are notified of the date and location of the first hearing session. All accrued but unpaid fees will be due and payable at the conclusion of the member's or associated person's involvement in the proceeding. No member will pay more than one prehearing and hearing process fee for any case. The process fees will stop accruing when either the member enters into a settlement of the dispute or the member is dismissed from the proceeding or, if the member is paying a process fee as a result of an associated person being named as a party, when the associated person enters into a settlement or is dismissed from the proceeding, whichever is later.]

      [Prehearing Process Fee Schedule

      (proceedings where more than $25,000 is in dispute)

      Service of Claim (accrues when the claim has been submitted and is ready to be served on the respondents) $50
      Case Preparation (accrues when the first answer to the claim is received or due and discovery or motions proceedings commence $150
      Prehearing Activities (accrues when the parties are first notified of the names of any arbitrators selected to hear the matter or are given the names of arbitrators to select) $400
        Total $600]

      Hearing Process Fee Schedule

      [(accrues and becomes due and payable when the parties are notified of the date and location of the first hearing session)]

      Damages Requested Hearing Process Fee
      $1 - $25,000 $ 0
      $25,000.01 - $50,000 $1,000
      $50,000.01 - $100,000 [$1,500] $1,700
      $100,000.01 - $500,000 [$2,500] $2,750
      $500,000.01 - $1,000,000 [$3,500] $4,000
      $1,000,000.01 - $5,000,000 [$4,500] $5,000
      More than $5,000,000 [$5,000] $5,500
      Unspecified [$2,000] $2,200

    • For Your Information (November)

      For Your Information

      As described in NASD Notice to Members 01-67, President Bush issued an executive order on September 24, 2001, blocking the property of and prohibiting transactions with persons who commit, threaten to commit, or support terrorism. The order was issued through the U.S. Treasury's Office of Foreign Assets Control (OFAC); the offices of the Secretaries of State and Treasury and the Attorney General determined the persons and organizations affected. On October 12, 2001, OFAC added 39 persons and entities suspected of terrorism (or Specially Designated Global Terrorists—SDGTs). The complete list can be found on the OFAC Web Site, www.treas.gov/ofac, under "Bulletin."

      Transactions are prohibited with the 39 persons and entities included in the Bulletin as well as those persons and organizations listed on the OFAC Web Site under "Terrorists," "Specially Designated Nationals and Blocked Persons," (SDN List), and the list of embargoed countries and regions.

      Please check the OFAC Web Site and implement procedures to check the Web Site routinely for the names of additional persons and entities suspected of being involved in terrorism and whose accounts and transactions should be blocked. If your firm blocks or is subject to a block of the movement of cash or securities, it should report the incident and the names of the persons or organizations involved by facsimile to the OFAC Compliance Division at (202) 622-2426.

      Exams Now Offered In Singapore

      NASD Regulation is now offering computerized delivery of qualification exams and Continuing Education in Singapore. For additional information about the delivery location in Singapore, and how to schedule an appointment at this location, view the exam location Web Pages on the NASD Regulation Web Site at www.nasdr.com/2634.htm.

    • 01-69 Nominees For District Committee And District Nominating Committee

      View PDF File

      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections


      Executive Summary

      The purpose of this Special Notice to Members is to announce the nominees for the District Committees and the District Nominating Committees. The individuals identified in this Special Notice to Members (see Attachment A) have been nominated for three-year terms on the District Committees and for one-year terms on the District Nominating Committees starting in January 2002. These nominees will be considered duly elected on November 1, 2001, unless an election is contested in accordance with the procedures summarized below.

      We appreciate the interest shown by many of you in participating in the District Committees and thank everyone for their continuing support of the self-regulatory process. We look forward to your participation in the matters of the Districts during the coming year, as well as hope that those who were not selected this year may wish to revisit this process next year.

      Contested Election Procedures

      If an officer, director, or employee of a National Association of Securities Dealers, Inc. (NASD®) member is interested in being considered as an additional candidate, he/she must indicate his/her interest to the District Director by October 31, 2001. If an additional candidate(s) comes forward by that date, the candidate has until December 3, 2001 to submit a petition to the District Nominating Committee with signatures from at least 10 percent of Executive Representatives of members eligible to vote in the District.

      If no additional candidates submit petitions by December 3, 2001, then the candidates nominated by the District Nominating Committee shall be considered elected, and the District Committee shall certify the election to the Board of Directors of NASD Regulation.

      Additional information pertaining to the District Election Procedures can be found in Article VIII of the By-Laws of NASD Regulation.

      Questions/Further Information

      Questions concerning this Special Notice may be directed to the District Director noted in Attachment A or to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8062 or via e-mail at: barbara.sweeney@nasd.com


      ATTACHMENT A

      District 1

      District Committee And District Nominating Committee Nominees

      Elisabeth P. Owens, District Director  
      525 Market Street, Suite 300, San Francisco, CA 94105 (415) 882-1200
      Northern California (the counties of Monterey, San Benito, Fresno, and Inyo, and the remainder of the state north or west of such counties), northern Nevada (the counties of Esmeralda and Nye, and the remainder of the state north or west of such counties), and Hawaii  

      2001 District Nominating Committee Chair
      Nicholas C. Cochran American Investors Company Dublin, CA
      District Committee Nominees
      Raymond J. Cyphers UBS PaineWebber, Inc. San Jose, CA
      Allan L. Herzog Prudential Securities, Inc. San Francisco, CA
      Robert A. Muh Sutter Securities, Inc. San Francisco, CA
      District Nominating Committee Nominees
      Stephen R. Adams Wells Fargo Van Kasper San Francisco, CA
      Janet W. Campbell Protected Investors of America Walnut Creek, CA
      Glenn M. Colacurci Salomon Smith Barney San Francisco, CA
      John C. Helmer Caldwell Securities, Inc. Danville, CA
      Jerry D. Phillips Sutro & Co. San Francisco, CA

      District 2

      District Committee And District Nominating Committee Nominees

      Lani M. Woltmann, District Director  
      300 South Grand Avenue, Suite 1600, Los Angeles, CA 90071 (213) 627-2122
      Southern California (that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo), southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye), and the former U.S. Trust Territories  

      2001 District Nominating Committee Chair
      Jerry M. Gluck Jefferies & Company, Inc. Los Angeles, CA
      District Committee Nominees
      Kevin J. Hart Sentra Securities Corp. c/o SunAmerica Financial Network, Inc. Woodland Hills, CA
      Joan A. Payden Payden & Rygel Los Angeles, CA
      Joel H. Ravitz Quincy Cass Associates, Inc. Los Angeles, CA
      Guy W. Williams Merrill Lynch Pierce Fenner & Smith, Inc. Laguna Hills, CA
      District Nominating Committee Nominees
      George H. Casey Crowell Weedon & Co. Los Angeles, CA
      Murray L. Finebaum Market Axess, Inc. Santa Monica, CA
      James B. Guillou Tucker Anthony Sutro, Inc La Jolla, CA
      Dean A. Holmes American General Financial Group Anaheim, CA
      Robert L. Winston American Funds Distributors, Inc. Los Angeles, CA

      District 3

      District Committee And District Nominating Committee Nominees

      Frank J. Birgfeld, District Director  
      Republic Plaza Building, 370 17th Street, Suite 2900, Denver, CO 80202-5629 (303) 446-3100
      Arizona, Colorado, New Mexico, Utah, and Wyoming  
      James G. Dawson, District Director  
      Two Union Square, 601 Union, Suite 1616, Seattle, WA 98101-2327 (206) 624-0790
      Alaska, Idaho, Montana, Oregon, and Washington  

      2001 District Nominating Committee Chair
      Douglas Strand Strand, Atkinson, Williams & York, Inc. Portland, OR
      District Committee Nominees
      Gregory R. Anderson TIAA/CREF Individual & Institutional Services, Inc. Denver, CO
      Robert E. Frey, Jr. KMS Financial Services, Inc. Seattle, WA
      John F. York Strand, Atkinson, Williams & York, Inc. Portland, OR
      District Nominating Committee Nominees
      Thomas R. Hislop Peacock, Hislop, Staley & Given, Inc. Phoenix, AZ
      John Morton Morton Clarke Fu & Metcalf, Inc. Seattle, WA
      William G. Papesh WM Fund Distributor, Inc. Seattle, WA
      Thomas Petrie Petrie Parkman & Co., Inc. Denver, CO
      James E. Stark Charles Schwab & Co., Inc. Phoenix, AZ

      District 4

      District Committee And District Nominating Committee Nominees

      Thomas D. Clough, District Director  
      120 W. 12th Street, Suite 900, Kansas City, MO 64105 (816) 421-5700
      Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota  

      2001 District Nominating Committee Chair
      Wayne H. Pererson USALLANZ Investor Services, LLC Minneapolis, MN
      District Committee Nominees
      William R. Giovanni Ameritas Investment Corp. Lincoln, NE
      Frank H. Kirk First Union Securities, Inc. Kansas City, MO
      James H. Warner The Warner Group, Inc. Sioux City, IA
      District Nominating Committee Nominees
      Robert M. Chambers Robert W. Baird & Co. Incorporated Des Moines, IA
      Cheryl Cook-Schneider Edward Jones St. Louis, MO
      Norman Frager Flagstone Securities St. Louis, MO
      John R. Lepley Princor Financial Services Corp. Des Moines, IA
      Brent M. Weisenborn Security Investment Company of Kansas City Kansas City, MO

      District 5

      District Committee And District Nominating Committee Nominees

      Warren A. Butler, Jr., District Director  
      1100 Poydras Street, Energy Centre, Suite 850, New Orleans, LA 70163-0802 (504) 522-6527
      Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, and Tennessee  

      2001 District Nominating Committee Chair
      Jerry Roberts Sterne, Agee & Leach, Inc. Little Rock, AR
      District Committee Nominees
      John J. Dardis Jack Dardis & Associates, Ltd. Metairie, LA
      J. Timothy Rice Rice, Voelker, LLC Mandeville, LA
      James T. Ritt Morgan Keegan & Company, Inc. Memphis, TN
      District Nominating Committee Nominees
      Carl W. Busch Prudential Securities Incorporated Oklahoma City, OK
      William T. Griggs, II Dupree & Company, Inc. Lexington, KY
      V. Hugo Marx, III Hugo Marx & Co., Inc. Birmingham, AL
      Dene R. Shipp SunTrust Equitable Securities, Inc. Nashville, TN
      William L. Tedford, Jr. Stephens Inc. Little Rock, AR

      District 6

      District Committee And District Nominating Committee Nominees

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

      2001 District Nominating Committee Chair
      William D. Connally Greenman Parker Connally, Greenman, Inc. Fort Worth, TX
      District Committee Nominees
      Donaldson D. Frizzell First Command Securities Corporation Fort Worth, TX
      Sennett Kirk, III Kirk Securities Corporation Denton, TX
      V. Keith Roberts American General Distributors, Inc. Houston, TX
      Daniel P. Son Penson Financial Services, Inc. Dallas, TX
      District Nominating Committee Nominees
      Daniel C. Dooley Maplewood Investment Advisors, Inc. Dallas, TX
      Kenneth R. Hanks SWS Securities, Inc. Dallas, TX
      William H. Lowell Lowell & Company, Inc. Lubbock, TX
      Fredrick W. McGinnis UBS PaineWebber, Inc. Houston, TX
      Jim G. Rhodes Rhodes Securities, Inc. Fort Worth, TX

      District 7

      District Committee And District Nominating Committee Nominees

      Alan M. Wolper, District Director  
      One Securities Centre, Suite 500, 3490 Piedmont Road, N.E., Atlanta, GA 30305 (404) 239-6100
      Florida, Georgia, North Carolina, South Carolina, Virginia, Puerto Rico, the Canal Zone, and the Virgin Islands  

      2001 District Nominating Committee Chair
      R. Charles Shufeldt SunTrust Banks, Inc. Atlanta, GA
      District Committee Nominees
      Jeffrey P. Adams Balentine & Company Atlanta, GA
      Richard G. Averitt, III Raymond James Financial Services, Inc. Atlanta, GA
      Harold F. Corrigan Merrill Lynch, Pierce, Fenner & Smith, Inc. Palm Beach, FL
      District Nominating Committee Nominees
      M. Anthony Greene Raymond James Financial Services, Inc. Atlanta, GA
      James W. Hamilton, Jr. Morgan Keegan & Co. Atlanta, GA
      Edward R. Hipp, III Centura Securities, Inc. Rocky Mount, NC
      Raymond W. Snow Merrill Lynch, Pierce, Fenner & Smith, Inc. West Palm Beach, FL
      Roark A. Young Young, Stovall & Company Miami, FL

      District 8

      District Committee And District Nominating Committee Nominees

      Carlotta A. Romano, District Director  
      55 West Monroe Street, Suite 2700, Chicago, IL 60603 (312) 899-4400
      Illinois, Indiana, Michigan, and Wisconsin  
      William H. Jackson, Jr., District Director  
      Renaissance on Playhouse Square, 1350 Euclid Avenue, Suite 650, Cleveland, OH 44115 (216) 592-2950
      Ohio and part of upstate New York (the counties of Monroe, Livingston, and Steuben, and the remainder of the state west of such counties)  

      2001 District Nominating Committee Chair
      Leonard L. Anderson Stifel Nicolaus & Company, Inc. Grand Haven, MI
      District Committee Nominees
      Bernard A. Breton Carillon Investments, Inc. Cincinnati, OH
      Donald A. Carlson B.C. Ziegler and Company Chicago, IL
      William K. Curtis M & I Brokerage Services, Inc. Milwaukee, WI
      Gerald L. Oaks Legg Mason Wood Walker, Inc. Cincinnati, OH
      Jill R. Powers Oberlin Financial Corporation Bryan, OH
      District Nominating Committee Nominees
      Wallen L. Crane, Jr. Salomon Smith Barney, Inc. Toledo, OH
      William L. Faulkner Continental Capital Securities, Inc. Sylvania, OH
      Thomas Harenburg Carl M. Hennig, Inc. Oshkosh, WI
      David Slavik Pershing Division of Donaldson, Lufkin & Jenrette Oak Brook, IL
      L. Gene Tanner NatCity Investments, Inc. Indianapolis, IN

      District 9

      District Committee And District Nominating Committee Nominees

      John P. Nocella, District Director  
      Eleven Penn Center, 1835 Market Street, Suite 1900, Philadelphia, PA 19103 (215) 665-1180
      Delaware, Pennsylvania, West Virginia, District of Columbia, Maryland, and the southern part of New Jersey in the immediate Philadelphia vicinity  
      Gary K. Liebowitz, District Director  
      581 Main Street, 7th Floor, Woodbridge, NJ 07905 (732) 596-2000
      New Jersey (except southern New Jersey in the immediate Philadelphia vicinity)  

      2001 District Nominating Committee Chair
      James J. Malespina Herzog, Heine, Geduld, Inc. Jersey City, NJ
      District Committee Nominees
      James E. Bickley Cresap, Inc. Radnor, PA
      Michael B. Row Donaldson, Lufkin & Jenrette Securities Corporation Jersey City, NJ
      Frank D. Ruscetti Harvest Financial Corporation Pittsburgh, PA
      District Nominating Committee Nominees
      Philip S. Cottone Rutherford, Brown & Catherwood, LLC Philadelphia, PA
      A. Louis Denton Philadelphia Corporation for Investment Services Philadelphia, PA
      Jerome J. Murphy Janney Montgomery Scott LLC Philadelphia, PA
      Joseph S. Rizzello Pershing Trading Company, L.P. Jersey City, NJ
      Gregory R. Zappala RRZ Public Markets, Inc. Cranberry Township, PA

      District 10

      District Committee And District Nominating Committee Nominees

      Cathleen Shine, District Director  
      33 Whitehall Street, New York, NY 10004 (646) 441-3000
      The five boroughs of New York City, and Long Island  

      2001 District Nominating Committee Chair
      Laurence H. Bertan Sanford C. Bernstein & Co., LLC New York, NY
      District Committee Nominees
      Jennifer A. Connors ITG Inc. New York, NY
      Joan E. Hoffman Deutsche Banc Alex. Brown Inc. New York, NY
      Nathalie P. Maio Bear, Stearns & Co. Inc. New York, NY
      Bertram J. Riley, Sr. Petersen Investments, Inc. New York, NY
      Mark W. Ronda Prime Charter Ltd. New York, NY
      District Nominating Committee Nominees
      William P. Behrens Northeast Securities, Inc. New York, NY
      Laurence H. Bertan Sanford C. Bernstein & Co., LLC New York, NY
      Philip V. Oppenheimer Oppenheimer & Close, Inc. New York, NY
      Eugene A. Schlanger Nomura Securities International, Inc. New York, NY
      Tom M. Wirtshafter American Portfolios Financial Services, Inc. Holbrook, NY

      District 11

      District Committee And District Nominating Committee Nominees

      Frederick F. McDonald, District Director  
      260 Franklin Street, 16th Floor, Boston, MA 02110 (617) 261-0800
      Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, and New York (except for the counties of Monroe, Livingston, and Steuben; the five boroughs of New York City; and Long Island)  

      2001 District Nominating Committee Chair
      Stephanie Brown Linsco/Private Ledger Corp. Boston, MA
      District Committee Nominees
      Michael C. Braun Moors & Cabot, Inc. Boston, MA
      Andrew F. Detwiler Fechtor, Detwiler & Co. Inc. Boston, MA
      Thomas J. Horack John Hancock Life Insurance Company Boston, MA
      District Nominating Committee Nominees
      Harry Branning Linsco/Private Ledger Corp. Glastonbury, CT
      Stephen O. Buff Fleet Securities, Inc. Boston, MA
      Sheldon Fechtor Fechtor, Detwiler & Co., Inc. Boston, MA
      Arthur F. Grant Cadaret, Grant & Co., Inc. Syracuse, NY
      Dennis Surprenant Cantella & Co., Inc. Boston, MA

    • 01-68 Fixed Income Pricing SystemSM Additions, Changes, And Deletions As Of August 21, 2001

      View PDF File

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      FIPS



      As of August 21, 1501, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

      Symbol Name Coupon Maturity
      ALWA.GA Alamosa Delaware Inc 12.500 02/01/11
      AMR.GA AMR Corp 9.000 09/15/16
      AMR.GB AMR Corp 10.150 03/15/20
      AMR.GC AMR Corp 9.880 06/15/20
      AMR.GD AMR Corp 10.000 04/15/21
      AMR.GE AMR Corp 9.750 08/15/21
      AMR.GF AMR Corp 9.800 10/01/21
      AMR.GG AMR Corp 9.000 08/01/12
      BRK.GA Berkshire Hathaway 1.000 12/02/01
      COD.GA Chiles Offshore LLC/Fin 10.000 05/01/08
      TWRS.GG Crown Castle Intl Corp 9.375 08/01/11
      RMY.GC Delco Remy Intl Inc 11.000 05/01/09
      DAL.GH Delta Air Lines Inc 7.700 12/15/05
      DAL.GI Delta Air Lines Inc 7.900 12/15/09
      DAL.GJ Delta Air Lines Inc 8.300 12/15/29
      DAL.GA Delta Air Lines Inc 9.000 05/15/16
      DAL.GB Delta Air Lines Inc 10.125 05/15/16
      DAL.GC Delta Air Lines Inc 10.375 02/01/11
      DAL.GD Delta Air Lines Inc 9.750 05/15/21
      DAL.GE Delta Air Lines Inc 8.500 03/15/02
      DAL.GF Delta Air Lines Inc 9.250 03/15/22
      DAL.GG Delta Air Lines Inc 10.375 12/15/22
      DIG.GA DII Group Inc 8.500 09/15/07
      FNV.GA Finova Group Inc 7.500 11/15/09
      IEE.GB Integrated Electrical Services Inc 9.375 02/01/09
      KEG.GB Key Energy Services Inc 8.375 03/01/08
      MRD.GA MacDermid Inc 9.125 07/15/11
      MEGA.GA Media General Inc 6.950 09/01/06
      MTH.GA Meritage Corp 9.750 06/01/11
      MHDS.GA Michael Foods Acquisition Corp 11.750 04/01/11
      NVI.GA National Vision Inc 12.000 03/03/09
      NXFI.GA Nexstar Finance LLC 12.000 04/01/08
      NTK.GG Nortek Inc Ser B 9.875 06/15/11
      PYX.GB Playtex Products Inc 9.375 06/01/11
      RCL.GB Royal Caribbean Cruises 8.125 07/28/04
      RCL.GC Royal Caribbean Cruises 8.250 04/01/05
      RCL.GD Royal Caribbean Cruises 7.125 09/18/02
      RCL.GE Royal Caribbean Cruises 7.250 08/15/06
      RCL.GF Royal Caribbean Cruises 7.000 10/15/07
      RCL.GG Royal Caribbean Cruises 7.500 10/15/27
      RCL.GH Royal Caribbean Cruises 6.750 03/15/08
      RCL.GI Royal Caribbean Cruises 7.250 03/15/18
      RCL.GJ Royal Caribbean Cruises 8.750 02/02/11
      SLMC.GA Select Medical Corp 9.500 06/15/09
      PKS.GF Six Flags Inc 9.500 02/01/09
      UAL.GW United Air Lines Inc 9.760 05/13/06
      UAL.GU United Air Lines Inc 10.110 02/19/06
      UAL.GV United Air Lines Inc 10.850 07/05/14
      UAL.GX United Air Lines Inc 9.760 05/20/06
      UAL.GY United Air Lines Inc 9.760 05/27/06
      UAL.GZ United Air Lines Inc 10.360 11/20/12
      UAL.HA United Air Lines Inc 10.360 11/27/12
      UAL.GR United Air Lines Inc 10.110 01/05/06
      UAL.GS United Air Lines Inc 10.850 02/19/15
      UAL.GT United Air Lines Inc 10.360 11/13/12
      VPI.GD Vintage Petroleum Inc 7.875 05/15/11

      As of August 21, 1501, the following bonds were deleted from the Fixed Income Pricing System.

      Symbol Name Coupon Maturity
      ANCG.GC Anker Coal Group Inc 9.750 10/01/07
      AETC.GA Applied Extrusion Tech Inc 11.500 04/01/02
      AXPD.GA Axia Inc 10.750 07/15/08
      BJS.GA BJ Services Co 12.875 12/01/02
      BDUS.GA Burlington Industries Cap Inc 16.875 07/01/04
      BRMH.GA Burlington Motor Holdings Inc 11.500 11/01/03
      CLUH.GA Comcast Cellular Hldgs Inc 9.500 05/01/07
      CYSS.GA County Seat Stores Inc 12.000 10/01/02
      CYSS.GB County Seat Stores Inc 12.000 10/01/01
      CPFU.GA CP Funding Corp 12.500 06/15/04
      WBB.GB Del Webb Corp 9.750 03/01/03
      DIIG.GA DII Group Inc 8.500 09/15/07
      FNVC.GA Finova Capital Corp 9.125 02/27/02
      FNVC.GB Finova Capital Corp 6.625 09/15/01
      FNVC.GC Finova Capital Corp 7.400 05/06/06
      FNVC.GD Finova Capital Corp 7.125 05/01/02
      FNVC.GE Finova Capital Corp 7.125 05/17/04
      FNVC.GF Finova Capital Corp 7.400 06/01/07
      FNVC.GG Finova Capital Corp 6.900 06/19/04
      FNVC.GH Finova Capital Corp 6.500 07/28/02
      FNVC.GI Finova Capital Corp 8.375 05/15/05
      FNVC.GJ Finova Capital Corp 5.875 10/15/01
      FNVC.GK Finova Capital Corp 6.250 11/01/02
      FNVC.GL Finova Capital Corp 6.750 03/09/09
      FNVC.GM Finova Capital Corp 6.125 03/15/04
      FNVC.GN Finova Capital Corp 0.000 11/08/02
      FNVC.GO Finova Capital Corp 7.250 11/08/04
      FNVC.GP Finova Capital Corp 6.150 03/31/03
      FNVC.GQ Finova Capital Corp 7.250 07/12/06
      FNVC.GR Finova Capital Corp 7.625 09/21/09
      GOOA.GA Geothermal Resources Intl Inc 13.000 11/15/91
      GOOA.GB Geothermal Resources Intl Inc 13.750 03/01/96
      GBIX.GA Globix Corp 11.000 04/15/04
      GKYD.GA Golden Sky DBS Inc 13.500 03/01/07
      HAY.GE Hayes Wheels International Inc 9.250 11/15/02
      HDRM.GA Hedstrom Corp 10.000 06/01/07
      HDHG.GA Hedstrom Holdings Inc 12.000 06/01/09
      HCOR.GA Helathcor Holdings Inc 11.000 12/01/04
      HEGP.GA Helicon Group LP/Cap Corp 11.000 11/01/03
      HHI.GC Home Holdings Inc 7.875 12/15/03
      HNTC.GB Huntsman Corp 11.000 04/15/04
      HNPK.GA Huntsman Packaging Corp 9.125 10/01/07
      IMAX.GA Imax Corp 10.000 03/01/01
      IPCG.GA Impac Group Inc Ser B 10.125 03/15/08
      IHMD.GA ImperialHome Décor Group Inc 11.000 03/15/08
      IFBC.GA Infinity Broadcasting Corp 10.375 03/15/02
      INGS.GB Ingersoll Newspapers Inc 12.125 09/01/00
      IAD.GA Inland Steel Inds Inc 12.750 12/15/02
      INRK.GA International Bank (Wash) 15.750 08/01/00
      ICFP.GA International Comfort Products Holdings Inc 8.625 05/15/08
      ITTO.GA ITT Corp New 6.250 11/15/00
      IVXH.GA Ivex Holdings Corp 13.250 03/15/05
      IVEX.GA Ivex Packaging Corp 12.500 12/15/02
      JCOM.GC Jacor Communications Co    
      HEFR.GA JH Heafner Company 10.000 05/15/08
      JJSA.GA Jitney-Jungle Stores Amer Inc 12.000 03/01/06
      JJSA.GB Jitney-Jungle Stores Amer Inc 10.375 09/15/07
      JBLT.GA Johnston Cola Group 11.375 09/15/01
      JOIN.GA Jones Intercable Inc 11.500 07/15/04
      JOSI.GA Josephson Intl Inc 12.500 05/15/03
      JPSA.GA JPS Automotive Products Inc 11.125 06/15/01
      KANE.GA Kane Industries Inc 8.000 02/01/98
      KHKY.GA Kash N Karry Food Stores Inc 0.000 02/01/03
      KCS.GB KCS Energy Inc 8.875 01/15/06
      KSRE.GA Kearny Street Real Estate LP 9.560 07/15/03
      KEYS.GA Keystone Group Inc 9.750 09/01/03
      KCAS.GA Kloster Cruise Ltd 13.000 05/01/03
      LESI.GA Lear Corp 11.250 07/15/00
      LPG.GA Life Partners Group Inc 12.750 07/15/02
      LTCH.GA Litchfield Fin'l Corp 10.000 11/01/02
      LSNU.GA Louisiana Casino Cruises Inc 11.000 12/01/05
      MACM.GA MacMillan Inc 10.250 11/01/01
      MCU.GA Magma Copper Co 12.000 12/15/01
      MLTT.GA MaLette Inc 12.250 07/15/04
      MNR.GA Manor Care Inc 9.500 11/15/02
      MCAB.GC Marcus Cable Co 14.250 12/15/05
      MDQC.GA Mediq Inc 13.000 06/01/04
      MED.GB Mediq Inc/PRN Life Support Sus Inc 11.000 06/01/08
      MRBH.GA Merit Behavioral Corp 11.500 11/15/05
      MTLM.GA Metal Management Inc 10.000 05/15/08
      MBCA.GA Metropolitan Broadcasting Corp 16.500 09/30/06
      MFST.GA MFS Communications Inc 9.375 01/15/04
      MFST.GB MFS Communications Inc 8.875 01/15/06
      MCUM.GA Michael Petroleum Corp 11.500 04/01/05
      MSI.GB Movie Star Inc 8.000 09/01/01
      NEOD.GB Neodata SVS Inc 12.000 05/01/03
      NMK.GC Niagara Mohawk Power Corp 7.125 07/01/01
      NDCO.GA Noble Drilling Corp 9.250 10/01/03
      NTK.GC Nortek Inc 9.875 03/01/04
      NOE.GA North Atlantic Energy Corp 9.050 06/01/02
      OMM.GA Omi Corp 10.250 11/01/03
      ORX.GC Oryx Energy Co 10.000 04/01/01
      OSPL.GA OSI Specialties Inc 9.250 10/01/03
      OXAU.GA Oxford Automotive Inc 10.125 06/15/07
      OXHP.GA Oxford Health Plans Inc 11.000 05/15/05
      PCFI.GA P&C Food Markets Inc 11.500 10/15/01
      PFID.GA P&F Industries Inc 13.750 01/01/17
      PADE.GA Pace Industries Inc 10.625 12/01/02
      PNAA.GB Pan Am World Airways Inc 15.000 04/15/04
      PDAG.GA Panda Global Energy Co 12.500 04/15/04
      PLHC.GB Paracelsus Healthcare Corp 10.000 08/15/06
      PKOH.GA Park-Ohio Industries Inc 9.250 12/01/07
      PATH.GA Pathmark Stores Inc 11.625 06/15/02
      PATH.GB Pathmark Stores Inc 9.625 05/01/03
      PATH.GC Pathmark Stores Inc 10.750 11/01/03
      PATH.GD Pathmark Stores Inc 12.625 06/15/02
      PDVA.GA PDV America Inc 7.750 08/01/00
      PFG.GA Penncorp Financial Group Inc 9.250 12/15/03
      PHP.GD Petroleum Heat & Power Inc 12.250 02/01/05
      PIDM.HS Piedmont Aviation Inc Ser D 10.150 03/28/01
      PIDM.HT Piedmont Aviation Inc Ser E 10.150 03/28/01
      PIDM.HU Piedmont Aviation Inc Ser F 10.150 03/28/01
      PIDM.HV Piedmont Aviation Inc Ser G 10.150 03/28/01
      PIDM.JN Piedmont Aviation Inc Ser H 9.750 05/08/01
      PIDM.JO Piedmont Aviation Inc Ser I 9.750 05/08/01
      PIDM.KN Piedmont Aviation Inc Ser J 9.900 05/13/01
      PIDM.KO Piedmont Aviation Inc Ser K 9.900 05/13/01
      PDCH.GA Plaid Clothing Group Inc 11.000 08/01/03
      PLTC.GA Plastic Containers Inc 10.750 04/01/01
      PLAY.GA Players Intl Inc 10.875 04/15/05
      PYX.GA Playtex Products Inc 8.875 07/15/04
      PPFG.GA PNPP II Funding Corp 8.070 05/30/00
      PGLI.GA Premier Graphics Inc 11.500 12/01/05
      PRVC.GA President Casinos Inc 13.000 09/15/01
      PRS.GB Presidio Oil Co 11.500 09/15/00
      PRLU.GA Price Comm Cellular Holding Inc 11.250 08/15/01
      PRWL.GA Pricellular Wireless Corp 14.000 11/15/01
      PRWL.GB Pricellular Wireless Corp 12.250 10/01/03
      PRWL.GC Pricellular Wireless Corp 10.750 11/01/04
      PIMO.GA Primeco Inc 12.750 03/01/05
      PUML.GA Purina Mills Inc 9.000 03/15/10
      QHGI.GA Quorum Health Group Inc 11.875 12/15/02
      ROIA.GA Radio One Inc 12.000 05/15/04
      RGRO.GB Ralphs Grocery Co 9.000 04/01/03
      RAPA.GB Rapid American Corp 0.000 03/01/01
      RAPA.GC Rapid American Corp 0.000 03/01/02
      RAPA.GD Rapid American Corp 0.000 03/01/03
      RAPA.GE Rapid American Corp 0.000 03/01/04
      RAPA.GF Rapid American Corp 0.000 03/01/05
      RAPA.GG Rapid American Corp 0.000 03/01/06
      RAPA.GH Rapid American Corp 0.000 03/01/07
      RRI.GA Red Roofs Inns Inc 9.625 12/15/03
      REVI.GA Reeves Industries Inc 11.000 07/15/02
      REGL.GA Regal Cinemas Inc 8.500 10/01/07
      RSV.GA Rental Services Corp 9.000 05/15/08
      RIHF.GC Resorts Intl Hotel Fin Inc 11.000 09/15/03
      RHC.GB Rio Hotel & Casino Inc 9.500 04/15/07
      RVW.GA Riverwood Intl Corp 10.750 06/15/00
      RVW.GC Riverwood Intl Corp 10.750 06/15/00
      RVW.GE Riverwood Intl Corp 10.375 06/30/04
      RMOC.GA Rutherford-Moran Oil Corp 10.750 10/01/04
      RXIH.GA RXI Holdings Inc 14.000 07/15/02
      RYL.GB Ryland Group Inc 9.625 06/01/04
      SGLS.GA Safelite Glass Corp 9.875 12/15/06
      ASDW.GA SD Warren Co 12.000 12/15/04
      SEG.GA Seagate Technology Inc 7.125 03/01/04
      SEG.GB Seagate Technology Inc 7.370 03/01/07
      SEG.GC Seagate Technology Inc 7.875 03/01/17
      SFXB.GC SFX Broadcasting Inc 11.375 10/01/00
      SBO.GB Showboat Inc 13.000 08/01/09
      SBDU.GA Signature Brands USA Inc 13.000 08/15/02
      SIAN.GA Silgan Corp 11.750 06/15/02
      SVRN.GE Sovereign Bancorp Inc 6.750 07/01/00
      SPLT.GA Splitrock Services Inc 11.750 07/15/08
      STCL.GA Stone Consolidated Corp 10.250 12/15/00
      STUA.GA Stuart Entertainment 12.500 11/15/04
      SMKG.GA Supermarkets Genl Holdings Corp 11.625 06/15/02
      SGH.GA Surgical Health Corp 11.500 07/15/04
      SNGY.GB Synergy Group Inc 9.500 09/15/00
      SIND.GA Synthetic Industries Inc 12.750 12/01/02
      TKPX.GB Tekin-Plex Inc 11.250 04/01/07
      TKPX.GA Tekni-Plex Inc 9.250 03/01/08
      TETI.GA Teletrac Inc 14.000 08/01/07
      SELO.GB The Selmer Co Inc 11.000 06/30/00
      SELO.GC The Selmer Co Inc 10.920 06/30/00
      TIPK.GB Tiphook Financial Corp 10.750 11/01/02
      TVNC.GA TNV Entertainment Corp 14.000 08/01/08
      TOKM.GB Tokenheim Corp 11.500 08/01/06
      TALR.GA Total Renal Care Inc 12.000 08/15/04
      TEGY.GA Transamerican Energy Corp 11.500 06/15/02
      TEGY.GB Transamerican Energy Corp 13.000 06/15/02
      TRAM.GE Transamerican Refining 16.000 06/30/03
      TRWP.GA Transwestern Publishing Co LP 9.625 11/15/07
      TCBV.GA Triarc Consumer/Bev Hldgs Corp 10.250 02/15/09
      TMAR.GA Trico Marine Svs Inc 8.500 08/01/05
      TUES.GC Tuesday Morning Corp 11.000 12/15/07
      ULTE.GA Ultimate Electronics Inc 10.250 01/31/05
      UDFS.GA United Defense Industry Inc 8.750 11/15/07
      UCAN.GA United States Can Co 13.500 01/15/02
      USAR.GP US Airways Inc Ser A 10.350 01/15/01
      USAR.OR US Airways Inc Ser A 10.230 06/27/00
      USAR.OV US Airways Inc Ser A 10.280 06/27/01
      USAR.OS US Airways Inc Ser B 10.230 06/27/00
      USAR.OW US Airways Inc Ser B 10.280 06/27/01
      USAR.OQ US Airways Inc Ser C 10.230 06/27/00
      USAR.OU US Airways Inc Ser C 10.280 06/27/01
      USAR.OT US Airways Inc Ser D 10.230 06/27/00
      USAR.OX US Airways Inc Ser D 10.280 06/27/01
      USNV.GA USN Communications Inc 14.625 08/15/04
      VANM.GA Van Kampen Merritt Cos Inc 9.750 02/15/03
      VEYI.GA Vista Eyecare Inc 12.750 10/15/05
      WFGM.GA Waterford Gaming LLC 12.750 11/15/03
      WBST.GA Webster Financial Corp 8.750 06/30/00
      WLAL.GA Wells Aluminum Corp 10.125 06/01/05
      WSFB.GB Western Finl Savings Bank 8.500 07/01/03
      WMAS.GF Western Mass Electric Co Ser B 7.375 07/01/01
      WMAS.GE Western Mass Electric Co Ser Y 7.750 03/01/24
      WR.GB Western Resources Inc 7.125 08/01/09
      WHPC.GA Wheeling Pittsburgh Corp 12.250 11/15/00
      WILX.GA Wilcox & Gibbs Inc 12.250 12/15/03
      WHSE.GA Williamhouse Regency Inc 11.500 06/15/05
      JBWB.GA Williams J.B. Hldgs Inc 12.000 03/01/04
      WCII.GC Winstar Communications Inc 15.000 03/01/07

      As of August 21, 2001 changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol New Name/Old NameCoupon Maturity
      There were no symbol changes for this time period.

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, NASDR Market 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.

    • 01-67 Executive Order Targeting Terrorists

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      INFORMATIONAL

      Terrorist Activity

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Senior Management

      Office of Foreign Assets Control
      Terrorist Activity



      Executive Summary

      At midnight on September 24, 2001, President Bush issued Executive Order 13224 (Executive Order) freezing the property of and prohibiting transactions with persons who commit, threaten to commit, or support terrorism. The order was issued through the United States Treasury Department's Office of Foreign Assets Control (OFAC), and the offices of the Secretaries of State and Treasury and the Attorney General determined the persons and organizations affected.

      National Association of Securities Dealers, Inc. (NASD®) members should establish procedures to ensure that they are complying with the rules and regulations set forth by the Treasury Department as outlined below. The OFAC Web Site (www.treas.gov/ofac/) lists those persons and organizations affected by the Executive Order, as well as those persons, organizations, and countries that the Administration suspects are involved in terrorist activities.

      Questions/Further Information

      Members should direct questions regarding this Notice to Andrew Labadie, Member Regulation, NASD Regulation, Inc., at (202) 728-8397; or Nancy Libin, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8835.

      Background:

      OFAC administers and enforces economic and trade sanctions against certain foreign countries, terrorism-sponsoring organizations, and international narcotics traffickers based on U.S. foreign policy and national security goals. OFAC acts under Presidential wartime and national emergency powers, as well as specific legislative authority, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

      Due to the breadth of foreign terrorists' financial assets, President Bush issued an Executive Order freezing the property of and prohibiting transactions with persons who commit, threaten to commit, or support terrorism. The President also indicated that the Administration would pursue further consultation and cooperation with foreign financial institutions as an additional tool to enable the United States to curtail the financing of terrorism.

      The number of persons and organizations ultimately affected by the Executive Order could be quite broad. Beyond those specifically named, the Administration will likely name additional persons and entities who:

      • pose a significant risk of committing acts of terrorism;


      • assist in, sponsor, or provide financial, material, or technological support for terrorist activities; or


      • act on behalf of, or associate with, those previously recognized by the Administration as terrorists.

      The Executive Order prohibits transactions with those persons and organizations listed on the OFAC Web Site (www.treas.gov/ofac) under "Terrorists" and "Specially Designated Nationals and Blocked Persons" (SDN List), as well as with the listed embargoed countries and regions. The names of those persons and organizations included in the September 24, 2001 Executive Order, and not currently reflected in one of the categories on the OFAC Web Site are as follows:

      • Al Qaida/Islamic Army


      • Abu Sayyaf Group


      • Armed Islamic Group (GIA)


      • Harakat ul-Mujahidin (HUM)


      • Al-Jihad (Egyptian Islamic Jihad)


      • Islamic Movement of Uzbekistan (IMU)


      • Asbat al-Ansar


      • Salafist Group for Call and Combat (GSPC)


      • Libyan Islamic Fighting Group


      • Al-Itihaad al-Islamiya (AIAI)


      • Islamic Army of Aden


      • Usama bin Laden


      • Muhammad Atif (aka, Subhi Abu Sitta, Abu Hafs Al Masri)


      • Sayf al-Adl


      • Shaykh Sai'id (aka, Mustafa Muhammad Ahmad)


      • Abu Hafs the Mauritanian (aka, Mahfouz Ould al-Walid, Khalid Al-Shanqiti)


      • Ibn Al-Shaykh al-Libi


      • Abu Zubaydah (aka, Zayn al-Abidin Muhammad Husayn, Tariq)


      • Abd al-Hadi al-Iraqi (aka, Abu Abdallah)


      • Ayman al-Zawahiri


      • Thirwat Salah Shihata


      • Tariq Anwar al-Sayyid Ahmad (aka, Fathi, Amr al-Fatih)


      • Muhammad Salah (aka, Nasr Fahmi Nasr Hasanayn)


      • Makhtab Al-Khidamat/Al Kifah


      • Wafa Humanitarian Organization


      • Al Rashid Trust


      • Mamoun Darkazanli Import-Export Company

      Note that all of these groups have aliases, so it is important that members obtain all of the names from the Web Site to be certain that they can properly identify all of the groups.

      Guidance

      As recommended by OFAC, broker/dealers should establish compliance programs to avoid violations and possible enforcement actions. The Treasury Department through OFAC can penalize member firms for initiating a transaction that should be prohibited, even if a clearing or other intermediary entity refuses to deliver or "blocks" the transaction based on the customer's inclusion on OFAC's SDN List. OFAC's Web Site gives examples of how violations may arise and notes that they can occur even in cases where a financial institution or intermediary is unaware that the initiating party is publicly suspected of being involved in, or directly supporting, terrorist activities.

      If your firm blocks or is subject to a block on the movement of cash or securities, your firm should report the incident and the names of the persons or organizations involved to the OFAC Compliance Division at (202) 622-2426 (facsimile). Debits to blocked customer accounts are prohibited, although credits are authorized. Cash balances in customer accounts must earn interest at commercially reasonable rates. Blocked securities may not be paid, withdrawn, transferred (even by book transfer), endorsed, or guaranteed.

      OFAC also requires the filing of a comprehensive annual report by September 30 each year on blocked property held as of June 30. The report is to be filed using Form TDF 90-22.50, which is available from OFAC's fax-ondemand service, electronically by clicking on the GPO ACCESSbutton on OFAC's Home Page, or by going directly to The Federal Bulletin Board and accessing OFAC's extended electronic information reading room, which is called the FAC_MISC file library. Members may request to submit the information in an alternative format or an extension of the reporting deadline. OFAC will consider these requests on a case-by-case basis.

      Again, for additional information, visit the OFAC Web Site at www.treas.gov/ofac.

    • 01-66 SEC Approves NASD Rule Proposal Relating to Operations

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      INFORMATIONAL

      Operations

      Effective Date: September 12, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management

      ACATS Rules
      Uniform Practice Code



      Executive Summary

      On September 12, 2001, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD®) Rule 11870(c) and Rule 11870(d)1 that are designed to expedite the transfer of customer accounts that contain proprietary or third-party products (e.g., mutual funds or money market funds) that the receiving member cannot receive or carry.

      The text of the amendments as provided in Attachment A became effective on September 12, 2001.

      Questions/Further

      Information

      Questions concerning this Notice may be directed to Susan DeMando, Director, Financial Operations, Member Regulation, NASD Regulation, at (202) 728-8411, or Shirley H. Weiss, Associate General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8844.

      Discussion

      NASD Regulation has amended Uniform Practice Code Rules 11870(c) and 11870(d) to conform to recent modifications to the Automated Account Transfer Service (ACATS).2 The new procedures will expedite the transfer of accounts containing third-party and/or proprietary products.3 The account transfer process starts when a customer whose account is carried by a member firm ("carrying member") wishes to transfer the account to another member (the "receiving member") and submits a signed broker-to-broker transfer instruction to the receiving member. The receiving member submits the instruction to the carrying member, and the carrying member has three business days either to validate and return the transfer instruction to the receiving member (with an attachment reflecting all positions and money balances as shown on its books) or to take exception to the instruction. Specifically, the carrying member: (1) identifies any assets in the account that it knows are nontransferable, including any asset that is a proprietary product of the carrying member, (2) identifies these assets to the customer in writing, and (3) requests instructions from the customer with respect to the disposition of such assets. The customer may ask the carrying member to liquidate the asset, continue to retain the asset, or transfer the asset in the customer's name to the customer.

      A customer's account may also contain third-party products (e.g., mutual fund/money market fund) that the receiving firm can neither receive nor carry because it does not maintain the necessary relationship or arrangement with appropriate third parties. The carrying member would not have identified those assets as nontransferable because it would not know whether the receiving member could receive/carry the asset.

      Under the prior rules, the carrying member attempted to transfer all third-party assets with the rest of the account within three business days following the validation of a transfer instruction. When the receiving member could not receive or carry the asset, it would reverse the transfer of those assets and send them back to the carrying member. In turn, customers received statements with multiple entries for assets that were unsuccessfully transferred and returned.

      Under the amendments to Rule 11870(c) and 11870(d), the receiving member will review the asset validation report, designate those proprietary and/or third-party assets it is unable to receive/carry, provide the customer with a list of those assets, and request instructions from the customer regarding their disposition. The customer may instruct the receiving member to liquidate the asset, continue to retain the asset, transfer the asset in the customer's name to the customer, or transfer the asset to the third party that is the original source of the product. Most importantly, the transfer of the other assets in the account will occur simultaneously with the receiving member's designation of nontransferable assets.

      These procedures should eliminate the need for reversing the transfer of third-party and/or proprietary products, thereby reducing delay and the cost of customer transfers incurred by members under the current system. These procedures also will substantially reduce customer confusion in that customers will no longer receive multiple account statements from the carrying and receiving firms as they transfer and then reverse transactions.

      Under Rule 11870(d)(3)(C), a member may take exception to a transfer instruction if the account number was invalid, i.e., the account number was not on the carrying member's books. Rule 11870(d)(3)(C), as amended, makes clear that the carrying member is responsible for tracking account number changes. An account number that has been changed due to internal reassignment of an account to another broker or account executive with the carrying member will not be considered invalid for purposes of taking exception to a transfer instruction.

      Effective Date of Amendments

      These amendments became effective on September 12, 2001.


      Endnotes

      1 See SEC Release No. 34-44787 (Sept. 12, 2001), 66 FR 48301 (Sept. 19, 2001) (File No. SR-NASD-2001-53) ("SEC Approval Order").

      2 ACATS is administered by the National Securities Clearing Corporation (NSCC).

      3 These changes also conform to a recent amendment to the Interpretation of New York Stock Exchange (NYSE) Rule 412. See SEC Release No. 34-44596 (July 26, 2001), 66 FR 40306 (Aug. 2, 2001).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      Uniform Practice Code

      11870. Customer Account Transfer Contracts

      (a) and (b) No change
      (c) Transfer Instructions
      (1) Account transfers accomplished pursuant to this Rule are subject to the following conditions, which the customer must be informed of, affirm, or authorize through their inclusion in the transfer instruction form required to be completed and signed to initiate the account transfer:
      (A) No change.
      (B) The customer will be contacted in writing by the carrying member, and/or by the receiving member, with respect to the disposition of any assets in the account that are nontransferable.
      (C) and (D) No change.
      (E) The carrying member and the receiving member must promptly resolve and reverse any nontransferable assets [which] that were not properly identified during validation. In all cases, each member shall promptly update [their] its records and bookkeeping systems and notify the customer of the action taken.
      (2) A proprietary product of the carrying member shall be deemed nontransferable unless the receiving member has agreed to accept transfer of the product. Upon receipt of the asset validation report, the receiving member shall designate any assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account. The carrying member, upon receipt of such designation, may treat such designated assets as nontransferable and refrain from transferring the designated assets.
      [(2)] (3) If an account includes any nontransferable assets that are proprietary products of the carrying member, the carrying member must provide the customer with a list of the specific assets and request, in writing and prior to or at the time of validation of the transfer instruction, further instructions from the customer with respect to the disposition of such assets. In particular, such request [,] should provide, where applicable, the customer with the following alternative methods of disposition for nontransferable assets:
      (A) through (C) No change.
      (4) If an account to be transferred includes any nontransferable assets that the receiving member has designated as assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account, the receiving member must provide the customer with a list of the specific assets and request, in writing and prior to the time it makes such designation, further instructions from the customer with respect to the disposition of such assets. In particular, such request should, where applicable, provide the customer with the following alternative methods of disposition for nontransferable assets:
      (A) Liquidation, with a specific indication of any redemption or other liquidation related fees that may result from such liquidation and that those fees may be deducted from the money balance due the customer.
      (B) Retention by the carrying member for the customer's benefit.
      (C) Shipment, physically and directly, in the customer's name to the customer.
      (D) Transfer to the third party that is the original source of the product, for credit to an account opened by the customer with that third party.
      [(3)] (5) If the customer has authorized liquidation or transfer of [such] assets deemed to be nontransferable, the carrying member must distribute[d] the resulting money balance to the customer or initiate the transfer within five (5) business days following receipt of the customer's disposition instructions.
      [(4)] (6) With respect to transfers of retirement plan securities accounts, the customer authorizes the custodian/trustee for the account:
      (A) and (B) No change.
      (d) Validation of Transfer Instructions
      (1) and (2) No change.
      (3) A carrying member may take exception to a transfer instruction only if:
      (A) and (B) No change.
      (C) the account number is invalid (account number is not on carrying member's books); however, if the carrying member has changed the account number for purposes of internally reassigning the account to another broker or account executive, it is the responsibility of the carrying firm to track the changed account number, and such reassigned account number shall not be considered invalid for purposes of fulfilling a transfer instruction.
      (D) through (L) No change.
      (4) through (8) No change.
      (e) through (n) No Change

    • 01-65 NASD Seeks Comment On Proposed Rules And Policies Relating To Expungement Of Information From The Central Registration Depository

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      ACTION REQUESTED

      Expungement

      Comment Period Expired December 31, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registration
      Senior Management

      Central Registration Depository System
      Expungement



      Executive Summary

      The National Association of Securities Dealers, Inc. (NASD®) requests comment on the establishment of certain criteria that must be met, and procedures that must be followed, before NASD Regulation would expunge certain information from the Central Registration Depository (CRD®) system pursuant to an expungement order. By way of background, information generally is expunged from the CRD system pursuant to a specific statutory requirement or a court order. While this practice is appropriate in most cases, NASD Regulation believes that refinements to this policy are necessary to address the expungement of customer dispute information (e.g., customer complaints or arbitration claims). With respect to customer dispute information, NASD Regulation believes that additional safeguards and procedures in the expungement process are necessary to ensure that investor protection interests are served before the extraordinary relief of expungement is granted.

      Accordingly, NASD specifically seeks comment on whether it should generally limit expungement of customer dispute information from the CRD system to cases where an expungement order is based on a finding by a fact finder (i.e., either an arbitrator or a court) that (1) the subject matter of a claim or information in the system involves a case of factual impossibility or "clear error" (e.g. , the associated person named in the proceeding did not work for the firm, or worked in a different office, and was named in error); (2) the claim in question is without legal merit; or (3) the information contained in the CRD system is determined to be defamatory in nature.

      NASD also seeks comment on (1) specific procedures that would be required to be followed depending on whether the finding that is made results from a contested proceeding (e.g. , an arbitration hearing or judicial proceeding) or from a settled matter (e.g., a stipulated award rendered in an arbitration forum or judicial proceedings based on a settlement); (2) the adoption of a rule amending the Code of Arbitration Procedure to require a finding in an arbitration award of one or more of the expungement criteria discussed in this Notice; and (3) the adoption of a rule or Interpretive Material that clearly articulates NASD Regulation's authority to pursue disciplinary action against a member that or associated person who seeks to have information about an arbitration claim expunged after there has been an award rendered against that member or associated person by the arbitrators or seeks to expunge any arbitration award that does not contain an expungement order and a finding of at least one of the criteria set forth in this Notice.

      Action Requested

      NASD encourages all interested parties to comment on the proposal. Comments must be received by November 24, 2001. Members and interested persons can submit their comments using the following methods:

      • mailing in the checklist (Attachment A)


      • mailing in written comments


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


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

      If you decide to submit comments using both the checklist and one of the other methods listed above, please indicate that in your submissions. The checklist and/or written comments should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      National Association of Securities
      Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1500

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

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

      Questions/Further Information

      As noted above, written comments should be submitted to Barbara Z. Sweeney. Questions concerning this NASD Notice to Members— Request For Comment may be directed to Richard E. Pullano, Chief Counsel, CRD/Public Disclosure, NASD Regulation, at (240) 386-4821; or to Shirley H. Weiss, Office of General Counsel, NASD Regulation, at (202) 728-8844.

      Background

      The CRD system is the registration and licensing system for the United States securities industry and its state and federal regulators and self-regulatory organizations.1 NASD Regulation and the North American Securities Administrators Association (NASAA) jointly administer the CRD system.2 All broker/dealers registered with the SEC are required to file their registration forms (Form BD and Form BDW) through the CRD system. Such broker/dealers also are required to file the registration forms of any of their associated persons who are NASD-registered through the CRD system (Form U-4 and Form U-5). These registration forms require comprehensive reporting of administrative information (personal, organizational, employment, registration, and other information) and disclosure information (information about criminal, regulatory, and financial matters, including information relating to customer disputes). This final category of "customer dispute information" includes customer complaints, arbitration claims, court filings made by customers, and the arbitration awards or court judgments that may result from those claims. This category of information contains allegations that a member or one or more of its associated persons has engaged in some type of misconduct.

      Regulators use the registration information, and other information contained in the CRD system,3 to assist them in fulfilling their regulatory responsibilities, including making determinations about registration and licensing of firms and associated persons. Member firms use the CRD system to help them meet their registration, licensing, and certain other compliance obligations. Much of the information reported to the CRD system is made publicly available, either by NASD Regulation through its Public Disclosure Program (PDP) or by the SEC and individual state securities administrators pursuant to applicable law.

      In operating the CRD system, NASD Regulation has followed procedures designed to ensure that the information in the system is accurate and complete. In establishing these procedures, NASD Regulation is guided by its mission of protecting investors and by CRD policy established with NASAA and the SEC. As the operator of the system with primary responsibility for maintaining its integrity, NASD Regulation also has an obligation to consider compelling issues involving personal privacy and fundamental fairness. Accordingly, NASD Regulation, working with the SEC, NASAA, other members of the regulatory community, and member firms, has endeavored to establish procedures reasonably designed to ensure that information submitted to and maintained on the CRD system is accurate and complete. These procedures, among other things, cover expungement of information from the CRD system in narrowly defined circumstances. Expungement is a remedy provided by federal and state law in certain circumstances that usually is effected through a court order.

      Since the inception of the CRD system in 1981, court-ordered expungements generally have been honored. Arbitrator-ordered expungements that met certain requirements also were honored until January 1999. In January 1999, after consultation with NASAA, NASD Regulation imposed a moratorium on arbitrator-ordered expungements from the CRD system. Under the moratorium, which is still in effect, NASD Regulation will not expunge information from the CRD system based on a directive contained in an arbitration award rendered in a dispute between a public customer and a firm or its associated persons, unless that award has been confirmed by a court of competent jurisdiction.4

      In July 1999, NASD issued NASD Notice to Members 99-54 seeking comment on issues related specifically to arbitrator-ordered expungements. NASD sought comment on possible approaches that would address the interests of parties in arbitration in having arbitrators' expungement orders given some meaningful effect while still addressing state recordretention requirements and other issues. Among other things, NASD Notice to Members 99-54 sought comment on whether NASD Regulation should establish specific standards that would have to be met before NASD Regulation would honor an expungement that was ordered by an arbitrator. The comments received in response to NASD Notice to Members 99-54 were mixed, although most commenters were in favor of allowing arbitrator-ordered expungements, particularly if arbitrators had the benefit of standards to guide them in making such determinations. On the other hand, many commenters opposed allowing arbitrators to direct expungement because of concerns about arbitrator authority or training and state law issues, among other reasons.

      Discussion

      Federal and state laws provide for expungement relief under very limited circumstances. In addition, persons may be granted an expungement remedy in a civil action (as a form of equitable relief) when, for example, harm is done to their reputations, or based on other equitable grounds. Expungement of information from the CRD system also is appropriate in certain circumstances where it is not expressly required by applicable law or by a court order in a legal proceeding to which NASD Regulation is a party.

      Expungement of information from the CRD system is an extraordinary remedy, however, that clearly is not appropriate in all circumstances. In addition, there is a potential for inappropriate use of the expungement process, particularly where parties have agreed to expunge customer dispute information as a part of a settlement. Both the investing public and regulators have interests in maintaining customer dispute information within the CRD system that may not be considered when two private parties agree to settle a civil suit or arbitration claim and to expunge information relating to that suit or arbitration claim from the CRD system.

      Since the issuance of NASD Notice to Members 99-54, NASD Regulation has been considering how to craft an approach that would balance all of the competing interests associated with executing arbitrator-ordered expungements that include customer dispute information. Developing an approach has been a difficult undertaking, as it requires a balancing of at least three legitimate but sometimes competing interests. NASD Regulation, the states, and other regulators have an interest in retaining broad access to customer dispute information to fulfill their regulatory responsibilities; individuals in the brokerage community have an interest in securing a fair process that recognizes their stake in protecting their reputations and permits expungement from the CRD system when appropriate; and investors have an interest in having access to information about brokers with whom they do business or may do business.5 NASD Regulation also has been concerned about crafting an approach that does not have an overly broad chilling effect on the settlement process or inappropriately interfere with the arbitration process or arbitrators' authority to award appropriate remedies.

      After considering the compelling interests at stake, NASD Regulation preliminarily has identified three bases that it believes warrant the extraordinary relief of expunging information from the CRD system. They include a finding that (1) factual impossibility or "clear error" exists (e.g., the associated person named in the proceeding did not work for the firm, or worked in a different office, and was named in error); (2) the claim is without legal merit; or (3) the information on the CRD system is defamatory in nature.6 As discussed in more detail below, NASD is seeking comment on whether interested parties agree that findings falling into one of these three categories are a sufficient basis for expungement of information from the CRD system and whether additional categories should be considered. With respect to the first category, NASD Regulation is specifically interested in hearing interested parties' views on whether the "factual impossibility" category is clear and broad enough, or whether the category also should address "clear error" situations (e.g., when a customer or a regulator names one registered person at a firm, but intended to name another registered person). NASD Regulation also is interested in commenters' views on what constitutes "clear error" or "factual impossibility."

      NASD Regulation also generally believes that, before any customer dispute information is expunged, an independent fact finder should make a finding that expungement relief is warranted on one of these three bases. With respect to the second category (i.e., claims that are found to be "without legal merit"), NASD Regulation emphasizes that merely prevailing in an arbitration or court proceeding would not, by itself, justify expungement. A fact finder would be required to make a specific finding that a claim was factually impossible, without legal merit, or defamatory in nature before NASD Regulation would execute any expungement directive. With respect to the third category, NASD is interested in commenters' views on whether fact finders should be required to find that information in the CRD system is defamatory in nature, or whether a finding that information is false or defamatory in nature would be a sufficient basis to expunge. NASD Regulation discusses below its preliminary views on specific categories of information that may be subject to expungement requests and proposed approaches/ criteria for expunging that information from the CRD system.

      Expungement Of Customer-Initiated Complaints/Arbitrations/Court Proceedings

      Expungement of customer dispute information is an especially difficult area given the competing interests involved.

      NASD Regulation recognizes that, in some cases, allegations of misconduct may be without merit or may falsely or mistakenly accuse associated persons of engaging in misconduct. Such allegations may unfairly tarnish the reputations of those associated persons and, as a result, associated persons increasingly are requesting expungement of the information as a form of equitable relief in connection with the resolution of these disputes. NASD Regulation also recognizes that some brokers and firms may inappropriately attempt to have meritorious or accurate information about their misconduct or alleged misconduct expunged from the CRD system.7

      Most customer/broker disputes are resolved in arbitration or, alternatively, are settled by the parties without the involvement of a finder of fact. Typically, neither of these dispute resolution methods results in a record that explicitly identifies the rationale for granting expungement relief.8 "Stipulated" (or consent) awards or settlements are a source of particular concern because typically there has been no hearing on the merits, no independent fact finder involved in the negotiations, and no rationale provided for the expungement. While there may be legitimate reasons for the expungement, those reasons generally are not provided in a stipulated award or settlement. Therefore, NASD Regulation is proposing that any approach dealing with the expungement of customer dispute information must address both expungement orders in arbitration awards after a hearing on the merits and "stipulated" or consent awards in which parties agree to expungement as part of the settlement and then present the settlement to the arbitrator for inclusion in an award.

      Awards After Hearing/Determination9

      NASD Regulation believes that merely prevailing in an arbitration case is not, by itself, an appropriate ground for expunging the proceeding from the CRD system.10

      Expungement is extraordinary relief that should be granted in limited circumstances only after a determination by an independent adjudicator that the matter in question meets at least one of the criteria established for expungement. As discussed above, NASD Regulation believes that the appropriate criteria for expunging customer dispute information may include a finding that: (1) factual impossibility or "clear error" exists (e.g. , the associated person named in the proceeding did not work for the firm, or worked in a different office, and was named in error); (2) the claim is without legal merit; or (3) the information on the CRD system is defamatory in nature. NASD Regulation proposes to execute arbitrators' directives to expunge customer dispute information from the CRD system only if one of these three findings is made and is expressly contained in the arbitration award. As discussed in more detail below, NASD Regulation also would require that all such directives be confirmed by a court of competent jurisdiction, and that NASD Regulation be given notice of any request for judicial confirmation or order of expungement11 prior to submission to the court.

      NASD Regulation believes that adverse arbitration awards (i.e., arbitration awards against a firm or associated person) should not be expunged pursuant to a post-award settlement with the customer, even if that settlement 567 NASD Notice to Members 01-65-Request For Comment October 2001 NASD Notice to Members 01-65-Request For Comment is approved by a court.12 An adverse arbitration award represents a finding by independent arbitrators, after consideration of the merits, that a customer claim and allegations made therein are meritorious in full or in part, and justify an award to a customer. Such information is valuable to regulators, the investing public, and to other securities firms that may be potential employers of the subject of the award. NASD Regulation believes that this information should be in the CRD system, and that it may be a violation of Rule 2110 to seek expungement under these circumstances.

      Stipulated Awards

      Because they originate as settlements between parties and generally do not involve independent fact finders in the entire process, "stipulated" or "consent" awards are especially difficult to address. As noted in NASD Notice to Members 99-54, pursuant to the Code of Ethics for Arbitrators in Commercial Disputes, arbitrators are not bound to sign a consent award unless the arbitrator is satisfied with the propriety of the terms of the settlement.13 Nevertheless, concerns have been raised about the possibility of negotiated arrangements wherein a firm may agree to settle a claim filed by a customer against an associated person and the firm, provided the customer agrees to the inclusion of a directive to expunge all information about the claim from the associated person's CRD record. In some cases, a customer claim/allegation may have merit and, therefore, should be reported on the uniform registration forms, included in the CRD system for use by regulators and broker/ dealers, and made available to investors through NASD Regulation's PDP. Expungement may be inappropriate under these circumstances.14

      NASD Regulation believes that it would be appropriate to include expungement relief in stipulated awards only in cases involving factual impossibility or in which a party was mistakenly named (the "clear error" criterion). In those cases, such persons should be able to avail themselves of the settlement opportunity outside of arbitration, and then request that an arbitrator issue an award that incorporates the stipulated settlement and includes expungement relief for certain named parties. NASD Regulation is not proposing to include the other two criteria (without legal merit or defamatory in nature) as grounds for expungement in stipulated awards because, in NASD Regulation's view, it is unlikely that claimants' counsel would agree to such findings as part of a settlement and because NASD Regulation believes that a fact finder's explicit determination that expungement is being ordered based on one of the three criteria discussed in this Notice is a necessary safeguard. NASD Regulation believes that settlements of customer complaints outside of the arbitration process that are reduced to stipulated court orders of expungement should be treated similarly. Accordingly, NASD Regulation proposes to execute expungement orders incorporating settlement agreements only if they are ordered by a court of competent jurisdiction and include a finding of factual impossibility or that the associated person whose information is to be expunged was named in clear error.15

      Court Confirmation Of Expungement Orders

      Consistent with the practice announced in NASD Notice to Members 99-54, NASD Regulation proposes to continue to require that any arbitration award in a customer dispute containing an expungement order be confirmed by a court of competent jurisdiction before NASD Regulation will execute the order. This requirement also will apply to customer disputes settled outside of the arbitration process and submitted to a court as a stipulated order. NASD Regulation will review every such expungement order to determine whether the expungement criteria have been met. Accordingly, NASD Regulation proposes that any expungement rule would require parties seeking expungement pursuant to an arbitration award to name NASD Regulation as an additional party in the confirmation proceeding, and to serve NASD Regulation with the appropriate court papers.16 If NASD Regulation determines that the expungement order meets the criteria set forth above, it will advise the court that it will not oppose expungement. On the other hand, if NASD Regulation determines that the expungement order does not meet the criteria, NASD Regulation will participate in the proceeding and oppose confirmation of the expungement portion of the arbitration award.17 In addition, NASD Regulation will notify the states when NASD-registered firms or individuals provide notice to seek an expungement, and one or more states may choose to intervene in the confirmation or other judicial proceeding.

      Summary

      NASD Regulation believes that there should be a way to remove information that is factually impossible, without legal merit, or defamatory in nature from the CRD system, but that any such removal should be made only after certain criteria are met and certain protocols are followed. Accordingly, NASD seeks comment on the following proposals that are intended to establish those criteria/protocols.

      Proposed Rules/Actions

      Adoption Of Customer Complaint/Arbitration Expungement Rule

      NASD specifically seeks comment on the following proposal.

      NASD Regulation will expunge customer dispute information from the CRD system only under the following conditions:

      I. Judicial or Arbitral Findings
      A. By hearing on the merits:

      Expungement resulting from a judicial or arbitral hearing on the merits must contain one of the following findings with respect to the person for whom expungement is ordered:
      1. Factual impossibility/"clear error"
      2. Without legal merit
      3. Defamatory in nature
      B. By stipulated award:

      Expungement resulting from a stipulated award presented to an arbitrator for signature and containing an expungement order must contain a finding by the arbitrator(s) of factual impossibility or clear error with respect to the associated person for whom expungement is ordered.
      C. Settlement of customer complaint without an award:

      Customer complaints that are settled and reduced to a settlement agreement that contains an expungement order will be expunged by NASD Regulation only if the settlement is approved by a court of competent jurisdiction, and the document signed by the court contains a finding that the associated person whose information is to be expunged was named in clear error.
      II. Notice and Court Confirmation

      All arbitrator-ordered expungements of customer dispute information must be confirmed by a court of competent jurisdiction. NASD Regulation will not expunge customer dispute information from the CRD system pursuant to a court confirmation of an arbitration award, or other judicial proceeding or a settlement agreement unless it receives notice and a copy of the proposed expungement order prior to its submission to the court,18 and is named as a party to the proceeding with respect to the expungement issue. NASD Regulation reserves the right to oppose confirmation of an arbitration award (or, in any other proceeding, to oppose the issuance of an expungement order) if it determines that the expungement order does not contain one or more of the criteria set forth in Section I above.
      III. Otherwise Required by Law or Court Order

      In addition, NASD Regulation will expunge customer dispute information if required to do so by applicable law or a lawful court order that is binding upon NASD Regulation. NASD Regulation would have to be named as a party to any judicial proceeding where an order to expunge such information from the CRD system is sought.

      NASD Regulation proposes to make determinations about what constitutes factual impossibility and "clear error." As discussed above, examples of factual impossibility could include cases where it can be demonstrated that it was factually impossible for the associated person named in the proceeding to have committed the alleged misconduct (e.g., the associated person named in a proceeding did not work for the firm or worked in a different office and was named in error). Examples of "clear error" could include cases where a customer names one registered person at a firm, but intended to name another registered person or where a clerical or procedural error results in the naming of the wrong person). NASD specifically seeks comment on what circumstances or criteria should qualify for the "clear error" category.

      Adoption Of A Rule Or Interpretive Material Articulating NASD Regulation's Authority For Violations Of Conduct Rule 2110

      NASD staff also seeks comment on whether to adopt a rule or Interpretive Material that would expressly articulate NASD Regulation's authority to pursue a disciplinary action (for violation of just and equitable principles of trade) against a member or an associated person who:

      1. seeks to have information about an arbitration claim expunged after there has been an award rendered against that member by the arbitrators;19 or
      2. seeks to expunge any arbitration award that does not contain an expungement order and a finding of at least one of the criteria set forth above.

      NASD Regulation's authority to pursue disciplinary actions against members for violations of Conduct Rule 2110 is quite broad and would encompass pursuing conduct that would undermine the regulatory function of fostering an effective dispute resolution system. Nevertheless, NASD comment on whether adopting an explicit rule or Interpretive Material may act as an additional deterrent to firms or associated persons who might inappropriately seek expungement relief.


      Endnotes

      1 NASD Regulation and NASAA jointly developed the CRD concept, and they jointly set CRD policy.

      2 NASAA is an association comprised of state and other securities regulators in the United States, as well as other securities regulators in North America. NASD Regulation was established in 1996 as a separate, independent subsidiary of the NASD. NASD Regulation has responsibility for the operation of the CRD system.

      3 The CRD system also contains other administrative information (e.g., registration status with various regulators, qualification examination results) and disclosure information reported by participating regulators and the Department of Justice.

      4 NASD Notice to Members 99-09 announced the imposition of the moratorium and specifically noted that, under the moratorium, NASD Regulation would continue to expunge information from the CRD system based on expungement directives rendered in disputes between associated persons and firms where arbitrators have awarded such relief based on the defamatory nature of the information at issue. NASD Regulation is not proposing any changes to that limited exception (which also was discussed in NASD Notice to Members 99-54) or to the general requirement that awards rendered in disputes between customers and firms or their associated persons that provide expungement relief be confirmed by a court of competent jurisdiction.

      5 While defamation actions brought by member firms are less likely to occur than actions brought by individuals, member firms also have an interest in protecting their reputations, and may seek appropriate relief against persons who make false statements about firms.

      6 Generally, defamation requires a false statement about an individual that is published to a third party and harms the individual's reputation. Federal and state courts generally apply a standard of actual malice or reckless disregard for statements about public individuals, and a negligence standard for statements about private individuals, for recovery on a defamation claim. The elements of defamation and the applicable standard of fault may vary among the states.

      7 With respect to the "alleged misconduct" category, NASD Regulation recognizes that information in the CRD system includes allegations of misconduct that have not yet been proven. Nevertheless, such allegations may have regulatory value as an early indicator of problems or as part of a larger pattern that may also include similar acts of misconduct that were found to have merit. Regulators understand the distinction between allegations and findings of misconduct, and NASD Regulation provides information through its PDP to inform the public of that distinction. Specifically, NASD Regulation informs requestors that customer complaints and other disclosure events may include allegations that have not been verified or proven to be true and that requestors should not assume that they are true. Moreover, with respect to pending regulatory/disciplinary actions that have been reported, requestors are informed that such items may be contested and ultimately withdrawn, dismissed, or otherwise resolved in favor of the broker.

      8 Arbitrators are not required to provide the reasoning for a particular decision or award and typically do not do so.

      9 This category includes cases that were decided on the papers, without a hearing.

      10 In this situation, the appropriate course of action is the filing of an amendment through the CRD system to report that the arbitration has been completed and that the party prevailed in the arbitration.

      11 While the majority of court orders that NASD Regulation receives confirm an arbitrator-ordered expungement award, NASD Regulation also receives court orders that order the expungement of customer dispute information when the parties went directly to court (and not to arbitration).

      12 NASD Regulation notes that an exception to this general policy would be where a court vacates an arbitration award and orders expungement as equitable relief.

      13 See Canon V(D) of The Code of Ethics for Arbitrators in Commercial Disputes (reproduced on the NASD Dispute Resolution Web Site at (www.nasdadr.com/ethics_code.asp).

      14 NASD Regulation is aware of allegations that firms have pressed customer/claimants into accepting expungement as a condition of settlement of arbitration proceedings. While we believe that the proposed rules would address these concerns, NASD Regulation would consider this practice to be a possible violation of Rule 2110.

      15 As discussed in more detail below, under the approach being contemplated in this NASD Notice to Members, a member would be required to provide NASD Regulation with notice that it was seeking expungement and would be required to make NASD Regulation a party to that proceeding. NASD Regulation would either advise a court that it did not oppose expungement relief or would participate in the proceeding and oppose the requested relief. NASD Regulation would, of course, abide by an expungement directive lawfully ordered by the courts after a hearing on the merits.

      16 This requirement would also apply to any other judicial proceeding that could result in an order for the expungement of customer dispute information from the CRD system.

      17 As noted above, NASD Regulation would, of course, abide by an expungement directive lawfully ordered by the courts after a hearing on the merits.

      18 A party seeking expungement relief should give notice prior to either the judicial proceeding in which the relief is requested or the judicial proceeding seeking to confirm an arbitration award ordering expungement.

      19 NASD Regulation does not seek to preclude a member or associated person from seeking to vacate an arbitration award under the limited bases delineated in an appropriate state or federal statute.


      ATTACHMENT A

      Request For Comment Checklist

      We have provided below a checklist that members and other interested parties may use in addition to or in lieu of written comments. This checklist is intended to offer a convenient way to participate in the comment process, but does not cover all aspects of the proposal described in the Notice. We therefore encourage members and other interested parties to review the entire Notice and provide written comments, as necessary.

      Instructions

      Comments must be received by November 24, 2001. 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 should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, DC 20006-1500

      Proposed Amendments Concerning Expungement of Information for the CRD System

      1. Should NASD Regulation adopt a rule that would require members to provide notice to NASD Regulation and make NASD Regulation a party to the proceeding before seeking a court order directing expungement or a confirming of an arbitration award that contains an expungement directive?

        Yes   No   See my attached written comments
      2. Should NASD Regulation establish specific standards that must be met before it will execute orders directing it to expunge customer dispute information from the CRD system? Are the standards identified in the Notice (i.e., factually impossible/clear error; without legal merit; and defamatory in nature) appropriate?

        Yes   No   See my attached written comments
      3. Should NASD Regulation execute arbitrators' directives to expunge customer dispute information from the CRD system if (1) arbitrators make specific findings in stipulated or consent awards; (2) arbitrators expressly include those findings in an award; and (3) a party confirms the award in a court of competent jurisdiction?

        Yes   No   See my attached written comments
      4. Should NASD Regulation adopt a rule or Interpretive Material that would explicitly articulate NASD Regulation's authority to pursue disciplinary actions for violations of just and equitable principles of trade against a member or associated person who seeks to have information about an arbitration claim expunged after there has been an award rendered against that member by the arbitrators or seeks to expunge any arbitration award that does not contain an expungement order and a finding of at least one of the criteria described in the Notice?

        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:

    • 01-64 NASD Announces Nominees For Regional Industry Member Vacancies On The National Adjudicatory Council

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      INFORMATIONAL

      NAC Nominees

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      National Adjudicatory Council



      Executive Summary

      The purpose of this Special Notice to Members is to announce the nominees for the National Adjudicatory Council (NAC) for the West Region and New York Region. The nominees, nominated for two-year terms beginning in January 2002, are listed in Exhibit I. These nominees will be proposed to the National Association of Securities Dealers, Inc. (NASD®) National Nominating Committee in 14 calendar days, unless an election is contested.

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

      Contested Election Procedures

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

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, DC 20006-1500
      (202) 728-8062

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

      Questions/Further Information

      Questions concerning this Special Notice to Members may be directed to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8062 or via e-mail at: barbara.sweeney@nasd.com.

      National Adjudicatory Council Membership And Function

      Membership

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

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

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

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

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

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

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

      Function

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

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


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


      • the exercise of exemptive authority; and


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

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


      EXHIBIT A

      Nominees For NAC Industry Member Vacancies

      West Region (Districts 1, 2, and 3)

      William A. Svoboda
      Morgan Stanley Dean Witter
      San Jose, CA

      New York Region (District 10)

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

    • 01-63 SEC Approves New Rule Relating To The Application Of NASD Rules And Interpretive Materials To Exempted Securities

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      INFORMATIONAL

      Exempted Securities

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Registered Representatives
      Senior Management

      Exempted Securities
      Government Securities
      Group Variable Contracts
      Non-Cash Compensation



      Executive Summary

      On July 31, 2001, the Securities and Exchange Commission (SEC) approved National Association of Securities Dealers, Inc. (NASD®) Rule 0116, which enumerates those NASD rules and interpretive materials that apply to transactions and business activities involving exempted securities, other than municipal securities.1 The rule change also codifies an NASD staff interpretation that the non-cash compensation provisions set forth in paragraph (g) of NASD Rule 2820 apply to group variable contracts that are exempted securities.

      The text of Rule 0116 is provided in Attachment A. This rule becomes effective on October 28, 2001.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Office of General Counsel, NASD Regulation, Inc., at (202) 728-8071.

      Background And Discussion

      Through the passage of the Government Securities Act Amendments of 1993 (GSAA), Congress authorized the NASD to apply its sales practice rules to transactions involving exempted securities, other than municipal securities. In 1996, the SEC approved an NASD proposal to implement its new authority granted under the GSAA.2 The 1996 SEC Order set forth the NASD rules and interpretive materials that apply to transactions involving exempted securities, except municipal securities. In addition, in Notice to Members (NtM) 96-66 (October 1996), the NASD also enumerated the NASD rules and interpretive materials that are applicable to transactions in exempted securities, excluding municipal securities.3

      Although NtM 96-66 listed the NASD rules and interpretive materials outlined in the 1996 SEC Order, the NASD Manual did not identify them. New Rule 0116 now codifies the rules and interpretivematerials that are applicable to transactions in exempted securities (other than municipal securities) as outlined in the 1996 SEC Order and NtM 96-66.4 The new rule will help members, their associated persons, and other interested persons identify those NASD rules and interpretive materials applicable to transactions involving certain exempted securities.

      In addition, new Rule 0116 codifies an NASD staff interpretation concerning the application of Rule 2820(g) (non-cash compensation provision) to certain group variable contracts that are exempted securities.5 When the NASD identified the NASD rules that would apply to exempted securities following the passage of the GSAA, it had not adopted NASD Rule 2820(g), and thus Rule 2820(g) was not included in the 1996 SEC Order and NtM 96-66. However, since the implementation of Rule 2820(g), the staff consistently has interpreted Rule 2820(g) to apply to group variable contracts that are exempted securities.


      Endnotes

      1 See Securities Exchange Act Release No. 44631 (July 31, 2001), 66 FR 41283 (August 7, 2001) (order approving File No. SR-NASD-00-38) (the "SEC Approval Order").

      2 See Securities Exchange Act Release No. 37588 (August 20, 1996), 61 FR 44100 (August 27, 1996) (order approving File No. SR-NASD-95-39) (the "1996 SEC Order").

      3 NASD rules and interpretive materials in the Rule 8000 Series were omitted from the list in NtM 96-66, although they were included in the 1996 SEC Order.

      4 Rule 0116(b) provides that, unless stated otherwise, members and their associated persons engaging in transactions and business activities relating to exempted securities, other than municipal securities, are subject to the following NASD Rules and Interpretive Materials: 2110, 2120, 2210, IM-2210-1, IM-2210-2, IM-2210-3, 2250, 2270, 2310, IM-2310-2, IM-2310-3, 2320, 2330, IM-2330, 2340, 2430, 2450, 2510, 2520, 2521, 2522, IM-2522, 2770, 2780, 2820(g), 2910, 3010, 3020, 3030, 3040, 3050, 3060, 3070, 3110, IM-3110, 3120, 3130, IM-3130, 3131, 3140, 3230, 3310, IM-3310, 3320, IM-3320, 3330, 8110, 8120, 8210, 8221, 8222, 8223, 8224, 8225, 8226, 8227, 8310, IM-8310-1, IM-8310-2, 8320 and 8330. This list reflects any deletions or other revisions to the rules and interpretive materials originally enumerated in the 1996 SEC Order. A detailed discussion of these changes is provided in the SEC Approval Order.

      5 Rule 2820(g) limits the manner in which members and their associated persons may pay or accept non-cash compensation in connection with the sale or distribution of variable contracts.


      ATTACHMENT A - RULE TEXT

      Note: All language is new.

      0116. Application of Rules of the Association to Exempted Securities

      (a) For purposes of this Rule, the terms "exempted securities" and "municipal securities" shall have the meanings specified in Sections 3(a)(12) and 3(a)(29) of the Act, respectively.
      (b) Unless otherwise indicated within a particular provision, the following Rules of the Association and Interpretive Materials thereunder are applicable to transactions and business activities relating to exempted securities, except municipal securities, conducted by members and associated persons: 2110, 2120, 2210, IM-2210-1, IM-2210-2, IM-2210-3, 2250, 2270, 2310, IM-2310-2, IM-2310-3, 2320, 2330, IM-2330, 2340, 2430, 2450, 2510, 2520, 2521, 2522, IM-2522, 2770, 2780, 2820(g), 2910, 3010, 3020, 3030, 3040, 3050, 3060, 3070, 3110, IM-3110, 3120, 3130, IM-3130, 3131, 3140, 3230, 3310, IM-3310, 3320, IM-3320, 3330, 8110, 8120, 8210, 8221, 8222, 8223, 8224, 8225, 8226, 8227, 8310, IM-8310-1, IM-8310-2, 8320 and 8330.

    • 01-62 Columbus 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



      Columbus Day: Trade Date—Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 8, 2001. On this day, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date Settlement Date Reg. T Date*
      Oct. 2 Oct. 5 Oct. 9
      3 9 10
      4 10 11
      5 11 12
      8 11 15
      9 12 16

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

      Transactions made on Monday, October 8, will be combined with transactions made on the previous business day, October 5, for settlement on October 11. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 8.


      * 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."

    • 01-61 Fixed Income Pricing SystemSM Additions, Changes, And Deletions As Of July 20, 2001

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      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      FIPS



      As of July 20, 2001, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

      Symbol Name Coupon Maturity
      ASTR.GA All Star Gas Corp 11.000 08/14/01
      AIQ.GA Alliance Imaging Inc 10.375 04/15/11
      AELU.GA American Cellular Corp 9.500 10/15/09
      ASCA.GB Ameristar Casinos Inc 10.750 02/15/09
      AMKR.GC Amkor Technology Inc 9.250 02/15/08
      AETC.GB Applied Extrusion Tech Inc 10.750 07/01/11
      AGY.GD Argosy Gaming Co 9.000 09/01/11
      CHK.GI Chespeake Energy Corp 8.125 04/01/11
      STZ.GA Constellation Brands Inc 8.000 02/15/08
      DHI.GG D.R. Horton Inc 7.875 08/15/11
      EMMS.GB Emmis Communications Corp 12.500 03/15/11
      ENSO.GD Envirosource Inc 14.000 12/15/08
      HBCR.GB Harborside Healthcare Corp 12.000 08/01/07
      ISFI.GA Istar Financial Inc 8.750 08/15/08
      LPX.GA Louisiana-Pacific Corp 8.500 08/15/05
      LPX.GB Louisiana-Pacific Corp 8.875 08/15/01
      LPX.GC Louisiano-Pacific Corp 10.875 11/15/08
      NVON.GA Noveon Inc 11.000 02/28/11
      ORN.GA Orion Power Holdings Inc 12.000 05/01/10
      PPE.GD Park Place Entertainment Corp 8.125 05/15/11
      PDSG.GA PDS Gaming Corp 12.000 07/01/07
      PENN.GB Penn National Gaming Inc 11.125 03/01/08
      PME.GA Penton Media Inc 10.375 06/15/11
      CHX.GB Pilgrims Pride Corp 9.625 09/15/11
      RYL.GG Ryland Group Inc 8.000 08/15/06
      SQAA.GB Sequa Corp 8.875 04/01/08
      STO.GN Stone Container Corp 9.250 02/01/08
      STO.GO Stone Container Corp 9.750 02/01/11
      TEX.GC Terex Corp 10.375 04/01/11
      WCIN.GA WCI Communities Inc 10.625 02/15/11

      As of July 20, 2001, the following bonds were deleted from the Fixed Income Pricing System.

      Symbol Name Coupon Maturity
      ABBY.GA Abbey Healthcare Group Inc 9.500 11/01/02
      AMD.GA Advanced Micro Devices Inc 11.000 08/01/03
      AIMM.GA Aim Management Group Inc 9.000 11/15/03
      AIFT.GA Aircraft Svs Intl Group Inc 11.000 08/15/05
      CDS.GA Alliance Entertainment Corp 11.250 07/15/05
      ALLY.GB Alliance Gaming Corp 12.875 06/30/03
      ALCU.GA Allnet Communications Svs Inc 9.000 05/15/03
      AWRL.GC America West Airlines 8.120 07/02/01
      AAG.GA American Annuity Group Inc 11.125 02/01/03
      AAG.GB American Annuity Group Inc 9.500 08/15/01
      AHI.GA American Healthcare Mgmt Inc 10.250 08/01/03
      ASKI.GB American Skiing Co 13.750 01/15/07
      AMIC.GA Americold Corp 15.000 05/01/07
      AMIC.GB Americold Corp 11.450 06/30/02
      AKNG.GA Ameriking Inc 10.750 12/01/06
      ASCA.GA Ameristar Casinos Inc 10.500 08/01/04
      ANCP.GA Anacomp Inc 15.000 11/01/00
      PTSH.GA Arcadcan partners (Potash) 10.750 05/01/05
      AS.GB Armco Inc 9.200 07/15/00
      AS.GC Armco Steel Corp 8.500 09/01/01
      ATCV.GA ATC Group Services Inc 12.000 01/15/08
      AVBM.GA Avalon Cable of Michigan 9.375 12/01/08
      AVGH.GA Avatar Holdings Inc 8.000 10/01/00
      BLYP.GA Bally Park Place Funding Inc 9.250 03/15/04
      BLYD.GA Bally's Grand Inc 10.375 12/15/03
      BARY.GA Barry's Jewelers Inc 11.000 12/22/00
      BZH.GA Beazer Homes USA Inc 9.000 03/01/04
      BHW.GA Bell & Howell Co 11.500 03/01/05
      BSPO.GA Bell Sports Inc 11.000 08/15/08
      BBY.GB Best Buy Inc 8.625 10/01/00
      BEV.GA Beverly Enterprise Inc 8.750 12/31/03
      BGLI.GA BGLS Inc 15.750 01/31/01
      BFDG.GA Big 5 Holdings Inc 13.625 09/15/02
      FLER.GB Big Flower Press Inc 10.750 08/01/03
      BYD.GA Boyd Gaming Corp 10.750 09/01/03
      BRCH.GA Breed Technologies Inc 9.250 04/15/08
      BVPS.GD BVPS II Funding Corp 7.670 12/01/00
      CE.GB Calenergy Co Inc 9.875 06/30/03
      CAHF.GA California Hotel Finance Co 11.000 12/01/02
      CPRK.GA Cap Rock Communications Corp 12.000 07/15/08
      CPRK.GB Cap Rock Communications Corp 11.500 05/01/09
      CSNO.GA Casino America Inc 11.500 11/15/00
      CSNO.GB Casino America Inc 12.500 08/01/03
      CMGF.GA Casino Magic Finance Corp 11.500 10/15/01
      CBG.GA CB Richard Ellis Service Inc 8.875 06/01/06
      CCIR.GB CCI Corp 13.875 07/15/00
      CHCR.GA Charter Communications SO East L.P. 11.250 03/15/06
      CHWN.GA Chatwins Group Inc 13.000 05/01/03
      CQB.GC Chiquita Brands Intl Inc 10.500 08/01/04
      CQB.GE Chiquita Brands Intl inc 11.500 06/01/01
      CITI.GA Citicasters Inc 9.750 02/15/04
      CYYS.GA Cityscape Financial Corp 12.750 06/01/04
      CLDG.GA Claridge Hotel & Casino Corp 11.750 02/01/02
      CKMH.GA Clark Materials Handling Co 10.750 11/15/06
      CUCN.GA Coldwell Bankers Corp 10.250 06/30/03
      CLDU.GA Colt Industries Inc 11.250 12/01/15
      CUMH.GA Columbia Healthcare Corp 10.875 03/01/02
      CUMH.GB Columbia Healthcare Corp 11.500 06/01/02
      CDDA.GA Commodore Media Inc 13.250 05/01/03
      CFNI.GA Contifinancial Corp 8.375 08/15/03
      CNAN.GB Continental Airlines Inc 7.522 06/30/01
      CCVS.GC Continental Cablevision Inc 11.000 06/01/07
      CMEY.GA Continental Medical Systems Inc 10.875 08/15/02
      CMCS.GD Corncast Corp 9.500 01/15/08
      CMCS.GF Corncast Corp 9.375 05/15/05
      COMN.GB Corndata Networks 13.250 12/15/02
      CMM.GA Criimi Mae Inc 9.125 12/01/02
      CSWS.GA CS Wireless Systems Inc 11.375 03/01/06
      DGN.GA Data General Corp 8.375 09/15/02
      DLMC.GA Del Monte Corp 12.250 04/15/07
      DLM.GA Del Monte Foods Co 12.500 12/15/07
      DLNF.GA Del Norte Funding Corp 11.250 01/02/14
      DTLS.GA Details Inc 10.000 11/15/05
      DLCA.GA Dial Call Communications Inc 10.250 12/15/05
      DTC.GB Domtar Inc 11.250 09/15/17
      EGEO.GA Eagle Geophysical Inc 10.750 07/15/08
      EPIH.GA Eagle-Picher Industry Inc 9.500 03/01/17
      ESTC.GA Echostar Communications Corp 12.875 06/01/04
      ECSR.GA Echostar DBS Corp 12.500 07/01/02
      EPHO.GB Econophone Inc 11.000 02/15/08
      EE.GB El Paso Electric Co 7.750 05/01/01
      ELPF.GA El Paso Funding Corp 10.750 04/01/13
      EGCS.GA Empire Gas Corp 12.875 07/15/04
      ERCF.GA Empress River Casino Finance Corp 10.750 04/01/02
      EDNY.GD Envirodyne Industry Inc 0.000 06/15/00
      EDYN.GD Envirosource Inc 9.750 06/15/03
      ERLY.GA Erly Industries Inc 12.500 12/01/02
      ETH.GA Ethan Allen Inc 8.750 03/15/01
      EVHC.GA Everest Healthcare Svs Corp 9.750 05/01/08
      EVGI.GA Evergreen International Aviation Inc 13.500 08/15/02
      FBWL.GA Fair Lanes Inc 9.500 07/15/01
      FLCN.GB Falcon Drilling Inc 12.500 03/15/05
      FMAC.GB First Merchants Accept Corp 11.000 03/15/05
      FNWH.GB First Nationwide Holdings Inc 12.250 05/15/01
      FTU.GA First Union Corp 7.500 12/01/02
      FLGS.GB Flagstar Corp 11.250 11/01/04
      FLGS.GC Flagstar Corp 10.750 09/15/01
      FLM.GB Fleming Companies Inc 7.937 12/15/01
      FDB.GA FoodBrands American Inc 10.750 05/15/06
      FCSG.GA Forecast Group LP 11.375 12/15/00
      FMPT.GA Forman Petroleum Corp 13.500 06/01/04
      GBPR.GA GB Property Funding Corp 10.875 01/15/04
      GNRP.GA Generac Portable Products LLC 11.250 07/01/06
      GNSF.GB GNS Finance Corp 9.25 03/15/03
      GTHC.GA Gothic Production Corp 11.125 05/01/05
      GCRP.GA Graphic Controls Corp 12.000 09/15/01
      GRDH.GA Great Dane Holdings 14.500 01/01/06
      GKBC.GA Great Lakes Bankcorp 18.000 03/01/06
      GSCW.GA GS Escrow Corp 6.750 08/01/01
      GSLN.GA Guardian S & L Assoc 12.625 01/15/02
      HWG.GA Hallwood Group Inc 13.500 07/31/09
      GBCR.GA Harborside Healthcare Corp 11.000 08/01/08
      HPH.GA Harnischfeger Industry Inc 8.900 03/01/22
      HPH.GB Harnischfeger Industries Inc 7.250 12/15/25
      HPH.GC Harnischfeger Industries Inc 6.875 02/15/27
      HPH.GD Harnischfeger Industries Inc 8.700 06/15/22
      HAY.GE Hayes Wheels International Inc 9.250 11/15/02
      HDRM.GA Hedstrom Corp 10.000 06/01/07
      HDHG.GA Hedstrom Holdings Inc 12.000 06/01/09
      HEGP.GA Helicon Group LP/Cap Corp 11.000 11/01/03
      HHI.GC Home Holdings Inc 7.875 12/15/03
      HZCM.GA Horizons/CMS Healthcare Corp 10.375 04/01/03
      HNPK.GA Huntsman Packaging Corp 9.125 10/01/07
      IMAX.GA Imax Corp 10.000 03/01/01
      IPCG.GA Impac Group Inc Ser B 10.125 03/15/08
      IHMD.GA Imperial Home Décor Group Inc 11.000 03/15/08
      IFBC.GA Infinity Broadcasting Corp 10.375 03/15/02
      INGS.GB Ingersoll Newspapers Inc 12.125 09/01/00
      IAD.GA Inland Steel Inds Inc 12.750 12/15/02
      INRK.GA International Bank (Wash) 15.750 08/01/00
      ICFP.GA International Comfort Products Holdings Inc 8.625 05/15/08
      IWIR.GA Intl Wireless Commun Hldgs Inc 0.000 08/15/01
      ITTO.GA ITT Corp New 6.250 11/15/00
      IVXH.GA Ivex Holdings Corp 13.250 03/15/05
      IVEX.GA Ivex Packaging Corp 12.500 12/15/02
      JCOM.GC Jacor Communications Co 8.000 02/15/01
      HEFR.GA JH Heafner Company 10.000 05/15/08
      JPSA.GA JPS Automotive Products Inc 11.125 06/15/01
      KBLR.GA Keebler Foods Corp 10.750 07/01/06
      LMFO.GA Loomis Fargo & Co 10.000 01/15/04
      MIKE.GA Michaels Stores 10.875 06/15/06
      OHC.GA Oriole Homes Corp 12.500 01/15/03
      OMI.GA Owens & Minor Inc New 10.875 06/01/06
      PAX.GA Paxson Communications Corp 11.625 10/01/02
      PIC.GB Piccadilly Cafeterias Inc 8.875 04/01/08
      RHC.GA Rio Hotel & Casino Inc 10.625 07/15/05
      SOLA.GA Sola Group LTD 9.625 12/15/03
      SLTF.GB Specialty Foods Corp 10.250 08/15/01
      TRHD.GA Transtar Holding LP 13.375 12/15/03
      UCIV.GA UCC Investors Holdings Inc 10.500 05/01/02

      As of July 20, 2001 changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol New Name/Old Name Coupon Maturity
      NXGN.GA MTUM.GA Next Generation Network
      Inc/Mentus Media Corp
      12.000 02/01/03
      SBLK.GA HVDM.GA SeaBulk Intl Inc/Hvide
      Marine Inc
      12.500 06/30/07

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, NASDR Market Regulation, at (240) 386-4994.

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

    • 01-60 New Requirements For Electronic Blue Sheets Submissions

      View PDF File

      ACTION REQUESTED

      Intermarket Surveillance Group

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management

      Blue Sheets



      Executive Summary

      This Notice to Members discusses new uniform provisions regarding the automated reporting requirement for Electronic Blue Sheets (EBS).

      Effective August 8, 2001 all members were required to:

      (1) electronically submit to the Securities and Exchange Commission (SEC or Commission), upon request, customer and proprietary transactions via the EBS system, and (2) provide to the SEC, upon request, a current contact person for blue sheet data.

      Effective January 7, 2002 all members will be required upon request to report via the EBS system:

      1. Prime Brokerage Identifiers
      2. Average Price Account Identifiers
      3. Depository Institution Identifiers

      All members are strongly encouraged to test their ability to provide these new categories of information with either the Securities Industry Automation Corporation (SIAC) or the NASD Form Filings system in order to be in compliance by the effective dates.

      Member firms that use a "service bureau" to transmit electronic blue sheets on their behalf are required to ensure that service bureaus comply with applicable SEC and SRO rules and regulations on their behalf.

      This Notice was prepared by the following self-regulatory organizations (SROs) acting jointly as members of the Intermarket Surveillance Group (ISG):

      American Stock Exchange, Inc. (Amex)

      Boston Stock Exchange, Inc. (BSE)

      Chicago Board Options Exchange, Inc. (CBOE)

      Chicago Stock Exchange, Inc. (CHX)

      Cincinnati Stock Exchange, Inc. (CSE)

      International Securities Exchange (ISE)

      NASD Regulation, Inc. (NASDR)

      New York Stock Exchange, Inc. (NYSE)

      Pacific Exchange, Inc. (PCX)

      Philadelphia Stock Exchange, Inc. (PHLX)

      New Uniform Provisions

      Recently, the SEC adopted Rule 17a-25 under Section 17 of the Securities Exchange Act of 1934 (Exchange Act).1

      Rule17a-25:

      Provision 1: codifies the requirement that broker/ dealers must electronically submit to the Commission, upon request, information concerning customer and proprietary transactions via the EBS system;

      Provision 2: requires broker/dealers to provide to the Commission, on request, and keep current, information concerning the firm's contact for blue sheet data; and,

      Provision 3: adds three reportable data elements not currently required by the EBS system utilized by the SROs:

      i. prime brokerage identifiers;
      ii. average price account identifiers; and
      iii. depository institution identifiers.

      Provisions 1 and 2 on the previous page became effective on August 8, 2001 while Provision 3 will be effective on January 7, 2002.

      As provided by SRO rules,2 members and member organizations must currently provide the data required in Provision 1 on the previous page to the SROs through the EBS system. Firms also use the EBS system to respond to SEC requests for information. Rule 17a-25 requires broker/dealers to submit the required information to the Commission upon request in a format specified by the broker/dealer's designated SRO under Rule 17d-1 of the Exchange Act.

      As a result of the new requirements in Provision 3 on the previous page, SIAC will add the three additional fields to the EBS system file. The chart below describes the format and location of the three new fields in the EBS system file. See Attachment A for the complete EBS system file3 layout. The fields are located in record "5" of each blue sheet transaction.

      • The prime broker field is to be populated with the clearing number of the account's prime broker.


      • The average price account field will be used to identify whether the account is the average price account itself or the recipient of transactions for an average price account. This field will be populated with the following values:


      • 1 = recipient of average price transaction

        2 = average price account itself

      • The depository institution identifier is to be populated with the identifying number assigned to the account by the depository institution.

      All members are strongly encouraged to test their enhanced blue sheet information with SIAC before sending actual blue sheet information with the new data elements. Please contact SIAC's Network Support Department at (212) 383-5401 for testing information. Firms that utilize SIAC's PC Data Entry system must obtain an updated version of the blue sheet data entry software from SIAC's PC Service Center at (212) 383-2062. Members that use the PC Data Entry system need not test. NASD members that submit EBS data via the Form Filings system should test their enhanced blue sheet information via Form Filings before sending actual blue sheet information with the new data elements. Those members should contact the CASH Help Desk at (800) 321-NASD (6273) for testing information.

      To comply with Provision 2 on the previous page, updated firm blue sheet contact information can be submitted to the SEC by providing Joseph Cella, Chief, Office of Market Surveillance, or Mark Lineberry, Branch Chief with the following:

      Full name, title, address, telephone number(s), facsimile number(s), and electronic mail address(es) for each person designated by the member, broker, or dealer as a SEC contact.

      They can be reached by writing to:

      Securities and Exchange Commission
      450 5th Street NW
      Washington, DC 20549-1001

      or via e-mail at cellaj@sec.gov or lineberrym@sec.gov, respectively.

      Questions concerning provisions of Rule 17a-25 should be directed to Alton Harvey, Office Chief, at (202) 942-4167, or Anitra Cassas, Special Counsel, at (202) 942-0089, Division of Market Regulation, Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549-1001.

      From Col To Col LNG Field Name Format Justify Cobol Picture Default Value
      62 65 4 Prime Broker Alphanumeric Left X(4) Spaces
      66 66 1 Average Price Account Alphanumeric X(1) Spaces
      67 71 5 Depository Institution Identifier Alphanumeric Left X(5) Spaces

      Questions/Further Information

      Questions concerning this Notice may be directed to:

      Amex
      Eric Miller (212) 306-1552
      BSE
      Brian Colby (617) 235-2158
      CBOE
      Pat Sizemore (312) 786-7752
      CHX
      Dan Liberti (312) 663-2057
      CSE
      Jeffrey T. Brown (312) 786-8893
      ISE
      James Sampson (212) 897-0235
      NASDR
      Jim Dolan (240) 386-5007
      NYSE
      Aldo Martinez (212) 656-8532
      PCX
      Tim Miller (415) 835-4848
      PHLX
      Edward Deitzel (215) 496-5298


      Endnotes

      1 See SEC Release No. 34-44494.

      2 Amex - Rule 153A, CBOE - Rule 15.7, CSE - 8.2, 5.3, ISE - Rule 1404, NASD - Rule 8211, 8212 and 8213, NYSE - Rule 342.20, 410A, 476 (a) (11), PCX - Rule 10.2(c), PHLX - Rule 785

      3 The NASD's Form Filing system for submitting EBS data is also being modified to add the three new reportable data elements. All NASD members submitting EBS data via Form Filings will be required to include all relevant information pertaining to the three new data elements with each EBS submission beginning on January 7, 2002.


      ATTACHMENT A

      RECORD LAYOUT FOR SUBMISSION OF TRADING INFORMATION

      **** THIS RECORD MUST BE THE FIRST RECORD OF THE FILE ****

      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 3 3 FILLER A LJ X (3) HDR
      4 5 2 FILLER A LJ X (2) .S
      6 10 5 DTRK-SYSID N LJ 9 (5) 12343
      11 12 2 FILLER A LJ X (2) .E
      13 14 2 FILLER N LJ 9 (2) 00
      15 16 2 FILLER A LJ X (2) .C
      17 20 4 DTRK-ORIGINATOR
      Please call SIAC for assignment (212) 383-2210
      A LJ X (4) --
      21 22 2 FILLER A LJ X (2) .S
      23 26 4 DTRK-SUB-ORIGINATOR A LJ X (4) --
      27 27 1 FILLER A LJ X (1) B
      28 33 6 DTRK-DATE
      Contains submission date.
      N LJ 9 (6) MMDDYY
      34 34 1 FILLER A LJ X (1) B
      35 59 25 DTRK-DESCRIPTION
      Required to identify this file.
      A LJ X (25) FIRM TRADING INFORMATION
      60 80 21 FILLER A LJ X (21) B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 HEADER RECORD CODE
      Value: Low Values OR ZERO
      A -- X --
      2 5 4 SUBMITTING BROKER NUMBER If NSCC member use NSCC clearing number. If not a NSCC member, use clearing number assigned to you by your clearing agency. A LJ X (4) B
      6 40 35 FIRM'S REQUEST NUMBER
      Tracking number used by the firm to record requests from an organization.
      A -- X (35) B
      41 46 6 FILE CREATION DATE Format is YYMMDD A -- X (6) --
      47 54 8 FILE CREATION TIME
      Format is HH:MM:SS
      A -- X (8) --
      55 55 1 REQUESTOR CODE Requesting Organization Identification.
      Values: The same codes in Exchange Code Field in RECORD SEQUENCE NUMBER ONE.
      A -- X --
      56 70 15 REQUESTING ORGANIZATION NUMBER Number assigned by requesting organization A LJ X (15) B
      71 80 10 FILLER A -- X (10) B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 RECORD SEQUENCE NUMBER ONE
      The first record of the transaction. Value: 1
      A -- X --
      2 5 4 SUBMITTING BROKER NUMBER
      Identical to Submitting Broker Number in Header Record
      A LJ X (4) --
      6 9 4 OPPOSING BROKER NUMBER
      The NSCC clearing house number of the broker on the other side of the trade.
      A LJ X (4) B
      10 21 12 CUSIP NUMBER
      The cusip number assigned to the security. Left justified since the number is nine characters at present (8+ check digit) but will expand in the future
      A LJ X (12) B
      22 29 8 TICKER SYMBOL
      The symbol assigned to this security.
      A LJ X (8) B
      30 35 6 TRADE DATE
      The date this trade executed. Format is YYMMDD.
      A -- X (6) B
      36 41 6 SETTLEMENT DATE
      The date this trade will settle. Format is YYMMDD
      A -- X (6) B
      42 53 12 QUANTITY
      The number of shares or quantity of bonds or option contracts.
      N RJ 9 (12) Z
      54 67 14 NET AMOUNT
      The proceeds of sales or cost of purchases after commissions and other charges.
      N RJ S9(12)V99 Z
      68 68 1 BUY/SELL CODE
      Values: 0 = Buy, 1 = Sale, 2 = Short Sale, 3 = Open Long, 4 = Open Short, 5 = Close Long, 6 = Close Short. A = Buy Cancel, B = Sell Cancel, C = Short Sale Cancel, D = Open Long Cancel, E = Open Short Cancel, F = Close Long Cancel, G = Close Short Cancel. Values 3 to 6 and D to G are for options only
      A -- X B
      69 78 10 PRICE
      The transaction price. Format: $$$$ CCCCCC.
      N RJ 9(4)V(6) Z
      79 79 1 EXCHANGE CODE
      Exchange where trade was executed.
      Values:

      A = New York Stock Exchange

      B = American Stock Exchange

      C = Chicago Stock Exchange

      D = Philadelphia Stock Exchange

      E = Pacific Stock Exchange

      F = Boston Stock Exchange

      G = Cincinnati Stock Exchange

      I = International Securities Exchange

      K = CBOE

      L = London Stock Exchange

      M = Toronto Stock Exchange

      N = Montreal Stock Exchange

      O = Vancouver Stock Exchange

      R = NASDAQ

      S = Over-the-Counter

      T = Tokyo Stock Exchange

      X = Securities Exchange Commission

      Z = Other
      A -- X B
      80 80 1 BROKER/DEALER CODE
      Indicate if trade was done for another Broker/Dealer. Values: 0 = No; 1 = Yes
      A -- X B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 RECORD SEQUENCE NUMBER TWO
      Value: 2
      A -- X --
      2 2 1 SOLICITED CODE
      Values: 0 = No; 1 = Yes
      A -- X B
      3 4 2 STATE CODE
      Standard Postal two character identification.
      A -- X (2) B
      5 14 10 ZIP CODE/COUNTRY CODE
      Zip Code -- five or nine character (zip plus four)
      Country code -- for future use.
      A LJ X (10) B
      15 22 8 BRANCH OFFICE/REGISTERED
      REPRESENTATIVE NUMBER
      Each treated as a four character field. Both are left justified.
      A LJ X (8) B
      23 28 6 DATE ACCOUNT OPENED
      Format is YYMMDD
      A -- X (6) B
      29 48 20 SHORT NAME FIELD
      Contains last name followed by comma (or space) then as much of first name as will fit.
      A LJ X (20) B
      49 78 30 EMPLOYER NAME A LJ X (30) B
      79 79 1 TIN 1 INDICATOR
      Values: 1 = SS#; 2 = TIN
      A -- X B
      80 80 1 TIN 2 INDICATOR
      Values: 1 = SS#; 2 = TIN -- for future use.
      A -- X B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 RECORD SEQUENCE NUMBER THREE
      Value: 3
      A -- X --
      2 10 9 TIN ONE
      Taxpayer Identification Number
      Social Security or Tax ID Number.
      A LJ X (9) B
      11 19 9 TIN TWO
      Taxpayer Identification Number #2
      Reserved for future use.
      A LJ X (9) B
      20 20 1 NUMBER OF N&A LINES A -- X B
      21 50 30 NAME AND ADDRESS LINE ONE A LJ X (30) B
      51 80 30 NAME AND ADDRESS LINE TWO A LJ X (30) B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 RECORD SEQUENCE NUMBER FOUR
      Value: 4
      A -- X --
      2 31 30 NAME AND ADDRESS LINE THREE A LJ X (30) B
      32 61 30 NAME AND ADDRESS LINE FOUR A LJ X (30) B
      62 62 1 PROPRIETARY-CUSTOMER INDICATOR
      1 = Trade was for a proprietary account of submitting broker/dealer or another broker/dealer
      2 = Trade was for customer of submitting broker/dealer or another broker/dealer
      A -- X B
      63 80 18 ACCOUNT NUMBER
      Account number
      A LJ X (18) B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 RECORD SEQUENCE NUMBER FIVE
      Value: 5
      A -- X (1) --
      2 31 30 NAME AND ADDRESS LINE FIVE A LJ X (30) B
      32 61 30 NAME AND ADDRESS LINE SIX A LJ X (30) B
      62 65 4 PRIME BROKER
      Clearing number of the account's prime broker.
      A LJ X (4) B
      66 66 1 AVERAGE PRICE ACCOUNT
      1 = recipient of average price transaction.
      2 = average price account itself.
      N -- 9 (1) Z
      67 71 5 DEPOSITORY INSTITUTION IDENTIFIER
      Identifying number assigned to the account by the depository institution.
      A LJ X (5) B
      72 80 9 FILLER A -- X (9) B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    


      FIELD FROM POSITION TO FIELD LENGTH FIELD NAME/DESCRIPTION/REMARKS FIELD FORMAT JUSTIFY PICTURE CLAUSE DEFAULT VALUE
      1 1 1 TRAILER RECORD DATE
      One record per submission. Must be the last record on the file. Value: High Values or "9"
      A -- X --
      2 17 16 TOTAL TRANSACTIONS
      The total number of transactions. This total excludes Header and Trailer Records.
      N RJ 9 (16) B
      18 33 16 TOTAL RECORDS ON FILE
      The total number of 80 byte records. This total includes Header and Trailer Records, but not the Datatrak Header Record (i.e., does not include the first record on the file).
      N RJ 9 (16) Z
      34 80 47 FILLER A -- X (47) B


      Field Format - Code Default Values - Code Justify
      alphanumeric = A Blanks = B RJ = Right Justification of Data
      numeric = N Zero = Z LJ = Left Justification of Data
      packed = P    
      binary = B    

    • 01-59 NASD Requests Comment On Proposed Rule Amendments To Address Shelf Offerings Of Securities

      View PDF File

      ACTION REQUESTED

      Regulation Of Shelf Offerings

      Comment Period Expires: October 15, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal & Compliance
      Registered Representatives
      Senior Management
      Trading & Market Making

      IM-2440
      Mark-Up Policy
      Merchant Banking
      NASD Rule 2710
      NASD Rule 2720
      NASD Rule 2810
      Shelf Offerings
      Underwriting Compensation



      Executive Summary

      NASD Regulation, Inc. (NASD RegulationSM) proposes to amend NASD Rules 2710, 2720, 2810, IM-2440, and Schedule A to the NASD By-Laws to adopt filing requirements and fees for shelf offerings of securities, and to otherwise amend those rules to address shelf offerings.

      The text of these proposed amendments is included with this NASD Notice to Members—Request for Comment (see Attachment A).

      Action Requested

      NASD Regulation encourages all interested parties to comment on the proposal. Comments must be received by October 15, 2001. Members and interested persons can submit their comments using the following methods:

      • mailing in the checklist (Attachment B)


      • mailing in written comments


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


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

      If you decide to submit comments using both the checklist and one of the other methods listed above, please indicate that in your submissions. The checklist and/or written comments should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, DC 20006-1500

      Important Note: The only comments that will be considered are those submitted via e-mail or in writing. Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.

      Questions/Further Information

      As noted, written comment should be submitted to Barbara Z. Sweeney. Questions concerning this NASD Notice to Members— Request for Comment may be directed to Joseph E. Price, Director, or Paul M. Mathews,Staff Supervisor, Corporate Financing Department, NASD Regulation, at (240) 386-4623.

      Background

      NASD Rule 2710 regulates the underwriting terms and arrangements of most public offerings of securities sold through NASD members. The underwriting terms and arrangements of Direct Participation Program (DPP) offerings are regulated by NASD Rule 2810. NASD Rule 2720 regulates public offerings when the securities offered are those of a member, the member's parent company, an affiliate of the member, or a company with which a member has a conflict of interest. Pursuant to the filing requirements in Rule 2710, members must file public offerings that are subject to Rules 2710, 2720, and 2810 (collectively the "Corporate Financing Rules") with the Corporate Financing Department of NASD Regulation (Department) for review.

      NASD Regulation applies the Corporate Financing Rules to shelf offerings that are made pursuant to Rule 415 under the Securities Act of 1933 (Securities Act). Certain shelf offerings of issuers with a three-year reporting history, significant float, and high trading volume are exempt from the Rules' filing requirements. The NASD discussed the application of the Corporate Financing Rules to shelf offerings in NASD Notice to Members 88-101 and stated the following:

      "[I]t is the view of the [Corporate Financing] Committee that the participation of a member in any offering of securities distributed pursuant to Rule 415 constitutes participation in a public offering [and]... any member who is named as a potential distribution participant in the registration statement or who may participate in any transaction that takes securities off the shelf is responsible for ensuring that a timely filing is made with the Department... ."

      Accordingly, NASD Regulation considers shelf offerings to be public offerings within the scope of the Corporate Financing Rules, and members that take securities off a shelf and sell them to the public must file information about the offering with the Department unless the transaction meets an exemption from the filing requirements provided in the Rules.

      The application of the Corporate Financing Rules to shelf offerings has raised a number of practical problems. For example, when more than one member takes securities off a shelf and sells them to the public, it may be unclear which member must make the requisite filing with the Department. Members also have questioned whether filing fees should be based on the entire amount of securities registered pursuant to Rule 415 or whether filing fees should be assessed only with respect to tranches that actually are taken off the shelf and sold.

      Many issuers initially file shelf offerings with the SEC before they enter into underwriting agreements with members for the sale of the securities. Because the NASD filing requirements are the responsibility of its members rather than issuers, the issuer may not file the offering with the Department. Those issuers that do file with the Department often cannot identify, at the time of filing, the members that will be engaged in sales or provide information regarding underwriting discounts, commissions, or other terms and arrangements. In addition, issuers often file shelf-registered offerings on behalf of selling securityholders. Because sales off the shelf would be under the control of the securityholders in those offerings, the issuer may have little or no information regarding the selling arrangements between the securityholders and members.

      Another difficult issue in regulating shelf-registered offerings involves the calculation of underwriting compensation. The proper calculation methodology is especially problematic because of the many kinds of transactions in which shelf-registered securities are distributed. For example, shelf offerings can be done as principal or agency transactions, at a fixed price or discount to the market price, or "at the market." Shelf takedowns may either be made pursuant to an underwriting agreement or without any written agreement, and pricing arrangements may involve complex formulas, such as those found in equity line or PIPE transactions.

      Finally, if members do not promptly file shelf-registered offerings prior to their participation in a takedown, the Department's review processes could delay the offering, thus affecting the registrant's ability to take advantage of market opportunities that shelf registration is designed to provide.

      Although NASD Regulation recognizes that the Corporate Financing Rules can be amended to better address the issues discussed above, we continue to believe that regulating these transactions provides important investor protections against abusive practices, including fraud and manipulation. The majority of NASD Regulation enforcement actions involving shelf offerings have involved unseasoned and thinly traded issuers, but shelf offerings of larger issuers eligible for Form S-3 also have been the subject of enforcement actions. In addition, shelf offerings of larger issuers sometimes involve compliance issues with regard to the underwriting compensation limitations of Rules 2710 and 2810 and the conflict-of-interest provisions of Rule 2720.

      Description Of Proposed Amendments Regarding Shelf Offerings

      A. Summary of Proposal: NASD Regulation proposes to amend Rules 2710, 2720, and 2810 to accommodate the special characteristics of shelf offerings while continuing to require pre-filing review of the types of shelf offerings that require closer regulatory oversight. Most shelf offerings would have to be filed either after the transaction has occurred as a "Notice Filing" or prior to the transaction as a "Full Review Filing." NASD Regulation would retain all of the current exemptions for shelf offerings of larger seasoned issuers and we propose a new transaction-based exception called the "Market Transaction Exception."

      We propose to make several conforming and clarifying amendments to the Corporate Financing Rules. For example, we would amend Rule 2710 to clarify how underwriting compensation is to be calculated, and how to apply the review period for underwriting compensation when shelf takedowns occur long after a shelf registration statement has been declared effective. We also propose to amend Rule 2720 to address the definition of investment grade rated debt and provide for coordination with Rule 2710 regarding shelf offering filing obligations and fee requirements. We propose to amend Rule 2810 so that DPP offerings that are registered and distributed pursuant to Rule 415 qualify for the new regulatory treatment of shelf offerings under Rule 2710. Conforming amendments also would include a proposal to amend the NASD's Mark-Up Policy in IM-2440 so that it applies to takedowns and sales that would be exempt from the compensation limits in Rule 2710 pursuant to the new Market Transaction Exception and an amendment to Schedule A to the NASD By-Laws to address the payment of Corporate Financing filing fees for shelf offerings.
      B. Notice Filings: In order to provide members with increased flexibility to quickly take advantage of market opportunities, NASD Regulation proposes to permit members to make "Notice Filings" for certain types of offerings. Members would not need a "no objections" opinion from the Department regarding underwriting terms and arrangements prior to participating in the offerings. We also propose to create an electronic filing form for the Notice Filing.
      1. Filing Requirement: Members would make Notice Filings after any takedown from the shelf that is not otherwise exempt from the filing requirements or required to be filed as a Full Review Filing. Offerings of investment grade rated debt that currently are required to be filed with the Department under Rule 2720 because they involve some conflict of interest also would be eligible for a Notice Filing.
      2. Filing Procedure: Each member that participates in a shelf takedown would be responsible for making a Notice Filing that provides information about its participation.
      a. General: We propose to require a Notice Filing no later than T+3 after each "takedown and/or sale" by a member. Each member selling securities registered on a shelf registration statement would be obligated to make a Notice Filing and pay a filing fee based on the value of the securities it sells.
      b. Multiple Takedowns: If a member participates in multiple takedowns within the T+3 time period, the filing requirement will operate on a rolling T+10 basis. Thus, if additional takedowns occur within T+3 of the first takedown, the member can delay filing the required Notice, but no later than T+10 after the first takedown covered by the Notice. The Notice filed in such a case would provide information on each of the takedowns. If a member participates in additional takedowns outside of the initial T+3 time period, then the member must make aseparate Notice Filing after each takedown.
      3. Filing Fee: Members that file a public offering of securities with the Department must pay a filing fee pursuant to the requirements in Section 6 of Schedule A to the NASD By-Laws (Schedule A). The required fee is equal to $500 plus .01% of the proposed maximum offering price of all securities registered on a registration statement. The fee is capped at $30,500 per registration statement. NASD Regulation proposes to amend Schedule A to address the payment of filing fees for Notice Filings. The NASD would waive the current minimum $500 fee and impose a filing fee of .01% of the maximum anticipated sales price of the securities to be offered by the member to the public after each takedown. Members would not be required to pay de minimus fees of less than $100 and the $30,500 cap would apply to each takedown of securities off of a particular shelf.
      4. Electronic Filing Process: We propose to create a Web-based electronic filing system for Notice Filings. The required information would be significantly less than that currently required for public offerings filed with the Department through COBRADesk. We anticipate that members making multiple Notice Filings could save previous submissions and change only the relevant portions in any new filing. We also expect to employ calculators, drop-down boxes, and other technological features to standardize and simplify the filing process. No hard-copy documents would be required to be submitted with a Notice Filing.
      C. Full Review Filings: NASD Regulation proposes to continue to require the filing of certain shelfregistered offerings prior to a member's participation in the distribution. These offerings would be subject to the Department's standard review procedures under the Corporate Financing Rules, and members would continue to be prohibited from participating in such a distribution unless the Department has issued an opinion of "no objections" regarding the underwriting terms and arrangements.
      1. Filings Required: NASD Regulation proposes to require Full Review Filings for non-exempt offerings:
      a. of securities of "thinly traded issuers," as proposed to be defined below, unless the sales qualify for the Market Transactions Exception;
      b. subject to Rule 2720, except that shelf takedowns and sales of "investment grade rated debt" will be eligible for Notice Filing;
      c. otherwise eligible for Notice Filing but in which a participating member:
      i. has acquired unregistered equity securities of the issuer in the 180-day period prior to the day of the intended takedown;1 or
      ii. will receive underwriting compensation that exceeds 8% of the offering proceeds (defined as "the maximum anticipated sales price of the maximum amount of securities to be offered to the public").
      2. Definition Of Thinly Traded Issuer: NASD Regulation proposes to define the term "thinly traded issuer" as an issuer that has publicly held equity securities held by non-affiliates that do not meet all of the following requirements:
      a. at least $25 million in public float;
      b. at least $100,000 average daily trading volume over the preceding 60 calendar days; and
      c. listed for at least 90 days on The Nasdaq Stock Market, a national securities exchange, or a "designated offshore securities market," as defined in Regulation S.
      3. Definition Of Investment Grade Rated Debt: NASD Regulation proposes to define the term "investment grade rated debt" for purposes of the Corporate Financing Rules as nonconvertible debt or preferred securities rated in one of the four highest generic rating categories by a nationally recognized statistical rating organization.
      4. Review Practices: The Department proposes to change its review practices for Full Review Filings. Each member that participates in a shelf offering would have to determine whether its participation required a Notice Filing, a Full Review Filing or qualified for the Market Transactions Exception. The Department would no longer issue a "no objections" letter that addresses all potential members that may participate in takedowns and sales. Instead, any opinion of no objections issued by the Department will only cover the arrangements entered into by the member that makes the Full Review Filing unless: (i) a managing underwriter makes the filing on behalf of a syndicate or selling group; (ii) each member that will participate in the distribution is identified; and (iii) detailed information is disclosed in the filing regarding the underwriting terms and arrangements.
      5. Filing Fee: Filing fees for Full Review Filings would not change from those currently assessed under Schedule A.
      D. The Market Transaction Exception (MTE): In order to facilitate sales of securities from a shelf registration that are more similar to ordinary trading than to a "public offering," NASD Regulation proposes to adopt an exception from filing for market transactions in shelf-registered equity or convertible-to-equity debt securities. To be eligible for the exception, a transaction would be required to meet all of the following standards:
      1. MTE Listing/Reporting Requirements: The equity securities to be offered or the equity securities underlying a convertible security would have to be listed on The Nasdaq Stock Market, a national securities exchange, or quoted on the OTC Bulletin Board, and the issuer must have been an Exchange Act reporting company for at least 180 days.
      2. MTE Volume Limitations: No member sells securities in an amount that:
      a. on any single trading day is in excess of 5% of the average daily trading volume (ADTV), calculated in accordance with SEC Regulation M;
      b. over 10 trading days that is in excess of 20% of the ADTV; and
      c. exceeds 20% of the shelfregistered securities in the aggregate (A Notice or Full Review Filing would be required once the 20% threshold has been reached).
      3. MTE Manner Of Sale Limitation: The member could not engage in any "special selling efforts" but may engage in ordinary "solicitation." "Special selling efforts" would include:
      a. "cold calling";
      b. the payment of commissions to sales persons that are higher than normal for ordinary trading transactions; or
      c. the issuance of a research report with respect to the security that does not comply with SEC Rules 138 or 139.
      4. MTE Compensation Limitation: Transactions eligible for the exception are limited to takedowns and sales in which:
      a. the member does not receive a mark-up, markdown, or commission greater than is customary for ordinary trading or that does not comply with the NASD's Mark-Up Policy; and
      b. the member has not acquired unregistered equity or equity-related securities of the issuer or any other item of compensation within the 180-day period prior to the date of the takedown.2
      5. MTE Ineligible Transactions: Transactions would not qualify for the exception if:
      a. the offering is subject to Rule 2720; or
      b. the transactions occur within 180 days of the issuer's initial public offering or the issuer has not been a reporting company for 180 days at the time of the transactions.
      E. Existing Filing Exemptions: Rule 2710 currently exempts certain shelf offerings from the filing provisions. All current filing exemptions available for shelf offerings would be retained, including the exemption for offerings of the securities of issuers that meet the 36-month reporting history, public float, and trading volume standards that were used to determine the eligibility to file registration statements on Forms S-3 and F-3 prior to 1992. In addition, the Rule exempts shelf offerings by Canadian issuers that registered on SEC registration statement Form F-10.3 Offerings with conflicts of interest governed by Rule 2720 are not eligible for these exemptions.
      NASD Regulation considered whether to expand the exemptions to all shelf-registered offerings filed on Forms S-3 and F-3. We decided not to propose this expansion, however, because we are aware of manipulative and abusive practices involving listed issuers with less than a three-year reporting history. Accordingly, NASD Regulation proposes to retain the current standards in order to ensure the fairness of underwriting terms and arrangements in the case of less experienced and less wellcapitalized issuers.4
      F. Underwriting Compensation Calculation Methodology: We propose to permit members to rely on one of several alternative methods to calculate the discount or commission received by members that participate in shelf offerings. The alternatives are intended to take into account the different characteristics of the securities sold in shelf offerings and recognize the different calculations currently used by members.
      1. Transactions Governed By An Agreement: When the shelf takedowns are governed by an underwriting, equity line, PIPE, or similar agreement between the issuer and any selling member, the amount of the commission or discount would be based on the calculation set forth in the agreement. Such agreements may be firm commitment underwriting agreements, best-efforts underwriting agreements, equity lines of credit agreements, purchase agreements, or some other form of agreement for the sale of securities from a shelf registration.5
      2. Transactions Not Governed By An Agreement: In the absence of an agreement governing a member's participation in a takedown of securities from a shelf registration, the following alternative methods of calculation would be available.
      i. In an agency transaction, the commission would be the amount of the actual commission that is added to the sale price of the securities paid by investors;
      ii. In a principal transaction not governed by an agreement, we are proposing three alternative methodologies that members could utilize to determine compensation amounts. In order to be eligible to make a Notice Filing, a discount calculated in accordance with the methodologies, when added to any other items of value received by members participating in the offering, could not exceed 8%.
      A. Resale Price Method: The discount would be calculated as the difference between the purchase price of the securities off the shelf and their resale price.
      B. Prevailing Market Price Method: The discount would be calculated as the difference between the purchase price of the securities off the shelf and the "prevailing market price" of the security in the principal market at the time of purchase, as calculated by reference to IM-2440, the Mark-Up Policy, and NASD Notice to Members 92-16.6 Because this methodology would not work in a dominated or controlled market, we propose not to make it available for offerings of securities of thinly traded issuers.
      C. Bought Deal Method: The discount would be calculated as the difference between the purchase price of the securities off the shelf and the price at which the first significant amount of sales after the takedown were executed. This methodology would take into account market price movements that occur subsequent to a member's acquisition of the shelfregistered securities that could affect the discount, while ensuring that enough securities are sold to establish a reasonable, bona fide compensation calculation. Using the Bought Deal Method would require either that:
      1. the purchase price of the takedown is of at least $10 million but no more than $50 million of securities and at least 50% of the securities are sold at the initial resale price or at lower prices; or
      2. the purchase price of the takedown exceeds $50 million and at least 25% of the securities are sold at the initial resale price or at lower prices; and
      3. Request for Comment on a Volume Weighted Average Price (VWAP) methodology. NASD Regulation requests comment on whether the alternative calculation methodologies should include one that takes into account the daily volume weighted average price per share of the security in the principal market at the time of purchase as reported by a third-party quotation service.
      4. Offering Proceeds. We also propose to amend the definition of "offering proceeds" in Rule 2710(a)(4) to provide that the offering proceeds in a shelf offering, which are used to determine both the filing fee and to calculate the amount of total compensation, shall be the maximum anticipated sales price of the securities that the member making the filing has sold (Notice Filing) or will offer to sell (Full Review Filing). The amount of compensation for a shelf offering would be calculated as follows. If, for example, the maximum discount is 5.5% using one of the methods set forth above, the amount of the discount will be considered to be 5.5% of the offering proceeds calculated in reliance on Rule 2710(a)(4). The value of any other items of value received by members participating in the offering would be factored into the offering proceeds to develop percentage values for each item of compensation. These percentage values would be added to the 5.5% discount in the example to determine the total amount of compensation.

      Endnotes

      1 A member would not lose its eligibility to make a Notice Filing if its acquisition of unregistered equity securities qualified for one of the exceptions from underwriting compensation proposed in the amendments to Rule 2710(c)(5) pending at the SEC, File No. SRNASD-00-04, Amendment No. 5. A PIPE or similar transaction in which a member or affiliate has purchased private placement securities that are immediately registered for distribution would be eligible for Notice Filing.

      2 The only types of securities that would be covered by this limitation are the securities considered an item of compensation received in connection with the offering under Rule 2710(c)(3)(A). Thus, a member's purchase of the issuer's straight debt securities would not eliminate the member's ability to rely on the Market Transaction Exemption.

      3 We propose to adopt new Rule 2710(b)(10)(D) to set out more clearly the eligibility requirements for the filing exemptions for shelf offerings on Forms S-3, F-3, and F-10. While these offerings are exempt from the Rule 2710 filing requirements, they must comply with the substantive requirements of Rule 2710 or Rule 2810, including the limitations on underwriting compensation.

      4 We propose, however, to rescind an interpretation included in Notice to Members 93-88 (December 1993) that provided that the exemptions were not available if shelf-registered securities were sold in conventional underwritten offerings within a few days following the effective date of the registration statement.

      5 In its review of Full Review Filings and its post-effective review of Notice Filings, the Department will analyze the calculations and amounts paid to ensure compliance with the Corporate Financing Rules.

      6 We propose to amend IM-2440 to clarify that the 5% policy does not apply to Full Review Filings or Notice Filings. Members relying on the Prevailing Market Price Method, however, would be required to calculate the applicable discount in accordance with the methodology for determining "prevailing market price" set forth in the Mark-Up Policy and Notice to Members 92-16.


      ATTACHMENT A

      PROPOSED AMENDMENTS TO THE CORPORATE FINANCING RULES

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

      2710. Corporate Financing Rule - Underwriting Terms and Arrangements

      (a) Definitions
      (1) Investment Grade Rated Debt
      Any public offering of straight debt or straight preferred securities rated in one of the four highest generic rating categories by a nationally recognized statistical rating organization.
      (2) Issuer
      The issuer of the securities offered to the public, any selling security holders offering securities to the public, any affiliate of the issuer or selling security holder, and the officers or general partners, directors, employees and security holders thereof.
      (2) (3) Net Offering Proceeds
      Offering proceeds less all expenses of issuance and distribution.
      (3) (4) Offering Proceeds
      The maximum Ppublic offering price of all securities offered to the public, not including securities subject to any overallotment option, securities to be received by the underwriter and related persons, or securities underlying other securities. In the case of a shelf offering, the maximum anticipated sales price of the securities that the member will offer to the public.
      (5) Participating Member(s)
      Any NASD member that is participating in a public offering, any associated person of the member, any members of their immediate family, and any affiliate of the member.
      (4) (6) Participation or Participating in a Public Offering
      Participation in the preparation of the offering or other documents, participation in the distribution of the offering on an underwritten, non-underwritten, or any other basis, furnishing of customer and/or broker lists for solicitation, or participation in any advisory or consulting capacity to the issuer related to the offering, but not the preparation of an appraisal in a savings and loan conversion or a bank offering or the preparation of a fairness opinion pursuant to SEC Rule 13e-3.
      (7) Securities Act
      The Securities Act of 1933, as amended.
      (8) Shelf Offering
      Any offering of securities registered with the SEC and offered pursuant to SEC Rule 415, adopted under the Securities Act.
      (9) Takedown
      In connection with a shelf offering, the securities purchased by a member in a principal transaction or the securities sold by a member in an agency transaction. If a member enters into an underwriting, equity line, or similar agreement with an issuer or selling security holders with respect to a shelf offering, a takedown shall be the entire amount of securities registered on the registration statement that is covered by the agreement.
      (10) Thinly-Traded Issuer
      An issuer that has publicly held equity securities held by non-affiliates do not have a public float of at least $25 million, an average daily trading volume (ADTV) of at least $100,000 over the preceding 60 calendar days, and has not been listed for at least 90 calendar days on The Nasdaq Stock Market, a national securities exchange, or a designated offshore securities market, as defined in SEC Regulation S, under the Securities Act.
      (5) (11) Underwriter and Related Persons
      Consists of underwriter's counsel, financial consultants and advisors, finders, any participating member, and any other persons related to any participating member.
      (b) Filing Requirements
      (1) - (3) No change.
      (4) No change.
      (B) No offering of securities subject to this Rule shall commence unless:
      (i) the documents and information specified in subparagraphs (5) and (6) below have been filed with and reviewed by the Association; and
      (ii) the Association has provided an opinion that it has no objections to the proposed underwriting and other terms and arrangements or an opinion that the proposed underwriting and other terms and arrangements are unfair and unreasonable, except that this requirement shall not apply in the case of a shelf offering subject to Notice filing under subparagraph (1)(B) below. If the Association's opinion states that the proposed underwriting and other terms and arrangements are unfair and unreasonable, the member may file modifications to the proposed underwriting and other terms and arrangements for further review.
      (C) No change.
      (5) No change.
      (6) Information Required to be Filed
      (A) No change.
      (B) No change.
      (7) Offerings Exempt from Filing
      Notwithstanding the provisions of subparagraph (1) above, documents and information related to the following public offerings need not be filed with the Association for review, unless subject to the provisions of Rule 2720. However, it shall be deemed a violation of this Rule or Rule 2810, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Rule or Rule 2810, as applicable:
      (A) securities offered by a corporate, foreign government or foreign government agency issuer which has unsecured non-convertible debt with a term of issue of at least four (4) years, or unsecured non-convertible preferred securities, rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories, except that the initial public offering of the equity of an issuer is required to be filed;
      (B) non-convertible debt securities and non-convertible preferred securities rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories;
      (C) offerings of securities:
      (i) registered with the Commission on registration statement Forms S-3 or F-3 pursuant to the standards for those Forms prior to October 21, 1992 and offered pursuant to SEC Rule 415 adopted under the Securities Act of 1933, as amended; or
      (ii) of a foreign private issuer incorporated or organized under the laws of Canada or any Canadian province or territory, and is registered with the Commission on Form F-10 pursuant to the standards for that Form approved in Securities Act Release No. 6902 (June 21, 1991) and offered pursuant to Canadian shelf prospectus offering procedures;
      (C) securities offered pursuant to a redemption standby "firm commitment" underwriting arrangement registered with the Commission on Forms S-3, F-3 or F-10 (only with respect to Canadian issuers);
      (E) (D) financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories;
      (F) (E) exchange offers of securities where:
      (i) the securities to be issued or the securities of the company being acquired are listed on The Nasdaq National Market, the New York Stock Exchange, or the American Stock Exchange; or
      (ii) the company issuing securities qualifies to register securities with the Commission on registration statement Forms S-3, F-3, or F-10, pursuant to the standards for those Forms as set forth in subparagraphs (C)(i) and (ii) of this paragraph paragraph 10(D); and
      (G) (F) offerings of securities by a church or other charitable institution that is exempt from SEC registration pursuant to Section 3(a)(4) of the Securities Act.
      (8) No change.
      (9) Offerings Required to be Filed
      Documents and information relating to all other public offerings including, but not limited to, the following must be filed with the Association for review:
      (A) direct participation programs as defined in Rule 2810(d)(2);
      (B) mortgage and real estate investment trusts;
      (C) rights offerings;
      (D) securities exempt from registration with the Commission pursuant to Section 3(a)(11) of the Securities Act of 1933, as amended, which is considered a public offering in the state where offered;
      (E) securities exempt from registration with the Commission pursuant to Rule 504 adopted under the Securities Act of 1933, as amended, which is considered a public offering in the states where offered;
      (F) securities offered by a bank, savings and loan association or common carrier even though such offering may be exempt from registration with the Commission;
      (G) securities offered pursuant to Regulation A or Regulation B adopted under the Securities Act of 1933, as amended;
      (H) exchange offers that are exempt from registration with the Commission under Sections 3(a)(4), 3(a)(9), or 3(a)(11) of the Securities Act of 1933 (if a member's participation involves active solicitation activities) or registered with the Commission (if a member is acting as dealermanager) (collectively "exchange offers"), except for exchange offers exempt from filing pursuant to subparagraph (7)(F) above that are not subject to filing by subparagraph (9)(I) below;
      (I) any exchange offer, merger and acquisition transaction, or other similar corporate reorganization involving an issuance of securities that results in the direct or indirect public ownership of the member; and
      (J) any offerings of a similar nature that are not exempt under subparagraph (7) or (8) above; and
      (K) shelf offerings pursuant to subparagraph (10) below.
      (10) Shelf Offerings
      (A) General Filing Requirement: A member that anticipates participating in a shelf offering in any capacity shall file with the Association the documents and information with respect to the offering specified in subparagraphs (5) and (6) above no later than one business day after the filing or submission of the registration statement with the SEC or, if the member's participation is to occur at least fifteen business days after effectiveness of the registration statement, no later than fifteen business days prior to the anticipated date on which offers will commence:
      (B) Notice Filing: A member that is required to file an offering pursuant to subparagraph (A) above, may instead file a Notice with the Association disclosing information required in the form of Notice no later than T+3 after the date of the takedown or, if more than one takedown occurs during the T+3 time period, no later than T+10 after the first takedown covered by the Notice, if the following conditions are met:
      (i) the participating member will not receive compensation in excess of 8%, as calculated pursuant subparagraphs (e)(3) and (4) below,
      (ii) the offering is not subject to Rule 2720, except for shelf offerings of only investment grade rated debt;
      (iii) the participating member has not acquired any unregistered securities of the issuer within 180 days of its participation in the takedown; and
      (iv) the securities offered are not those of a thinly-traded issuer.
      (C) Market Transaction Exemption: A takedown of equity securities or convertible-to-equity debt securities off a shelf offering shall be exempt from the filing requirement in subparagraph (A) above if the following conditions are met:
      (i) the conditions set out in subparagraph (B)(i)-(iii) above are met;
      (ii) the securities offered are not those of a thinly-traded issuer, unless the thinly-traded issuer has been subject to the reporting requirements of Section 12 or 15(d) of the Securities Act for more than 180 days;
      (iii) the takedown does not occur within 180 days of the issuer's initial public offering;
      (iv) the security is listed on The Nasdaq Stock Market or a national securities exchange or quoted on the OTC Bulletin Board;
      (v) no member sells an amount of securities in excess of:
      a. 5% of the average daily trading volume (ADTV), calculated in compliance with SEC Regulation M, on any trading day; and
      b. 20% of the ADTV over 10 trading days; and
      c. exceeds 20% of the shelf registered securities in the aggregate.
      (vi) no member:
      a. engages in special selling efforts or unusual solicitation activities, including "cold calling";
      b. grants higher-than-normal commissions to sales persons that are not standard for ordinary trading transactions; and
      c. issues any research report with respect to the security that does not comply with SEC Rules 138 or 139.
      (vi) no participating member receives compensation (including the mark-up, mark-down, or commission) that exceeds the amount permitted under NASD IM-2440, the Mark-Up Policy; and
      (vii) the participating member has not acquired unregistered equity or equity-related securities of the issuer or any other item of underwriting compensation (excluding the mark-up, mark-down, or commission) within the 180 day period prior to the date of the takedown.
      (D) Exemption From Filing: Notwithstanding subparagraphs (A) and (B) above, documents and information related to the following shelf offerings need not be filed with the Association for review, unless the shelf offering is subject to the provisions of Rule 2720. Shelf offerings of securities are exempt from the Rule's filing requirements if the offering is:
      (i) by a company that has been subject to the reporting requirements of Section 12 or 15(d) of the Act for at least 36 calendar months, and is current in its reporting obligations, if:
      a. the company registers the offering with the Commission on registration statement Form S-3 and the aggregate market value of the company's voting stock held by non-affiliates is at least $150 million or, alternatively, at least $100 million and the stock has had an annual trading volume of at least three million shares; or
      b. the company registers the offering with the Commission on registration statement Form F-3 and the aggregate market value worldwide of the company's voting stock held by non-affiliates is the equivalent of at least $300 million; or
      (ii) registered with the Commission on Form F-10 by a foreign private issuer incorporated or organized under the laws of Canada or any Canadian province or territory and offered pursuant to Canadian reporting requirements for at least 36 calendar months, and is current in its reporting obligations, and the aggregate market value of the company's outstanding equity is at least (CN) $75 million.
      (10) and (11) renumbered (11) and (12).
      (c) & (d) No change.
      (e) Application of Rule to Shelf Offerings
      (1) Shelf offerings filed under subparagraphs (b)(10)(A) and (B) are subject to subparagraph (c)(4) and subparagraph (c)(7), as follows:
      (A) If a takedown occurs less than 15 business days following effectiveness of a shelf registration statement, the review period and lock-up restriction shall be based on the required filing date for the shelf offering under subparagraphs (b)(10)(A) above.
      (B) If a takedown occurs 15 business days or more following effectiveness of a shelf registration statement, the review period and lock-up restriction shall be based on the earlier of the takedown or the commencement of sales.
      (2) Compensation received by participating members shall include all items of value received and all arrangements entered into for the future receipt of an item of value, as required pursuant to subparagraph (c)(4) above, and shall not be unfair or unreasonable pursuant to paragraph (c) above.
      (3) For purposes of determining the maximum amount of underwriting compensation that is considered fair and reasonable under subparagraph (c) (2), the discount or commission paid to members shall be:
      (A) the amount calculated pursuant to the terms of an underwriting, equity line, or similar agreement that governs the transaction;
      (B) in an agency transaction not governed by an agreement, the amount of the actual commission that is added to the sale price of the securities paid by investors;
      (C) in a principal transaction not governed by an agreement, the difference between the purchase price of the securities off the shelf paid by members and either the:
      (i) resale price of the security;
      (ii) "prevailing market price" of the security in the principal market at the time of purchase, as calculated by reference to IM-2440, the Mark-Up Policy, and NASD Notice to Members 92-16 so long as the securities are not those of a thinlytraded issuer; or
      (iii) initial resale price of the security, so long as:
      a. the purchase price of the takedown is of at least $10 million but no more than $50 million of securities and at least 50% of the securities are sold at the initial resale price or at lower prices; or
      b. the purchase price of the takedown exceeds $50 million of securities and at least 25% of the securities are sold at the initial resale price or at lower prices.


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

      (a) & (b) - No change
      (c) Participation in Distribution of Securities of Member or Affiliate
      (1) & (2) No change
      (3) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of its own or an affiliate's securities, or of securities of a company with which it or its associated persons, parent or affiliates have a conflict of interest, one or more of the following three criteria shall be met:

      (A)No change.
      (B) the offering is of a class of equity securities for which a bona fide independent market exists as of the date of the filing of the registration statement and as of the effective date thereof; or
      (C) the offering is of a class of securities rated BAA or better by Moody's rating service or BBB or better by Standard & Poor's rating service or rated in a comparable category by another rating service acceptable to the Association by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
      (m) Filing Requirements; Coordination with Rule 2710
      (1) No change
      (2) All offerings of securities included within the scope of this Rule shall be subject to the provisions of Rule 2710, and documents and filing fees relating to such offerings shall be filed with the Association pursuant to the provisions of that Rule and Section 6 of Schedule A to the NASD By-Laws. The responsibility for filing the required documents and fees shall be that of the member issuing securities, or, in the case of an issue of an affiliate, the managing underwriter or, if there is none, the member affiliated with the issuer.
      (3) No change


      2810. Direct Participation Programs

      (c) Filing Requirements: Coordination with Rule 2710
      All offerings of securities included within the scope of this Rule shall be subject to the provisions of Rule 2710, and documents and filing fees relating to such offerings shall be filed with the Association pursuant to the provisions of that Rule and Section 6 of Schedule A to the NASD By-Laws.
      (c) is renumbered (d).


      IM-2440. Mark-Up Policy

      (c) Transactions to Which the Policy is Applicable
      The Policy applies to all securities handled in the over-the counter market, whether oil royalties or any other security, in the following types of transactions:
      (6) Transactions in which a member sells securities from an offering registered with the SEC pursuant to SEC Rule 415 that relies on the exemption from filing with the Association under Rule 2710(b)(10)(C) for Market Transactions.
      (d) Transactions to Which the Policy is Not Applicable
      The Mark-Up Policy is not applicable to the sale of securities where a prospectus or offering circular is required to be delivered and:
      (1) the securities are sold at the specific public offering price; or
      (2) the securities are registered pursuant to SEC Rule 415 and are subject to the compensation limitations of Rule 2710 or Rule 2810.


      Schedule A to the NASD By-Laws

      Assessments and fees pursuant to the provisions of Article VI of the By-Laws of the NASD shall be determined on the following basis.
      Section 6 - Fees for Filing Documents Pursuant to the Corporate Financing Rule
      (a) There shall be a fee imposed for the initial documents relating to any offering filed with the NASD pursuant to the Corporate Financing Rule equal to $500 plus .01% of the proposed maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement or included on any other type of offering document (where not filed with the SEC), but shall not exceed $30,500. The amount of filing fee may be rounded to the nearest dollar.
      (b) There shall be an additional fee imposed for the filing of any amendment or other charge to the documents initially filed with the NASD pursuant to the Corporate Financing Rule equal to .01% of the net increase in the maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement, or any related Rule 462(b) registration statement, or reflected on any Rule 430A prospectus, or included on any other type of offering document. However, the aggregate of all filing fees paid in connection with as SEC registration statement or other type of offering document shall not exceed $30,500.
      (c) The fee imposed for a shelf offerings of securities filed with the NASD pursuant to pursuant to Rule 2710(b)(10)(A), shall be calculated pursuant to subsections (a) and (b) above.
      (d) The fee imposed for shelf offering of securities filed with the NASD as a Notice Filing pursuant to Rule 2710(b)(10)(B), shall be equal to .01% of the maximum sales price of the maximum amount of securities that a member will offer to the public after each takedown off the shelf, but no member shall pay an excess of $30,500 in connection with any takedown of securities. A member is not required to pay fees in amounts less than $100 due under this section in connection with a Notice Filing.

      ATTACHMENT B

      Request For Comment Checklist

      We have provided below a checklist that members and other interested parties may use in addition to or in lieu of written comments. This checklist is intended to offer a convenient way to participate in the comment process, but does not cover all aspects of the proposal described in the Notice. We therefore encourage members and other interested parties to review the entire Notice and provide written comments, as necessary.

      Instructions

      Comments must be received by October 15, 2001. 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 should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD Regulation, Inc.
      1735 K Street, NW
      Washington, DC 20006-1500


      Proposed Amendments to Rule 2710 to Address Shelf Offerings of Securities

      1. Should the NASD change the way shelf offerings are regulated under its current rules?

        Yes   No   See my attached written comments
      2. Do you believe that the new approach to regulate shelf offerings is consistent with the NASD's investor protection goal?

        Yes   No   See my attached written comments
      3. Should the requirements for the Market Transaction Exception be relaxed to permit members to sell more shelf-registered securities without making a filing?

        Yes   No   See my attached written comments
      4. We propose to permit members to make Notice Filings when a conflict of interest exists solely for offerings of investment grade rated debt securities. Should members be permitted to make more filings subject to Rule 2720 (conflicts of interest rule) as Notice Filings?

        Yes   No   See my attached written comments
      5. Should the proposed definition of "thinly traded issuer," which impacts eligibility for Notice Filings and use of the "Prevailing Market Price Method" of calculating underwriting compensation, be revised to include fewer issuers?

        Yes   No   See my attached written comments
      6. Should a member receiving compensation greater than 8% but within the compensation table set forth in NASD Notice to Members 92-53 for offerings of a particular size and type be subject to a Full Review rather than a Notice Filing?

        Yes   No   See my attached written comments
      7. Are the compensation methodologies proposed sufficient to cover the various ways members sell shelf-registered securities?

        Yes   No   See my attached written comments
      8. Should the $10 million threshold for using the "Bought Deal Method" of calculating underwriting compensation be lower?

        Yes   No   See my attached written comments
      9. Should a VWAP-based methodology for calculating underwriting compensation be included in this proposal?

        Yes   No   See my attached written comments
      10. Should the proposed methodology for calculating filing fees for Notice Filings be adopted?

        Yes   No   See my attached written comments
      11. Should members be required to disclose in the "Plan of Distribution" or "Underwriting" section of the Registration Statement the methodology relied on for calculating underwriting compensation under NASD rules?

        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:

    • 01-58 Rules Relating To Bond Mutual Fund Volatility Ratings Extended Two Years

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      INFORMATIONAL

      Bond Mutual Fund Volatility Ratings

      SUGGESTED ROUTING

      KEY TOPICS

      Advertising/Investment Companies
      Executive Representatives
      Legal & Compliance
      Mutual Fund
      Registered Representatives
      Senior Management

      Bond Mutual Fund Volatility Ratings
      NASD IM-2210-5
      NASD Rule 2210



      Executive Summary

      On August 10, 2001, the effectiveness of the National Association of Securities Dealers, Inc. (NASD®) rules that govern the use of bond mutual fund volatility ratings in member sales material was extended until August 31, 2003. NASD IM-2210-5 permits members and associated persons to include bond mutual fund volatility ratings in supplemental sales literature, subject to certain conditions. NASD Rule 2210(c)(3) requires supplemental sales literature containing bond mutual fund volatility ratings to be filed with the Advertising Regulation Department (the Department) for review and approval at least 10 days prior to use.

      The Securities and Exchange Commission (SEC) originally approved IM-2210-5 and 2210(c) (3) on an interim 18-month pilot basis, which period was to expire on August 31, 2001. NASD Regulation, Inc. (NASD RegulationSM) proposed that the pilot period be extended an additional two years, until August 31, 2003. Pursuant to SEC rules, the proposal was effective immediately upon filing.

      Included with this Notice is Attachment A (text of rule amendments).

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Thomas M. Selman, Senior Vice President, Investment Companies/Corporate Financing, NASD Regulation, at (240) 386-4533; Joseph P. Savage, Counsel, Investment Companies Regulation, NASD Regulation, at (240) 386-4534; or Sarah J. Williams, Assistant General Counsel, NASD Regulation, at (202) 728-8083.

      Background

      On February 29, 2000, the SEC approved the adoption of NASD Interpretive Material 2210-5, which permits members and their associated persons to include bond mutual fund volatility ratings in supplemental sales literature (mutual fund sales material that is accompanied or preceded by a fund prospectus). The SEC also approved at that time new NASD Rule 2210(c)(3), which sets forth the filing requirements and review procedures applicable to sales literature containing bond mutual fund volatility ratings. Previously, the NASD Regulation staff interpreted NASD rules to prohibit the use of bond mutual fund volatility ratings in sales material.

      IM-2210-5 permits the use ofbond mutual fund volatility ratings only in supplemental sales literature and only if certain conditions are met:

      • The word "risk" may not be used to describe the rating.


      • The rating must be the most recent available and be current to the most recent calendar quarter ended prior to use.


      • The rating must be based exclusively on objective, quantifiable factors.


      • The entity issuing the rating must provide detailed disclosure on its rating methodology to investors through a toll-free telephone number, a Web site, or both.


      • A disclosure statement containing all of the information required by the rule must accompany the rating. The statement must include such information as the name of the entity issuing the rating, the most current rating and the date it was issued, and a description of the rating in narrative form containing certain specified disclosures.

      Rule 2210(c)(3) requires members to file bond mutual fund sales literature that includes or incorporates volatility ratings with the Department at least 10 days prior to use for Department approval. If the Department requests changes to the material, the material must be withheld from publication or circulation until the requested changes have been made or the material has been re-filed and approved. For a more complete description of IM-2210-5 and Rule 2210(c)(3), please see NASD Notice to Members 00-23 (April 2000).

      Extension Of Trial Period

      The SEC originally approved IM-2210-5 and the new Rule 2210(c)(3) on an 18-month trial basis, which trial period was scheduled to expire on August 31, 2001, unless extended or permanently approved by the NASD at or before that date. NASD Regulation requested the 18-month trial period to provide an opportunity to assess whether the rule had facilitated the dissemination of useful, understandable information to investors, and whether it had prevented the dissemination of inappropriate and misleading information.

      The Department has received very few filings pursuant to these provisions. In general, these filings have met the requirements of IM-2210-5. However, the staff does not believe that it has received a sufficient number of filings to evaluate adequately the rule's effectiveness. The staff believes that additional experience with the rule is necessary to evaluate adequately its effect on the delivery of accurate and useful information to investors concerning bond mutual fund volatility.

      Accordingly, NASD Regulation is extending the expiration date of IM-2210-5 and Rule 2110(c)(3) for an additional two years, until August 31, 2003, to allow more filings to be made. Before this period expires, the NASD Regulation staff will evaluate the rule and determine whether to recommend that the rule be eliminated, modified, or permanently approved as is.

      NASD Regulation also is amending IM-2110-5 to clarify that if it expires on August 31, 2003, Rule 2110(c)(3) also would expire at that time.


      ATTACHMENT A - RULE TEXT

      New language is underlined; deletions are in brackets.

      IM-2210-5. Requirements for the Use of Bond Mutual Fund Volatility Ratings

      (This rule and Rule 2210(c)(3) will expire on August 31, [2001] 2003, unless extended or permanently approved by the Association at or before such date.)

      (a) No change.
      (b) No change.
      (c) No change.

    • For Your Information (September)

      For Your Information

      Check/Wire Payments Reflected In CRD Accounts

      The National Association of Securities Dealers, Inc. (NASD®) Finance Department has identified the following possible reasons a check or wire payment may not be reflected in a member firm's CRD® account:

      • If your payment was sent by a parent firm, on behalf of an affiliated firm, it may have been credited to the parent's CRD account.


      • If payment was sent by an affiliated firm, on behalf of a parent firm, it may have been credited to the affiliated firm's CRD account.


      • If your payment was sent by a clearing firm, it may not have had a proper Firm CRD # or recognizable name and, therefore, may be held by our Finance Department.


      • If an incorrect lockbox number was used in the address, your payment may be applied to other accounts your firm has with the NASD (e.g., Assessments, CRD Renewals, Advertising Regulation, etc.).

      Please consider the above scenarios when inquiring about a payment that is believed to be mis-posted. Any information you can supply will greatly assist our Finance Department staff in researching your payment and making a prompt correction.

      Finally, please remember that to ensure proper application of your funds, be certain to include your Firm CRD # on your check and verify the correct lockbox number for the type of payment you are remitting.

      If you have any questions about this information, please contact the Gateway Call Center at (301) 869-6699.

    • 01-57 NASD Announces Nomination Procedures For Regional Industry Member Vacancies On The National Adjudicatory Council

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      INFORMATIONAL

      NAC Nominations

      Nomination Deadline: September 14, 2001

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      National Adjudicatory Council



      Executive Summary

      The purpose of this Special Notice to Members is to advise members of the nomination procedures to fill two upcoming vacancies on the National Adjudicatory Council (NAC). The two-year terms of NAC regional Industry members from the West Region and the New York Region expire in January 2002. The current regional Industry members from these regions are eligible to serve another two-year term.

      Exhibit I contains a list of NAC regional Industry members whose terms expire in January 2002. Exhibit II contains a list of all NAC members. The procedures to fill the NAC regional Industry vacancies are outlined in Exhibit III. Also, a Candidate Profile Sheet is included in Exhibit IV.

      Nomination Process

      Members are encouraged to submit nominations for the upcoming NAC vacancies. To nominate a candidate, members should submit a cover letter and the Candidate Profile Sheet (Exhibit IV) to the appropriate Regional Nominating Committee Chair, the NASD Regulation District Director, or National Association of Securities Dealers, Inc. (NASD®) Corporate Secretary (listed in Exhibit I) by September 14, 2001.

      The completed Candidate Profile Sheets will be provided to all Regional Nominating Committee members for review. On or about October 3, 2001, the Regional Nominating Committees will provide NASD members with written notice of NAC candidates the Committee proposes for nomination to the National Nominating Committee. Pursuant to Article V, Section 5.3(a) of the NASD Regulation By-Laws, the NASD National Nominating Committee shall nominate all candidates for the NAC for subsequent appointment by the Board.

      Questions/Further Information

      Questions concerning this Special Notice to Members may be directed to the District Directors listed in Exhibit I or to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8062 or via e-mail at: barbara.sweeney@nasd.com.

      National Adjudicatory Council Membership And Function

      Membership

      The NAC consists of 14 members—seven Industry members and seven Non-Industry members. Exhibit II contains a list of all current NAC members. Two Industry members are appointed by the NASD Regulation Board of Directors as at-large members. Five Industry members each represent one of the following geographic regions:

      West Region: Hawaii, California, Nevada, Arizona, Colorado, New Mexico, Utah, Wyoming, Alaska, Idaho, Montana, Oregon, and Washington.

      South Region: Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, Tennessee, Texas, Florida, Georgia, North Carolina, South Carolina, Puerto Rico, Virginia, Canal Zone, and the Virgin Islands.

      Central Region: Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Illinois, Indiana, Michigan, Western New York state, and Wisconsin.

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

      New York: New York City and Long Island.

      We are seeking nominations for the West and New York Regions.

      Function

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

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


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


      • the exercise of exemptive authority; and


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

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


      EXHIBIT I

      NAC Industry Members With Terms Expiring In January 2002

      West Region (Districts 1, 2, and 3)

      NAC Incumbent: Anthony B. Petrelli

      If you are interested in nominating yourself or a colleague to represent the West Region for a two-yearterm on the NAC, please submit a cover letter and acompleted Candidate Profile Sheet (Exhibit IV) to any of the following individuals by September 14, 2001.

      Dean A. Holmes
      Regional Nominating Committee Chair
      American General Financial Group
      222 S. Harbor Boulevard, Suite 100
      Anaheim, CA 92805
      (714) 817-8121

      Elisabeth P. Owens
      District 1 Director, NASD Regulation, Inc.
      525 Market Street, Suite 300
      San Francisco, CA 94105-2711
      (415) 882-1200

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

      Frank Birgfeld
      District 3 Director, NASD Regulation, Inc.
      Republic Office Building
      370 17th Street, Suite 2900
      Denver, CO 80202-5629
      (303) 446-3100

      James G. Dawson
      District 3 Director, NASD Regulation, Inc.
      Two Union Square
      601 Union Street, Suite 1616
      Seattle, WA 98101-2327
      (206) 624-0790

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street NW
      Washington, D.C. 20006
      (202) 728-8062

      New York Region (District 10)

      NAC Incumbent: Joan Caridi

      If you are interested in nominating yourself or a colleague to represent the New York Region for a two-year term on the NAC, please submit a cover letter and a completed Candidate Profile Sheet (Exhibit IV) to any of the following individuals by September 14, 2001.

      John Iachello
      Regional Nominating Committee Chair
      ABN AMRO Securities LLC
      55 East 52nd Street
      New York, NY 10055
      (212) 409-7199

      Robert B. Kaplan
      District 10 Deputy Director, NASD Regulation, Inc.
      One Liberty Plaza
      New York, NY 10006
      (212) 858-4487

      Joseph M. McCarthy
      District 10 Deputy Director, NASD Regulation, Inc.
      One Liberty Plaza
      New York, NY 10006
      (212) 858-4265

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street NW
      Washington, D.C. 20006
      (202) 728-8062


      EXHIBIT II

      2001 National Adjudicatory Council

      Mary E.T. Beach Attorney
      Robert J. Birnbaum Attorney
      Herbert H. Brown Attorney
      Joan Caridi CS First Boston
      David A. DeMuro Lehman Brothers, Inc.
      Alice T. Kane American General
      Roberta S. Karmel Kelley Drye & Warren LLP
      Douglas L. Kelly A.G. Edwards & Son, Inc.
      Mark D. Madoff Bernard L. Madoff Investment Securities
      Anthony B. Petrelli Neidiger, Tucker, Bruner, Inc.
      Mark A. Sargent Villanova University School of Law
      Theodore W. Urban Ferris Baker Watts, Inc.
      Barbara L. Weaver Legg Mason Wood Walker, Inc.
      Elliott J. Weiss Charles E. Ares Professor of Law, The University of Arizona


      EXHIBIT III

      National Adjudicatory Council Nomination Procedures

      1. NASD Regulation maintains Regional Nominating Committees in the manner specified in Article VI of the By-Laws of NASD Regulation, Inc.
      2. Members located in the West Region and New York are hereby notified of the upcoming election of members to the National Adjudicatory Council and are encouraged to submit names of potential candidates to their respective Chair of the Regional Nominating Committee, District Director or to NASD Corporate Secretary Barbara Z. Sweeney (see Exhibit I) by September 14, 2001.
      3. Nominees will be asked to complete a Candidate Profile Sheet which will be reviewed by the Regional Nominating Committee.
      4. The Regional Nominating Committee shall review the background of the candidates and the description of the NASD membership provided by NASD Regulation staff and shall propose one or more candidates for nomination to the National Nominating Committee. In proposing a candidate for nomination, the Regional Nominating Committee shall endeavor to secure appropriate and fair representation of the region.
      5. On or about October 3, 2001, the Regional Nominating Committee shall notify in writing the Executive Representatives and branch offices of the NASD members in the region the name of the candidate it will propose to the National Nominating Committee for nomination to the National Adjudicatory Council.
      6. If an officer, director, or employee of an NASD member in the region is not proposed for nomination by the Regional Nominating Committee and wants to seek the nomination, he or she shall send a written notice to the Regional Nominating Committee Chair or the Secretary of NASD Regulation within 14 calendar days after the mailing date of the Regional Nominating Committee's notice (#5 above) and proceed in accordance with the Contested Nomination Procedures found in Article VI of the NASDR By-Laws.
      7. If no additional candidate comes forward within 14 calendar days, the Regional Nominating Committees shall certify their candidates to the National Nominating Committee.

      Additional information pertaining to the National Adjudicatory Council Election Procedures can be found in Article VI of the By-Laws of NASD Regulation. The By-Laws can be found in the online NASD Manual at www.nasdr.com.


      EXHIBIT IV

      Date:______/______/______

      Candidate Profile Sheet

      Current Employment

      Name: CRD#:
      Firm: #RRs at Firm:
      Title/Primary Responsibility:
      Address:
      City: State: Zip:
      Phone: Fax:
      E-mail:

      Prior Employment (List the most recent first. Feel free to include extra pages if necessary.)

      Firm:
      Title/Primary Responsibility:
      Firm:
      Title/Primary Responsibility:

      General Areas of Expertise (please check all that apply) Product Expertise (please check all that apply)
        Compliance/Legal   Investment Advisory   Corporate Bonds   Investment Company
        Corporate/Finance   Retail Sales   Direct Participation Programs   Options
        Financial/Operational   Trading/Market Making   Equity Securities   Variable Contracts Securities
        Institutional Sales   Other:   Municipal/Government Securities   Other:

      Memberships/Positions Held in Trade or Business Organizations

      __________________________________________________________________________
      __________________________________________________________________________

      Past NASD Experience and Dates of Service (please check all that apply)

      Committee Member (Identify committee:__________________) Approx. Dates:_____________
      Arbitrator: Approx. Dates:_____________
      Mediator: Approx. Dates:_____________
      Expert Witness (arbitrations; disciplinary proceedings):________ Approx. Dates:_____________
      Other: Approx. Dates:_____________

      Educational Background

      School: Degree:
      School: Degree:

    • 01-56 NASD Notice Of Meeting And Proxy

      View PDF File

      ACTION REQUESTED

      Board Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives

      Board Elections



      The Annual Meeting of Members of the National Association of Securities Dealers, Inc. (NASD®) will be held on September 13, 2001, at 10:00 a.m., at the Loews L'Enfant Plaza Hotel, 480 L'Enfant Plaza, SW, in Washington, DC. The purpose of the meeting is to conduct the election of Governors to the NASD Board. Members can raise other topics for discussion by properly notifying the NASD of these topics.1 The record date for the Annual Meeting is the close of business on August 9, 2001.

      It is important that all members be represented at the Annual Meeting. Members are urged to vote in the election of Board members using one of the methods described below.

      Board Of Governors Election

      There are eight vacancies to be filled at this meeting—four Industry governorships and four Non-Industry governorships. The nominees for the vacancies are listed in Attachment A. The nominees elected will serve for terms specified in Attachment A.

      Attachment B includes the biographies of the nominees of the NASD National Nominating Committee. Attachment C contains the names of the current Board of Governors.

      Voting Methods

      Members will be able to vote using one of the following three methods:

      • U.S. Mail


      • Internet


      • Phone

      The enclosed proxy contains detailed instructions on the voting procedures.

      Questions regarding this notice may be directed to:

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1500
      (202) 728-8062


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


      ATTACHMENT A — LIST OF NOMINEES

      The following persons have been nominated by the NASD National Nominating Committee to serve on the Board of Governors of the NASD for a term specified below. Terms run from September 13, 2001 to September 2004.

      INDUSTRY Terms of Office 2001-2004
      John W. Bachmann Managing Partner, Edward Jones
      Richard F. Brueckner Chief Operating Officer, Pershing Division of Credit Suisse First Boston
      (Clearing Firm Candidate)
      Stephen L. Hammerman Vice Chairman of the Board, Merrill Lynch & Co., Inc.
      (National Retail Firm Candidate)
      Raymond A. Mason Chairman of the Board and Chief Executive Officer, Legg Mason Wood Walker, Inc.
      (Regional Retail Firm Candidate)


      NON-INDUSTRY Terms of Office 2001-2004
      James E. Burton Chief Executive Officer, California Public Employees' Retirement System
      Sir Brian Corby Chairman, Prudential Assurance Company (Retired)
      Harry P. Kamen Chairman of the Board and Chief Executive Officer, Metropolitan Life Insurance Company (Retired)
      John Rutherfurd President and Chief Executive Officer, Moody's Corporation


      ATTACHMENT B — BOARD NOMINEE PROFILES

      Profiles Of Board Nominees For Industry Governors

      Industry

      John W. Bachmann

      John W. Bachmann is Managing Partner of Edward Jones. Mr. Bachmann began his career at Jones as a parttime college intern, eventually succeeding Edward D. Jones, Jr. as Managing Partner in 1980. During Mr. Bachmann's tenure, Edward Jones has grown from 200 to 7,000-plus offices in the United States, and it has expanded to Canada and the United Kingdom. Mr. Bachmann has also served two terms as Chairman of the Securities Industry Association, as a member of the board of governors of the Chicago Stock Exchange, and as Chairman of District 4 for the NASD. Currently, Mr. Bachmann is Chairman of the Regional Chamber and Growth Association, and a Director of the U.S. Chamber of Commerce. He holds a BA degree in Economics from Wabash College, an MA degree in Finance from Northwestern University, two honorary degrees, and is a graduate of the Institute of Investment Banking at the Wharton School of Business.

      Richard F. Brueckner

      Richard F. Brueckner is Chief Operating Officer of the Pershing Division of Credit Suisse First Boston (formerly DLJ Securities Corporation) and Managing Director of its Financial Services Group. He previously was Treasurer of DLJ Securities and Chief Financial Officer of Pershing. Mr. Brueckner is Chairman of the Board of Trustees and CEO of the Securities Industry Foundation for Economic Education, and has served as a Governor of the NASD, Chairman of the NASD's National Adjudicatory Council, and Chairman of the NASD's New York District Committee. Mr. Brueckner graduated from Muhlenberg College with a BA degree in Economics and is a Certified Public Accountant.

      Stephen L. Hammerman

      Stephen L. Hammerman is Vice Chairman of the Board of Merrill Lynch & Co., Inc., serves on the corporation's Board of Directors, and is a member of the firm's Executive Committee. He has served as a Director of the New York Stock Exchange, as Chairman of the NASD, and as Director of the Securities Investors Protection Corporation. In addition to having served the government as New York Regional Administrator for the SEC and as an Assistant US Attorney in the Criminal Division for the southern district of New York, Mr. Hammerman is active in philanthropic, educational, and community affairs. Mr. Hammerman is a graduate of the University of Pennsylvania's Wharton School and received his law degree from New York University.

      Raymond A. Mason

      Raymond A. Mason founded Mason and Company in 1962 and has spent his career building the financial services organization, Legg Mason, Inc. He serves as Chairman of the Board and Chief Executive Officer of its principal subsidiary, Legg Mason Wood Walker, Inc. Mr. Mason has served as Chairman and as a board member of the Securities Industry Association, Chairman of the Board of Governors of the NASD, and Chairman of the Regional Firms Committee of the New York Stock Exchange. Mr. Mason has many civic interests and is a trustee or board member of many educational and philanthropic institutions. Mr. Mason is Chairman-elect of the Johns Hopkins University Board of Trustees. He holds a BA degree in Economics from the College of William and Mary, and has received honorary Doctorate degrees from his alma mater, Loyola College, and Mount St. Mary's College.


      Profiles Of Board Nominees For Non-Industry Governors

      Non-Industry

      James E. Burton

      James E. Burton is Chief Executive Officer of the California Public Employees' Retirement System, the nation's largest public pension fund. Previously, Mr. Burton served as Assistant Executive Officer of CalPERS investment operations, supervising investment operations in all asset classes. Prior to this position, Mr. Burton was Deputy State Controller. He has also served on a number of boards, commissions, and committees, and currently is Second Vice President and member of the Executive Committee of the National Association of State Retirement Administrators. He is also currently a member of the Executive Committee of the Council of Institutional Investors. Mr. Burton is a graduate of the University of San Francisco.

      Sir Brian Corby

      Sir Brian Corby spent many years working for the Prudential Assurance Company in London where he held a number of positions—apart from working in its branch in South Africa—including Chief Actuary, Group Chief Executive, and Chairman. Sir Brian has held positions with advisory groups, art and educational institutions, and industry associations, including the Institute of Actuaries, where he qualified as a Fellow. He was a Director of the Bank of England from 1985 to 1993. Following his retirement from full-time executive employment, Sir Brian became President of the Confederation of British Industry from 1990 to 1992, the first such appointment from the insurance industry and he was Chancellor of the University of Hertfordshire from 1992 to 1996. Recently, Sir Brian has chaired a number of study groups for the Federal Trust on the subjects of European pension reform and venture capital and public-private partnerships in Europe. Sir Brian holds an honors degree in Mathematics from St. John's College, Cambridge, as well as three honorary degrees.

      Harry P. Kamen

      Harry P. Kamen is former Chairman of the Board and Chief Executive Officer of Metropolitan Life Insurance Company. Mr. Kamen served in that capacity from 1993 to 1998, having joined the organization in 1959. He serves as a Director of the following corporate Boards: Banco Santander Central Hispano, Bethlehem Steel Corporation, Metropolitan Life, Pfizer Inc., and B-Direct Capital. Mr. Kamen holds an AB from the University of Pennsylvania and an LLB from Harvard University Law School.

      John Rutherfurd, Jr.

      John Rutherfurd is President and Chief Executive Officer of Moody's Corporation. Mr. Rutherfurd joined Moody's in 1995 to develop new business activities with the title of Managing Director, Moody's Holdings. He was appointed Chief Administrative Officer in 1996 and President in January 1998. Mr. Rutherfurd is a graduate of Princeton University and Harvard Law School.


      ATTACHMENT C — CURRENT BOARD MEMBERS

      Governors With Terms Expiring In 2001

      Industry Non-Industry Public
      Frank E. Baxter
      Chairman and CEO
      Jefferies Group, Inc.

      Donald B. Marron
      Chairman
      UBS PaineWebber Incorporated

      Kenneth D. Pasternak
      President and CEO
      Knight Trading Group

      Todd A. Robinson
      Chairman and CEO
      LPL Financial Services
      Michael W. Brown
      Retired CFO
      Microsoft

      Harry P. Kamen
      Retired Chairman and CEO
      Metropolitan Life Insurance Company

      James S. Riepe
      Vice Chairman
      T. Rowe Group, Inc.
       

      Governors With Terms Expiring In 2002

      Industry Non-Industry Public
      M. LaRae Bakerink
      First Vice President and Chief Compliance Officer
      Pacific American Securities, LLC

      David A. DeMuro
      Lehman Brothers, Inc.

      Richard C. Romano
      President
      Romano Brothers & Co.
      H. Furlong Baldwin
      Chairman
      Mercantile Bankshares Corporation

      Eugene M. Isenberg
      Chairman and CEO
      Nabors Industries, Inc.

      Arthur Rock
      Principal
      Arthur Rock & Co.

      James F. Rothenberg
      President
      Capital Research and Management Company
      Kenneth M. Duberstein
      Chairman and CEO
      The Duberstein Group, Inc.

      Donald J. Kirk
      Vice Chairman
      Public Oversight Board
      American Institute of Certified Public Accountants

      John D. Markese
      President
      American Association of Individual Investors

      Governors With Terms Expiring In 2003

      Industry Non-Industry Public
      William C. Alsover, Jr.
      Chairman
      Centennial Securities Company, Inc.

      Anthony J. Boglioli
      President
      Whitehall Brokerage Services, Ltd.

      David S. Pottruck
      President and Co-Chief Executive Officer
      The Charles Schwab Corporation
      Arvind Sodhani
      Vice President and Treasurer
      Intel Corporation
      Brian T. Borders, Esq.
      Association of Publicly
      Traded Companies
      Mayer, Brown & Platt

      Sharon P. Smith
      Dean, College of Business Administration
      Fordham University

    • 01-55 Fixed Income Pricing SystemSM Additions, Changes, And Deletions As Of June 21, 2001

      View PDF File

      FIPS Changes

      SUGGESTED ROUTING

      KEY TOPICS

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

      FIPS



      As of June 21, 2001, the following bonds were added to the Fixed Income Pricing System (FIPSSM).

      Symbol Name Coupon Maturity
      ADVP.GA AdvancePCS 8.500 04/01/08
      AES.GJ AES Corp 8.750 06/15/08
      AES.GK AES Corp 7.375 06/15/13
      ATWC.GA American Tower Corp 9.375 02/01/09
      BID.GA Sotheby's Holdings Inc 6.875 02/01/09
      BRUQ.GA BRL Universal Equipment Corp 8.875 02/15/08
      BUCB.GA Blum CB Corp 11.250 06/15/11
      CMS.IM CMS Energy Corp 8.900 07/15/08
      CNC.GH Conseco Inc 10.750 06/15/08
      ELEP.GA El Paso Energy Partners LP 8.500 06/01/11
      KME.GA Key3Media Group Inc 11.250 06/15/11
      LEVI.GC Levi Strauss & Co 11.625 01/15/08
      LQI.GB La Quinta Properties Inc 7.600 07/15/01
      NWSW.GB Northwestern Steel & Wire Co 9.500 06/15/49
      NXTL.GI Nextel Communications Inc 9.500 02/01/11
      POAN.GC Protection One Alarm Monitoring Inc 8.125 01/15/09
      PPP.GC Pogo Producing Co 8.250 04/15/11
      STN.GG Station Casinos Inc 8.375 02/15/08
      UFI.GA Unifi Inc 6.500 02/01/08

      As of June 21, 2001, the following bonds were deleted from the Fixed Income Pricing System.

      Symbol Name Coupon Maturity
      BEPA.GA BE Aerospace Inc 9.875 02/01/06
      CHTT.GA Chattem Inc 12.750 06/15/04
      CIDL.GC Citadel Broadcasting Co 9.250 11/15/08
      CONA.GC Container Corp of America 11.250 05/01/04
      CPN.GA Calpine Corp 9.250 02/01/04
      GTFL.GA Green Tree Financial Corp 10.250 06/01/02
      ICIX.GA Intermedia Communications Inc 12.500 05/15/06
      ICIX.GB Intermedia Communications Inc 11.250 07/15/07
      ICIX.GD Intermedia Communications Inc 8.500 01/15/08
      ICIX.GE Intermedia Communications Inc 8.875 11/01/07
      ICIX.GF Intermedia Communications Inc 8.600 06/01/08
      ICIX.GG Intermedia Communications Inc 12.250 03/01/09
      ICIX.GH Intermedia Communications Inc 9.500 03/01/09
      LQI.GB La Quinta Property 7.600 07/15/01
      LU.GA Lucent Technologies Inc 6.900 07/15/01
      MEOP.GA Mesa Operating Company 10.625 07/01/06
      MEOP.GB Mesa Operating Company 11.625 07/01/06
      MORT.GE Marriott Corp 10.250 07/18/01
      MUZK.GA Musicland Group Inc 9.000 06/15/03
      PDC.GA Presley Cos Del 12.500 07/01/01
      PLH.GA Pierce Leahy Corp 11.125 07/15/06
      PYTX.GD Playtex Family Products Corp 9.000 12/15/03
      RJR.GB RJ Reynolds Tobacco Holdings Inc 8.000 07/15/01
      RT.GD Ryerson Tull Inc 8.500 07/15/01
      STN.GC Station Casinos Inc 10.125 03/15/06
      TRFI.GA Trans Financial Bancorp Inc 7.250 09/15/03

      As of June 21, 2001 changes were made to the symbols of the following FIPS bonds:

      New Symbol Old Symbol New Name/Old Name Coupon Maturity
      There were no symbol changes for this time period.

      All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Patricia Casimates, NASDR Market Regulation, at (240) 386-4994.

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

    • 01-54 SEC Approves Proposed Additions To The List Of Rules Appropriate For Disposition As Minor Violations Of Rules And For The Establishment Of Late Fees For Certain Filings And Reports

      View PDF File

      INFORMATIONAL

      Minor Violations Of Rules And Late Fees

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Minor Rule Violation Plan
      Schedule A of the NASD By-Laws



      Executive Summary

      On July 3, 2001, the Securities and Exchange Commission (SEC) approved rule changes proposed by the National Association of Securities Dealers, Inc. (NASD®) that afford the NASD more flexibility in responding to certain technical or minor violations of NASD rules.1 The NASD is expanding upon the list of rule violations that can be resolved through its Minor Rule Violation Plan (MRVP) and is establishing late fees for certain filings and reports.

      The amendments become effective on September 10, 2001. The text of the amendments is attached (see Attachment A).

      Questions concerning this Notice may be directed to the Legal Division, Enforcement, NASD Regulation, Inc., at (202) 974-2800, Legal Section, Market Regulation, NASD Regulation, Inc., at (240) 386-5139; or Office of General Counsel, NASD Regulation, Inc., at (202) 728-8071.

      Late Fees

      The NASD is amending Schedule A of its By-Laws to impose late filing fees for certain filings andreports. The late fees will be assessed on a per-day basis for a period of not more than 10 business days. The fees are administrative rather than disciplinary in nature and should help to deter violations of certain NASD filing requirements. The NASD staff may institute disciplinary proceedings where the late filing is serious.

      In those instances where a member knows it is unable to mee