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  • 2006

    • 06-74 Member Business Continuity Experiences regarding Hurricanes Katrina and Rita

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      GUIDANCE

      Business Continuity Planning

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Information Technology
      Legal & Compliance
      Operations
      Senior Management
      Training
      Business Continuity Planning
      Rule 3500 Series (Emergency
      Preparedness)

      Executive Summary

      In May 2004, NASD issued Notice to Members 04-37 regarding business continuity planning. That Notice addressed NASD Rules 3510 and 3520 and provided supplemental detail regarding the key elements of a business continuity plan (BCP).

      Following Hurricanes Katrina and Rita in August and September 2005, NASD issued a voluntary survey on the topic of business continuity planning to certain member firms within the affected areas. The objective of the survey was to assess the value of business continuity planning and to learn from these firms' experiences. Overall, the survey helped provide valuable insight into business continuity planning and the implementation of such plans in the wake of a disaster. Firm responses also provide guidance to all member firms about specific business functions and tools that performed well following these events, as well as those that did not. The information in this Notice does not create new rules or obligations on members, nor does the implementation of any or all of the guidance create a "safe harbor" relative to any NASD rules.

      Questions/Further Information

      Questions concerning this Notice may be directed to Daniel M. Sibears, Executive Vice President & Deputy, Member Regulation, at (202) 728-8221.

      Background

      Implementation of NASD Rules 3510 and 3520 Addressing BCPs and Emergency Contact Information

      In the days and weeks following September 11, 2001, the securities markets and industry showed an impressive ability to recover and continue business. To learn from the events of this period, NASD surveyed randomly selected members to gauge the industry's recovery capabilities in greater detail to determine, among other things, whether any regulatory action was needed to assure swift recovery in the event of any future significant business disruptions.

      The survey yielded valuable results. It showed that a significant number of NASD member firms did not have BCPs in place at the time, or had plans that did not provide coverage in certain areas, such as document back-up and customer access to accounts during an emergency. As a result, NASD determined that member firms would benefit from the implementation of a BCP that contained, at a minimum, the following ten key components:

      (i) Data back-up and recovery;
      (ii) All mission-critical systems;
      (iii) Financial and operational assessments;
      (iv) Alternate communications between the member and its customers;
      (v) Alternate communications between the member and its employees;
      (vi) Alternate physical location of employees;
      (vii) Critical business constituent, bank and counter-party impact;
      (viii) Regulatory reporting;
      (ix) Communications with regulators; and
      (x) Assurance of customers' prompt access to their funds and securities in the event that the member determines that it is unable to continue its business.

      These key components, along with industry feedback, were used to develop the new Rule 3500 Series (Emergency Preparedness) that requires members to establish emergency preparedness plans and procedures. The Securities and Exchange Commission (SEC) approved the rule series on April 7, 2004.1 NASD issued Notice to Members 04-37 in May 2004 to provide guidance to members regarding the implementation of the rules.

      Rule 3510 (Business Continuity Plans) requires each member to create and maintain a written BCP identifying procedures relating to an emergency or significant business disruption that are "reasonably designed to enable the member to meet its existing obligations to customers" and enumerates certain requirements that each plan must address.2 Rule 3510 further requires each member to update its plan upon any material change in operations, structure, business or location and, at a minimum, to conduct an annual review of its plan.3 Each member also must disclose to its customers how its BCP addresses the possibility of a future significant business disruption and how the member plans to respond to events of varying scope.4

      Rule 3520 (Emergency Contact Information) requires each member to report to NASD prescribed emergency contact information for the member and update that information in the event of any material change.5 This is done electronically through NASD's Contact System (NCS).

      Learning from Hurricanes Katrina and Rita

      Following Hurricanes Katrina and Rita in 2005, NASD conducted a survey ("Katrina Survey" or "survey") of the business continuity planning of certain member firms impacted by these events. The objective of this voluntary survey was to assess the value of business continuity planning and to learn from these firms' experiences. The selected members included local, regional and national firms operating in affected areas of Louisiana, Mississippi and Alabama at the time of the hurricanes.

      The Katrina Survey contained questions regarding the performance of firms' BCPs before, during and after Hurricanes Katrina and Rita. For various plan aspects, the survey asked firms to rank the performance of their BCPs and to provide feedback on their experiences. Overall, the Katrina Survey helped provide insight into business continuity planning that was effective and ineffective during these events. Firm responses also provided guidance about specific business functions and tools that performed successfully, as well as those that did not. In this regard, the results offered in this Notice are provided as guidance to members to use as they deem appropriate. The information does not create new rules or obligations on members, nor does the implementation of any or all of the guidance create a "safe harbor" relative to any NASD rules.

      Discussion

      Input from firms that found their business continuity planning effective during Hurricanes Katrina and Rita:

      •   Some firms had pre-established and pre-tested recovery sites, systems and servers in place prior to the hurricanes. These back-up resources were activated by designated staff in advance of storm arrival and allowed for seamless transition of operations from the impacted offices to the back-up facilities. Additionally, persons at recovery sites were specifically empowered to act on behalf of the firm.
      •  Some medium and larger firms represented that they benefited from having fully functional branch offices outside of the affected area. The branch offices served in some cases as the back-up center of operations as well as the relocation site for evacuated staff members. Telephones were forwarded to the branch office or recovery site in advance of storm arrival.
      •   Some firms established nationwide toll-free numbers and Web site information specifically for business continuity purposes. This contact information was disseminated to customers (via such means as customer account statements) and employees well in advance of a disruptive event. Customers and employees were also encouraged to access the firm Web site for updates.
      •  Some smaller firms noted the importance of cross-training employees to perform necessary functions. Employees experienced logistical difficulties, inconsistent access to firm systems and customers, and unavailability of relevant staff at particular locations. Cross-training allowed those employees with access to firm systems the ability to cover the responsibilities of, and handle customer contacts for, their impacted colleagues.
      •  Medium and smaller firms stated that their respective clearing firms were instrumental in assisting with continuity of operations during these events. It was reported that clearing firms performed consistently well by providing access to customer funds and securities.

      Input from firms that found their business continuity planning was not effective enough to compensate for the effects of Hurricanes Katrina and Rita:

      •  Some firms noted the challenge of identifying and verifying customers following the hurricanes. These firms noted that they had underdeveloped customer identification procedures to address such circumstances.
      •  Some small, medium and large firms experienced problems at their respective back-up/recovery sites due to untested servers, untested systems, inadequate access to systems or inadequate capacity.
      •  Small firms with the fewest resources available to them had no alternate or recovery site in place at the time of the hurricanes.
      •   Firms that relied heavily on paper records experienced the loss of irreplaceable documents and critical business information.
      •   Some firms determined that portions of their BCPs were incomplete or out-ofdate. Some plans, for example, did not provide clearing firm contact information or contained out-of-date employee or customer contact information.

      The survey also sought to learn specific lessons based on the experiences of member firms during Hurricanes Katrina and Rita. Members responding to the survey provided suggestions, feedback and advice borne from these experiences.

      What some firms found helpful during the events of Hurricanes Katrina and Rita:

      •  Across the board, firms surveyed noted that text messaging proved surprisingly reliable as compared to use of cell phones or land lines. In some cases, text messaging was the only reliable way to communicate with colleagues for a period of weeks.
      •  Some firms recommended shipping in cell phones that have area codes outside the impacted regions, as they proved more reliable than cell phones with local area codes during and after the storms. Others found that having pre-loaded laptops with wireless cards or laptops shipped in by a parent company or clearing firm provided significant assistance in re-establishing and/or maintaining continuity of operations.
      •  Medium and small firms expressed the importance of maintaining a relationship with a "sister" broker-dealer where they could recover, as well as implementing a "buddy" system among firm employees to assist in locating one another.
      •  One firm recommended gathering additional information from customers, including contact numbers of relatives who could contact the customer. This information would be gathered on a voluntary basis in advance of an event. This additional information would assist a firm in communicating with displaced customers.
      •  Having a Web site with screens for check-in, updates and postings for employees aided communication and coordination. In addition, firms recommended establishing a toll-free number for employees to check-in or "meet" by telephone.
      •  Periodically repeating employee training to aid in memory recall of emergency plans during such an event and to keep procedures and protocols fresh in employees' minds.
      •  Having a checklist of steps to follow and documents to move during evacuation of a site.
      •  Understanding how to remove hard drives from desktop computers so that valuable information could be preserved even though hardware was lost.
      •  Ensuring a clear understanding between clearing and correspondent firms as to the actions triggered by emergency circumstances and the time frames for the commencement and termination of the emergency procedures.

      What some firms found least useful/helpful during Hurricanes Katrina and Rita:

      •  Firms found that land line telephones within the impacted regions, as well as cell phones with area codes of the impacted regions, were not reliable. Also, firms that intended to rely on call forwarding through local switching stations found that switching stations impacted by flooding could not re-route telephones. These firms suffered from the inability to contact, or be contacted by, customers and employees.
      •  When the hurricanes hit, some firms were relying on a local electronic mail (email) provider rather than a national email provider. The local provider was also impacted during the storms and service was disrupted. In addition, servers located within impacted regions were disabled and unable to be serviced.
      •   Firms noted two items that posed significant employee-related challenges during and after Hurricanes Katrina and Rita: (1) Employees refusing to leave the impacted region and (2) long-term office space and employee housing in alternate locations/recovery sites that were not secured in advance of, or immediately following, the disasters.

      Firm Feedback regarding NASD's BCP Tool, Templates and Related Resources:

      Member firms were asked in the Katrina Survey to assess NASD's post-disaster response as well as to rate NASD's BCP guidance. The overall response was positive with firms saying NASD was "flexible," "accommodating" and "realistic." Firms stated they found NASD's BCP guidance to be satisfactory.

      Resources Available through NASD

      NASD continues to provide multiple BCP tools, templates and related resources on its Web site,
      www.nasd.com/RulesRegulation/IssueCenter/BusinessContinuityPlanning/index.htm.

      These online resources include:

      •   BCP Frequently Asked Questions (FAQ).
      •  BCP Repository Service.
      •  The BCP Repository Service is powered by EVault and offered in association with NASD to provide members, for a fee, the following:
      —   Remote access: upload, download and modify documents from anywhere with an Internet connection;
      —   Collaboration: smooth document collaboration across authorized users;
      —   Security: over-the-wire encryption of all uploaded and downloaded documents; and
      —   Varied authorization levels: different access controls may be granted to individual users in the same account.
      •  An example of a BCP disclosure statement for introducing firms with a clearing firm arrangement.
      •  NASD Small Firm BCP Template as an optional guide to small introducing firms to assist them in creating and maintaining BCPs and emergency contact person lists under NASD Rules 3510 and 3520. The template recognizes that many small introducing firms rely on parts of a clearing firm's BCP for many of the missioncritical functions of the introducing firm. The template also contains instructions, relevant rules and Web sites, and other resources that are useful for developing a BCP for a small introducing firm.
      •  A BCP planning case study.

      Common Findings from NASD Examinations

      Members have generally been in compliance with the requirements of NASD Rules 3510 and 3520 since implementation in 2004. Many have used the NASD Small Firm Business Continuity Plan Template to develop plans. Nonetheless, there have been areas of concern related to business continuity uncovered during NASD examinations that include:

      (i) Consistency of addressing all of the BCP Requirements. Findings include members not adequately addressing one or more of the following key components of an effective BCP:
      •   Impact of disruption upon critical business constituents.
      •   Regulatory reporting and communications with regulators.
      •   Providing customers with prompt access to funds and securities in the event that the firm is unable to continue its business.
      •   Disclosure statement that addresses the possibility of a future business disruption and how the firm plans to respond to events of varying scope.
      •  Updating and annually reviewing BCPs, and senior management approval of BCPs.
      •  Data back-up and recovery during an emergency or significant business disruption.
      (ii) Firm Identification of Emergency Contact Persons on NCS. Various NASD exams reviewing BCP compliance found that firms had not filed their designated two emergency contact person information on NCS as required by Rule 3520.

      Summary of Survey Results

      Based on the Katrina Survey results, firms found they were impacted in different ways by Hurricanes Katrina and Rita. Their experiences varied depending on the firm's size and preparedness. Smaller firms with fewer relative resources faced the most severe impacts. Some of these small firms benefited from strong relationships with their respective clearing firms, which in turn were able to take calls and handle customer needs during the emergency. Medium-size and larger firms had additional staff and resources to absorb the storms' impacts, including established and fully functional alternate business locations outside of the directly impacted areas.

      Regardless of a firm's size or impact proximity, firms with well-tested BCPs found they faced minimal disruption. For example, firms of various sizes and resources operating inside the city of New Orleans that had thoroughly developed and tested their plans encountered fewer disruptions than less prepared firms operating outside of directly impacted areas. In this regard, the results of the survey captured in this Notice may assist members in better preparing for emergencies or significant business disruption caused by events such as fire, flood, wind and earthquake, a disruption involving power or property, or an unknown variable. Preparation and practice, as evidenced by the results of the Katrina Survey, will support a firm's ability to address the needs of all constituents during a time of crisis.


      1 See Securities Exchange Act Release No. 49537 (Apr. 7, 2004), 69 Fed. Reg. 19586 (Apr. 13, 2004) (SEC Notice of Order Approving File No. SR-NASD-2002-108).

      2 Rule 3510(a) and (c).

      3 Rule 3510(b). Each member must designate a member of senior management who is also a registered principal to approve the plan and be responsible for conducting the required annual review. Rule 3510(d).

      4 Rule 3510(e).

      5 In addition, each member must review and, if necessary, update the member's emergency contact information within 17 business days after the end of each calendar quarter. See Rule 3520(b).

    • 06-73 2007 Trade Date — Settlement Date Schedule

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      INFORMATIONAL

      2007 Trade Date—Settlement Date Schedule

      SUGGESTED ROUTING

      KEY TOPICS

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

      Martin Luther King, Jr., Day:

      The NASDAQ Stock Market® and the securities exchanges will be closed on Monday, January 15, 2007, in observance of Martin Luther King, Jr., Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Jan. 9 Jan. 12 Jan. 17
      10 16 18
      11 17 19
      12 18 22
      15 Markets Closed
      16 19 2

      Presidents' Day:

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, February 19, 2007, in observance of Presidents' Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Feb. 13 Feb. 16 Feb. 21
      14 20 21
      15 21 23
      16 22 26
      19 Markets Closed
      20 23 27

      Good Friday:

      The NASDAQ Stock Market and the securities exchanges will be closed on Good Friday, April 6, 2007. "Regular way" transactions made on the business days noted below will be subject to the following schedule::

      Trade Date Settlement Date Reg. T Date*
      April 2 April 5 April 10
      3 9 11
      4 10 12
      5 11 13
      6 Markets Closed
      9 12 16

      Memorial Day:

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, May 28, 2007, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      May 22 May 25 May 30
      23 29 31
      24 30 June 1
      25 31 4
      28 Markets Closed
      29 June 1 5

      Independence Day:

      The NASDAQ Stock Market and the securities exchanges will be closed on Wednesday, July 4, 2007, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      June 28 July 3 July 6
      29 5 9
      July 2 6 10
      3 9 11
      4 Markets Closed
      5 10 12

      Labor Day:

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, September 3, 2007, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Aug. 28 Sept. 31 Sept. 5
      29 Sept. 4 6
      30 5 7
      31 6 10
      Sept. 3 Markets Closed
      4 7 11

      Columbus Day:

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 8, 2007. 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. 10 Oct. 9 Oct. 9
      3 9 10
      4 9 11
      5 10 12
      8 11 15
      9 12 16

      Note:

      October 8, 2007, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 8, will be combined with transactions made on the previous business day, October 5, for settlement on October 11. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 8.

      Veterans Day:

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veterans Day, Monday, November 12, 2007. 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*
      Nov. 6 Nov. 9 Nov. 13
      7 13 14
      8 14 15
      9 15 16
      12 15 19
      13 16 20

      Note:

      November 12, 2007, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, 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.

      Thanksgiving Day:

      The schedule of trade dates-settlement dates below reflects the observance of the financial community of Thanksgiving Day, Thursday, November 22, 2007. All securities markets will be closed on Thursday, November 22, 2007, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 16 Nov. 21 Nov. 26
      19 23 27
      20 26 28
      21 27 29
      22 Market Closed
      23 28 30

      Christmas Day and New Year's Day:

      The NASDAQ Stock Market and the securities exchanges will be closed on Tuesday, December 25, 2007, in observance of Christmas Day and Tuesday, January 1, 2008, 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, 2008
      25 Markets Closed
      26 31 3
      27 Jan. 2, 2008 4
      28 3 7
      31 4 8
      Jan 1, 2008 Market 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 NASD Uniform Practice Code and the Municipal Securities Rulemaking Board Rule Rule G-12 on Uniform Practice.

      Questions regarding the application of those settlement dates to a particular situation may be directed to the Market Integrity 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."

    • 06-72 Amendments to Rule 2340 Requiring Customer Account Statements to Include a Statement Reminding Customers to Report Inaccuracies in Their Accounts in Writing; Revised Effective Date: May 31, 2007

      NTM 06-72 supersedes NTM 06-60

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      GUIDANCE

      Customer Account Statements

      SUGGESTED ROUTING

      KEY TOPICS

      Individual Investors
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Clearing Firms
      Customer Account Statements
      Introducing Firms
      NASD Rule 2340
      SIPA (Securities Investor Protection Act)
      SIPC (Securities Investor Protection Corporation)

      Executive Summary

      NASD is issuing this Notice to supersede NASD Notice to Members (NTM) 06-60 and replace the guidance provided in that Notice. On September 7, 2006, the Securities and Exchange Commission (SEC) approved amendments to Rule 2340requiring customer account statements to include a statement advising customers to promptly report any inaccuracy or discrepancy in their account to the introducing firm and clearing firm (where these are different firms) and to re-confirm any oral communication in writing.1 NTM 06-60 announced the effective date of that rule change as March 6, 2007. On December 5, 2006, the SEC approved NASD's request to change the effective date of this requirement to May 31, 2007.2

      Additionally, this Notice clarifies an interpretation of the SEC's Division of Market Regulation under the net capital rule and SEC Rule 15c3-3 that requires clearing firms to include in customer account statements a telephone number at the clearing firm that a customer may use to contact the firm with inquiries regarding the customer's account.3

      As revised, the effective date of this rule change is May 31, 2007. Included with this Notice is Attachment A, the text of amended Rule 2340.

      Questions/Further Information

      Questions concerning this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411.

      Background and Discussion

      In May 2001, the GAO (the U.S. General Accounting Office, now known as the Government Accountability Office) issued a report in which it made recommendations to the SEC and the Securities Investor Protection Corporation (SIPC) about ways to improve the information available to the public about SIPC and the Securities Investor Protection Act (SIPA). Among other things, the GAO recommended that self-regulatory organizations, such as NASD, explore actions to include information on periodic statements to inform investors that they should document any unauthorized trading in writing.4 This is important because, in the event a firm goes into SIPC liquidation, SIPC and the trustee generally will assume that the firm's records are accurate unless the customer is able to prove otherwise. In this regard, the SIPC brochure states that if customers ever discover an error in a confirmation or account statement, they should immediately bring the error to the attention of the brokerage firm in writing and keep a copy of such writing.5 The SIPC brochure also advises customers that if there is something wrong with the brokerage firms' records of their accounts, the customer will have to prove that, or SIPC and the trustee will assume that the firm's records are accurate.

      Consistent with GAO's recommendation, NASD has amended Rule 2340 to require general securities firms to include in account statements required by Rule 2340 a statement advising each customer to report promptly any inaccuracy or discrepancy in that person's account to his or her brokerage firm. Where the customer's account receives services from both an introducing and clearing firm, the advisory must state that the reports be made to both firms. This statement must also advise customers that any oral communications should be re-confirmed in writing to further protect the customer's rights, including rights under SIPA. Where account statements are delivered electronically, this statement may also be delivered electronically, provided it is on the same screen as the account statement, and the customer is not required to use a "click-through process" to bring it up on the screen. This statement will emphasize to customers the importance of promptly reporting, in writing, any suspected inaccuracy or discrepancy in their accounts and will remind customers of the importance of creating the written documentation that could prove helpful in the event of a SIPC liquidation to further evidence an assertion that the broker-dealer's records are inaccurate.

      The statement required by Rule 2340, as amended, does not impose any limitation whatsoever on a customer's right to raise concerns regarding inaccuracies or discrepancies in his or her account at any time, either in writing or orally, and to bring these concerns to his or her brokerage and/or clearing firm or, in the course of a liquidation proceeding, to SIPC. Further, although firms that issue account statements are required by this amendment to advise customers to "promptly" report their concerns to their firm(s) and reconfirm any conversations with their firms in writing, Rule 2340 does not impose any time limit during which customers may report inaccuracies in their accounts.

      NASD reminds its members that an SEC interpretation requires them to include in each account statement the pertinent telephone number at the clearing firm that a customer may use to contact the firm with inquiries regarding his or her account.6 In addition, the SEC, in approving the rule change, noted that it would be more beneficial for firms to include on account statements both introducing and clearing firm contact information sufficient to allow investors to timely report unauthorized transactions or other account discrepancies to both firms (if the firms are different).7


      1 See Exchange Act Release No. 54411 (Sept. 7, 2006) 71 FR 54105 (Sept. 13, 2006) (Order Granting Approval of Proposed Rule Change Relating to Rule 2340 Concerning Customer Account Statements; File No. SR-NASD-2004- 171) (SEC Approval Order), as corrected by Exchange Act Release No. 54411A (Oct. 6, 2006).

      2 See Exchange Act Release No. 54872 (December 5, 2006) (Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to Establishing an Effective Date for Amendments to NASD Rule 2340); File No. SRNASD- 2006-128). NASD notes that the effective date of May 31, 2007 is consistent with the effective date of a substantially similar New York Stock Exchange LLC requirement. See SR-NYSE-2005-09.

      3 See infra note 6.

      4 See Securities Investor Protection: Steps Needed to Better Disclose SIPC Policies to Investors (GAO-01-653).

      5 The SIPC brochure, entitled Understanding the Securities Investor Protection Corporation, is published on SIPC's Web site at www.sipc.org. The brochure provides a basic explanation of SIPC and SIPA and answers questions about SIPC liquidations.

      6 In its November 24, 1992 release announcing "Final Rule Amendments" to its net capital rule, the SEC's Division of Market Regulation stated that it has interpreted the net capital rule and SEC Rule 15c3-3 to require that, among other things, clearing firms must issue account statements directly to customers, and that each statement must contain the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding the customer's account. See Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992) (S7-28-89). See also supra note 1, 71 FR at 54107, footnote 24, as corrected by Exchange Act Release No. 54411A.

      NASD noted in NTM 93-46 (July 1993) that SEC staff subsequently clarified this requirement. The Notice stated that SEC staff had reconsidered its interpretation concerning customer account statements that a clearing firm must send directly to the customers of an introducing firm. In reviewing its position that each account statement had to include the name and telephone number of a responsible clearing firm employee that a customer could contact with inquiries regarding the customer's account, SEC staff noted that individuals may assume different responsibilities at their firms or may leave their employment altogether. Hence, requiring firms to name a specific individual on customer account statements, which are often pre-printed, may lead to confusion for customers inquiring about their accounts. For this reason, SEC staff determined that it is sufficient for firms to include just the pertinent telephone number. This requirement became effective as of October 1, 1993. NASD advised its members in the Notice that the following language is acceptable to SEC staff for use on customer account statements for purposes of meeting the requirements of the SEC's net capital rule and SEC Rule 15c3-3:

      [Name of clearing firm] carries your account and acts as your custodian for funds and securities deposited with us directly by you, through [name of introducing firm] or as a result of transactions we process for your account. Inquiries concerning the position and balances in your account may be directed to our Client Service Department: [telephone number]. All other inquiries regarding your account or the activity therein should be directed to [name of introducing firm].

      7 See supra note 1, 71 FR at 54107. Firms that are members of both NASD and the New York Stock Exchange should also review the requirements of NYSE Rule 409 in the NYSE Interpretation Handbook at 4105, which states that "Statements of accounts to customers must clearly and prominently disclose on the front of the statement…the identity of the introducing and carrying organization and their respective phone numbers for service[.]" The Handbook further advises that the phone number of the carrying organization may appear on the back of the statement, but if it does, it must be in "bold" or "highlighted" letters.


      ATTACHMENT A

      * * * * *

      2340. Customer Account Statements

      (a) General

      Each general securities member shall, with a frequency of not less than once every calendar quarter, send a statement of account ("account statement") containing a description of any securities positions, money balances, or account activity to each customer whose account had a security position, money balance, or account activity during the period since the last such statement was sent to the customer. In addition, each general securities member shall include in the account statement a statement that advises the customer to report promptly any inaccuracy or discrepancy in that person's account to his or her brokerage firm. (In cases where the customer's account is serviced by both an introducing and clearing firm, each general securities member must include in the advisory a reference that such reports be made to both firms.) Such statement also shall advise the customer that any oral communications should be re-confirmed in writing to further protect the customer's rights, including rights under the Securities Investor Protection Act (SIPA).
      (b) through (d) No change

      * * * * *

    • 06-71 Clarification of Exemption for Market Makers Acting in the Capacity of Exchange Market Maker and Interpretive Guidance Relating to Riskless Principal Transactions

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      GUIDANCE

      Trading Activity Fee

      SUGGESTED ROUTING

      KEY TOPICS

      Finance
      Legal & Compliance
      Registered Representatives
      Senior Management
      Trading
      NASDAQ Exchange Market Makers
      Riskless Principal
      Trading Activity Fee

      Executive Summary

      NASD is issuing this Notice to supplement guidance provided in NASD Notice to Members (NTM) 06-44 relating to the application of the Trading Activity Fee (TAF) to members acting in the capacity of an exchange specialist or market maker.

      In NTM 06-44, NASD stated that the exemption for proprietary transactions effected on the NASDAQ Exchange in the capacity of a market maker was limited to those transactions effected through a registered market maker's attributable quote. In response to members' concerns regarding the complexity of distinguishing between transactions resulting from attributable versus unattributable quotes, NASD is expanding the exemption for proprietary transactions effected on an exchange in the capacity of a market maker to include transactions effected through both attributable and unattributable orders/quotes.

      This expansion of the market maker proprietary transaction exemption will be retroactively effective to August 1, 2006. Members that have already calculated and reported their TAF obligations under the previous guidance that do not wish to re-calculate and amend previously submitted TAF Self-Reporting Forms may begin applying the expanded exemption beginning December 1, 2006.

      NASD is also providing in this Notice additional guidance regarding the application of the TAF with respect to riskless principal transactions.

      Questions/Further Information

      Questions concerning this Notice should be directed to the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071; or NASD Finance at (240) 386-5397.

      Background and Discussion

      In 2003, the SEC approved NASD's new member regulatory pricing structure, which: (1) eliminated the NASDAQ market-based regulatory fee; (2) instituted a new transaction-based TAF applied across a broader range of equity, options and securities futures transactions; (3) increased the rates assessed to member firms under the Personnel Assessment (PA); and (4) implemented a simplified three-tiered flat rate for the Gross Income Assessment (GIA), whereby deductions and exclusions were eliminated.1 NASD uses fees collected under the member regulatory pricing structure to fund member regulatory activities, including the regulation of members through examination, processing of membership applications, financial monitoring, policymaking, rulemaking, and interpretive and enforcement activities.

      Exemption for Market Makers Acting in the Capacity of Exchange Market Maker

      Section 1 of Schedule A to NASD's By-Laws exempts from the TAF "proprietary transactions by a firm that is a member of both NASD and a national securities exchange, effected in its capacity as an exchange specialist or market maker, and that are subject to Securities Exchange Act of 1934, Section 11(a) and Rule 11a1-1(T)(a) thereunder." Accordingly, this exemption applies to transactions that occur on the NASDAQ Exchange in the same manner it is applicable to transactions that occur on other exchanges. To assist members in understanding the application of this exemption to market making activity on the NASDAQ Exchange, NASD published NTM 06-44 and is now supplementing that guidance in this Notice.

      Specifically, NASD has expanded the exemption to include all proprietary transactions effected in a member's capacity as a market maker on the NASDAQ Exchange (or any other exchange on which the member is a registered exchange market maker), regardless of whether the quote/order was initially entered on an attributable or unattributable basis. As stated in NTM 06-44, transactions not effected through the NASDAQ Exchange, such as those reported to either a Trade Reporting Facility (TRF)2 or the Alternative Display Facility (ADF),3 will be subject to the TAF, regardless of whether the transaction was effected in the member's capacity as a market maker.

      Riskless Principal Transactions

      Since the implementation of the TAF in 2003, NASD has issued numerous NTMs containing interpretive guidance regarding how the TAF is to be applied in various trading scenarios, including the treatment of riskless principal transactions. In response to questions received by the staff with respect to riskless principal transactions, NASD is clarifying guidance with respect to the appropriate application of the TAF to such transactions. The following guidance applies to all riskless principal transactions regardless of whether the member is a market marker or non-market maker, or if the transaction is executed on a national securities exchange or over-the-counter.

      As provided for in Question 14 of NTM 02-63, transactions that qualify for riskless principal treatment under applicable trade reporting rules will be viewed as one transaction for purposes of assessing the TAF.4 Assessment of the TAF for trades executed in a riskless principal capacity depends on whether your firm received the order from another NASD member broker-dealer, a customer5 or a non-NASD member broker-dealer. Specifically:

      •   Members executing sell orders in a riskless principal capacity on behalf of another NASD member will not be assessed a TAF, consistent with application of the TAF to transactions where one member acts as agent on behalf of another member (See Q3 of NTM 02-75). Rather, the TAF is assessed on the NASD member who is the ultimate seller of the security, not the firm acting as riskless principal.
      •   Members executing sell orders in a riskless principal capacity on behalf of a customer will be assessed the TAF, consistent with the application of the TAF to transactions where a member effects a sale for a customer on an agency basis (See Q2 of NTM 02-75).
      •   Members executing sell orders in a riskless principal capacity on behalf of a non-NASD member broker/dealer will be assessed a TAF only if the transaction occurs otherwise than on a national securities exchange. If the order is executed on a national securities exchange, no TAF will be assessed on the member acting in a riskless principal capacity.

      1 See Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003) (approving SR-NASD-2002-148) and Exchange Act Release No. 47106 (Dec. 30, 2002), 68 FR 819 (Jan. 7, 2003) (approving SR-NASD-2002-99).

      2 See Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR-NASD-2005-087) (SEC approval of the changes to NASD rules to reflect NASDAQ's Exchange Registration and the operation of the TRF by NASDAQ subject to NASD's regulatory license and oversight).

      3 See Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 (July 31, 2002) (SEC approval of SR-NASD-2002-97 authorizing NASD to operate the ADF on a pilot basis); Exchange Act Release No. 47633 (Apr. 10, 2003), 68 FR 19043 (Apr. 17, 2003) (File No. SR-NASD-2003-067) (extension of ADF pilot until January 26, 2004); Exchange Act Release No. 49131 (Jan. 27, 2004), 69 FR 5229 (Feb. 3, 2004) (File No. SR-NASD-2004-012) (extension of ADF pilot until October 26, 2004); Exchange Act Release No. 50601 (Oct. 28, 2004), 69 FR 64611 (Nov. 5, 2004) (File No. SR-NASD-2004-160) (extension of ADF pilot until July 26, 2005); Exchange Act Release No. 52122 (July 25, 2005), 70 FR (Aug. 1, 2005) (File No. SR-NASD-2005-092) (extension of ADF pilot until April 26, 2006); and Exchange Act Release No. 53699 (April 21, 2006), 71 FR 25271 (Apr. 28, 2006) (File No. SR-NASD-2006-050) (extension of ADF pilot period until January 26, 2007).

      4 Specifically, Q14 in NTM 02-63 states: "Q. If a firm executes a trade on a riskless principal basis, will a fee be assessed on both the initial leg of the transaction and the offsetting transaction with the customer? A. No. Riskless principal transactions reported correctly will be viewed as one transaction for the purposes of assessing the Trading Activity Fee."

      5 For purposes of these requirements, customer is defined as not a broker-dealer. See NASD Rule 0120(g).

    • 06-70 SEC Approves Amendments Expanding the OATS Requirements to OTC Equity Securities and NASD Publishes Revised OATS Reporting Technical Specifications; Effective Date: June 11, 2007

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      GUIDANCE

      Order Audit Trail System (OATS)

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      NASD Rules 6950 through 6958
      Order Audit Trail System (OATS)

      Executive Summary

      On October 10, 2006, the Securities and Exchange Commission (SEC) approved amendments to NASD Rules 6951, 6952, and 6955 to expand the OATS reporting requirements to over-the-counter (OTC) equity securities.1 NASD is publishing this Notice to explain those amendments and inform members that a new version of the OATS Reporting Technical Specifications (Technical Specifications) also is being published to reflect these amendments and other technical changes described herein. The Technical Specifications can be found on NASD's Web site at Regulatory Systems > OATS > Technical Specifications. The effective date of the amendments and the changes to the Technical Specifications is June 11, 2007.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126 or to the Office of General Counsel at (202) 728-8071.

      Discussion

      Amendments to the OATS Rules

      Expansion of the OATS Reporting Requirements to OTC Equity Securities

      NASD Rules 6950 through 6958 (the OATS Rules) require member firms to record in electronic form and report to NASD on a daily basis certain information regarding orders originated, received, transmitted, modified, canceled or executed by NASD members relating to equity securities listed and traded on the NASDAQ Stock Market. OATS captures this order information and integrates it with quote and transaction information to create a time-sequenced record of orders, quotes and transactions. This information is critical to NASD staff in conducting surveillance and investigations of member firms for violations of NASD rules and federal securities laws.

      Currently, the OATS reporting requirements do not apply to OTC equity securities. To enhance the effectiveness of NASD's surveillance programs, the SEC approved amendments to the OATS Rules to expand the types of securities that members must report to OATS. Under these amendments, members will be required to record and report order information relating to "OTC equity securities," which are defined as equity securities that (1) are not listed on a national securities exchange; or (2) are listed on one or more regional stock exchanges and do not qualify for dissemination of transaction reports via the facilities of the Consolidated Tape. This definition would include, inter alia, equity securities quoted on the OTC Bulletin Board Service or on the Pink Sheets Electronic Quotation Service. For purposes of the OATS Rules, the definition of "OTC equity securities" specifically excludes direct participation programs, as defined in Rule 6910.2

      As a result of these amendments, beginning on June 11, 2007, members will be required to record and report to OATS all order information regarding equity securities listed on the NASDAQ Stock Market and OTC equity securities.

      Revision to OATS Rules Regarding Orders with Unavailable Information

      From time to time, a member may receive or execute orders in a security that does not have a symbol assigned to it at the time an OATS order event occurs. To address this situation, and any other situation involving information that is unavailable at the time of an OATS order event, the SEC approved amendments to NASD Rule 6955 to clarify that a member is not required to transmit an OATS report to NASD until NASD has assigned a symbol to that security.3 After a symbol has been assigned, the member must report all applicable order information to OATS.4 Although the OATS reporting requirement is delayed pending the assignment of a symbol, the member must comply with the recording requirements under Rule 6954, which requires that the member record an order event immediately following its occurrence.5 Order events that are submitted to OATS on an OATS processing date later than the order event date because of a delay in the assignment of a symbol will not be marked late by OATS.

      Changes to the Technical Specifications

      NASD is also announcing the publication of a new version of the Technical Specifications. The primary revision to the Technical Specifications is the expansion of the list of securities that will be reportable to OATS as of June 11, 2007; namely, OTC equity securities. A list of OTC equity securities that are subject to the OATS reporting requirements will be available through the OATS Web page on NASD's Web site at www.nasd.com.

      In addition to the expanded list of reportable securities, the following changes will also be effective as of June 11, 2007:

      •  Addition of new Destination Codes to indicate that an order was routed to a specific U.S. exchange, a non-U.S. exchange or to a non-member affiliate of an NASD member.
      •  Addition of a new Member Type Code to indicate that an order was received from a non-member affiliate of an NASD member.
      •  Addition of new Special Handling Codes.
      •  Addition of a new Reporting Exception Code to identify transactions reported to NASD on Form T.6
      •  Addition of new Desk Type Codes.



      1 Exchange Act Rel. No. 54585 (Oct. 10, 2006), 71 FR 61112 (Oct. 17, 2006) (SR-NASD-2005-101).

      2 Consistent with the trade reporting rules for OTC Equity Securities under the Rule 6600 Series, "restricted securities," as defined in Rule 144(a)(3) under the Securities Act of 1933, and any securities designated in the PORTAL Market (the Rule 6700 Series) are not subject to the OATS Rules.

      3 The amendments to Rule 6955 provide that members are not required to transmit the OATS report to NASD until all of the information identified in Rule 6954(b), (c) and (d) is available. Although the provision is not limited to orders involving securities without symbols, NASD anticipates that most, if not all, delayed OATS reports will involve such orders. The security symbol is a unique data element in that the timing of its issuance is not wholly within the control of the member. NASD anticipates that, in general, most OATS information should be available on the date on which the OATS reporting event occurs.

      4 NASD emphasizes that members should make requests for symbols promptly to minimize any delay in trade reporting, as well as delays between the OATS order event and the transmission of the OATS report to NASD. In general, members are required to report trades within 90 seconds of execution or on a next-day basis, as applicable, under Rule 6620(a).

      5 Most situations relating to orders placed in securities without assigned symbols involve foreign securities. In connection with such orders, members should convert any foreign currency amounts to U.S. dollars for purposes of OATS reporting. Members are permitted to use reasonable business practices for the conversion; however, members should document their practice regarding currency conversion and should be consistent in their methodology.

      6 NASD Rule 6620(a)(4) provides that in instances where electronic submission to the OTC Reporting Facility is not possible, last sale reports of transactions in OTC Equity Securities shall be reported as soon as practicable to the Market Regulation Department on Form T.

    • 06-69 NASD Issues Additional Guidance on Rule 3060 (Influencing or Rewarding Employees of Others)

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      GUIDANCE

      Gifts and Gratuities

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Executive Representatives
      Internal Audit
      Legal & Compliance
      Registered Representatives
      Senior Management
      Gifts
      Gratuities
      Rule 3060

      Executive Summary

      As a result of a recent review of gift and gratuity practices at member firms, NASD has become aware of several deficiencies in firms' compliance procedures relating to the application of Rule 3060. To aid firms in their compliance efforts, NASD is issuing the Notice, which focuses on some of the more common compliance weaknesses observed.

      Questions/Further Information

      Questions regarding this Notice may be directed to Gary L. Goldsholle, Vice President and Associate General Counsel, Office of the General Counsel, at (202) 728-8104; or Joseph P. Savage, Associate Vice President, Investment Companies Regulation, Regulatory Policy and Oversight, at (240) 386-4534.

      Background and Discussion

      Rule 3060 prohibits any member or person associated with a member from giving, or permitting to be given, anything of value in excess of $100 per individual per year where such payment is in relation to the business of the recipient's employer. The rule protects against improprieties that may arise when members or their associated persons give gifts or gratuities to employees of a customer.

      A. Personal Gifts/Exclusions

      The prohibitions in Rule 3060 generally do not apply to personal gifts such as a wedding gift or a congratulatory gift for the birth of a child, provided that these gifts are not "in relation to the business of the employer of the recipient." In determining whether a gift is "in relation to the business of the employer of the recipient," members should consider a number of factors, including the nature of any pre-existing personal or family relationship between the person giving the gift and the recipient, and whether the registered representative paid for the gift. When a firm bears the cost of a gift, either directly or by reimbursing an employee, NASD presumes that such gift is in relation to the business of the employer of the recipient.

      The analysis of whether a gift is "in relation to the business of the employer" is required in connection with all gifts; firms should not treat gifts given during the holiday season or for other life events as personal in nature.
      B. De minimis and Promotional Items

      Rule 3060 also does not apply to gifts of de minimis value (e.g., pens, notepads or modest desk ornaments) or to promotional items of nominal value that display the firm's logo (e.g., umbrellas, tote bags or shirts).1 In order for a promotional item to fall within this exclusion, its value must be substantially below the $100 limit. Gifts valued in amounts above or near $100 would not be considered nominal. For example, expensive leather luggage and crystal pieces, notwithstanding the presence of firm logos, are not eligible for the exclusion for promotional items of nominal value.

      NASD also generally does not apply the prohibition in Rule 3060 to customary Lucite tombstones, plaques or other similar solely decorative items commemorating a business transaction, even when such items have a cost of more than $100. NASD does not believe such gifts are items of value within the scope of Rule 3060. The restrictions of Rule 3060 would apply, however, where the item is not solely decorative, irrespective of whether the item was intended to commemorate a business transaction. For example, NASD staff observed firms providing individuals with a bicycle and elaborate electronic equipment following the closing of a transaction. Such items are impermissible gifts under Rule 3060.
      C. Aggregation of Gifts

      Rule 3060 imposes a gift limit of $100 per individual recipient per year. To ensure compliance with this $100 limit, firms must aggregate all gifts given by the member and each associated person of the member to a particular recipient over the course of a year. In addition, each firm must state in its procedures whether it is aggregating all gifts given by the firm and its associated person on a calendar year, fiscal year, or on a rolling basis beginning with the first gift to any particular recipient.
      D. Valuation of Gifts

      In general, gifts should be valued at the higher of cost or market value, exclusive of tax and delivery charges. When valuing tickets, a member should use the higher of cost or face value. For example, if a member makes a gift of a ticket to a sporting event that it procured in the secondary market, the value of such ticket would be the higher cost to the member, not the face value of the ticket.2

      If gifts are given to multiple recipients, members should record the names of each recipient and calculate and record the value of the gift on a pro rata per recipient basis, for purposes of ensuring compliance with the $100 limit. A gift basket worth $250 delivered to an office of three individuals for the benefit of each individual would be permissible under the Rule.
      E. Gifts Incidental to Business Entertainment

      There is no express exclusion from Rule 3060 for gifts given during the course of business entertainment and conferences.3 Thus, for example, purchasing an umbrella during a round of golf would be considered a gift. Firms must record these gifts, and include the value of such gifts, as part of their Rule 3060 compliance procedures.
      F. Supervision and Recordkeeping

      Rule 3060 requires separate recordkeeping of gifts and gratuities. Rule 3010 requires a firm to have a supervisory system reasonably designed to achieve compliance with Rule 3060. In order to meet these standards, firms are required to have systems and procedures reasonably designed to ensure that gifts in relation to the business of the employer of the recipient given by the firm and its associated persons to employees of clients of the firm are (i) reported to the firm, (ii) reviewed for compliance with Rule 3060, including aggregation as discussed above, and (iii) maintained in the firm's records. Such procedures should include provisions reasonably designed to ensure that an associated person who is making a gift is not responsible for determining whether such gift is personal rather than in relation to the business of the recipient's employer. Items of de minimis value or nominal promotional or commemorative items are not subject to Rule 3060's record-keeping requirements.

      1 Additional guidance concerning these recordkeeping requirements is provided in Section F, infra.

      2 For purposes of this example, we are treating the ticket as a gift insofar as no representative from the member firm accompanied the recipient at the event.

      3 In some cases, gifts given during business entertainment may fall within the exclusion for promotional items, discussed above.

    • For Your Information

      View PDF File

      2006—2007 Filing Due Dates

      NASD would like to remind members of their obligation to file the appropriate FOCUS reports, Schedule I filings, Annual Audits, Customer Complaints and Short Interest reports by their due dates. The following schedule outlines due dates for 2006 reports that have 2007 due dates, and for 2007 reports. Questions regarding the information to be filed can be directed to the appropriate District Office. Business questions as to how to file the FOCUS report, resetting passwords 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 Mello at (240) 386-5091.

      Schedule I Filings

      Report Date Due Date
      December 31, 2006 January 26, 2007*
      Report Date Due Date
      December 31, 2007 January 25, 2008

      The Schedule I report is required pursuant to SEC Rule 17a-10. Schedule I reports are filed electronically and are due at midnight, Eastern Time (ET) on the due dates noted.

      * This date was moved forward by one day due to the National Day of Mourning for President Ford.

      2007 Monthly and Fifth FOCUS II/IIA Filings

      Report Date Due Date
      January 31, 2007 February 26, 2007
      February 28, 2007 March 23, 2007
      April 30, 2007 May 23, 2007
      May 31, 2007 June 25, 2007
      July 31, 2007 August 23, 2007
      August 31, 2007 September 26, 2007
      October 31, 2007 November 26, 2007
      November 30, 2007 December 26, 2007

      A "fifth" FOCUS report is required by SEC Rule 17a-5(a)(2)(iii) for quarterly FOCUS report filers that have a fiscal year end other than a quarter end. Such report is due within 17 business days after the firm's fiscal year end.

      2006–2007 Quarterly FOCUS Part II/IIA Filings

      Report Date Due Date
      December 31, 2006 January 26, 2007*
      March 31, 2007 April 25, 2007
      June 30, 2007 July 25, 2007
      September 30, 2007 October 23, 2007
      December 31, 2007 January 25, 2008

      FOCUS reports (monthly, quarterly and fifth) are filed electronically and are due at midnight, ET on the due dates noted.

      * This date was moved forward by one day due to the National Day of Mourning for President Ford.

      2007 Fiscal Year End Annual Audit Filings Due Dates

      Report Date Due Date
      January 31, 2007 April 2, 2007
      February 28, 2007 April 30, 2007
      March 31, 2007 May 30, 2007
      April 30, 2007 June 29, 2007
      May 31, 2007 July 30, 2007
      June 30, 2007 August 29, 2007
      July 31, 2007 October 1, 2007
      August 31, 2007 October 30, 2007
      September 30, 2007 November 29, 2007
      October 31, 2007 December 31, 2007
      November 30, 2007 January 29, 2008
      December 31, 2007 January 29, 2008

      Annual Audits are filed in hard copy and must be received by close of business on the dates noted. Annual Audits are due, pursuant to SEC Rule 17a-5(d)(5) no later than 60 calendar days after fiscal year end. Firms that do not use a fiscal year end date coinciding with a month end date should not rely on this schedule in determining due dates.

      2006–2007 3070/Customer Complaints Due Dates

      Report Date Due Date
      4th quarter 2006: January 16, 2007
      1st quarter 2007: April 16, 2007
      2nd quarter 2007: July 16, 2007
      3rd quarter 2007: October 15, 2007
      4th quarter 2007: January 15, 2008

      Market Regulation Department 2007 Short Interest Reporting Deadlines

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

      REPORTS MUST BE FILED BY THE TIMES NOTED, EASTERN TIME.

    • 06-68 SEC Approves Amendments to Rule 2340 to Allow DVP/RVP Customers to Elect Not to Receive Account Statements; Effective Date: November 22, 2006

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      GUIDANCE

      Customer Account Statements

      SUGGESTED ROUTING

      KEY TOPICS

      Institutional Customers
      Legal & Compliance
      Operations
      Senior Management
      Clearing Firms
      Customer Account Statements
      DVP/RVP (Delivery versus Payment/
      Receive versus Payment)
      NASD Rule 2340
      NASD Rule 3110
      NASD Rule 11860
      SEC Rule 10b-10
      SEC Rule 15c3-2
      SEC Rule 17a-4

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to Rule 2340 that permit customers whose accounts are carried solely for the purpose of execution on a DVP/RVP (delivery versus payment/receive versus payment) basis to opt out of receiving customer account statements.1

      The effective date of this rule change is November 22, 2006. Included with this Notice is Attachment A, the text of amended Rule 2340.

      Questions/Further Information

      Questions concerning this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411.

      Background and Discussion

      Rule 2340 requires any member that conducts a general securities business and also carries customer accounts or holds customer funds or securities, at least once each calendar quarter, to send an account statement to each customer whose account had a security position, money balance or account activity during the time since the last statement was sent. The account statement must contain a description of any securities positions, money balances or account activity in the account.

      In a DVP/RVP arrangement, payment for securities purchased is made to the selling customer's agent and/or delivery of securities sold is made to the buying customer's agent in exchange for payment at time of settlement, usually in the form of cash.2 Because transactions in DVP/RVP accounts (chiefly institutional accounts) are settled directly with the agent on a transaction-by-transaction basis, account statements sent by general securities firms to customers with DVP/RVP accounts generally do not reflect any cash balance or security position at the end of a quarter. Rather than using the information provided in quarterly statements, DVP/RVP customers generally rely on trade runs or customer confirmations issued pursuant to SEC Rule 10b-10 for transaction-related information.3

      The amendments to Rule 2340 relieve members from the obligation to send quarterly statements to customers with DVP/RVP accounts if: (1) the customer's account is carried solely for the purpose of execution on a DVP/RVP basis; (2) all transactions in the account are handled on a DVP/RVP basis in conformity with Rule 11860;4 (3) there are no securities or cash positions in the account at the end of the quarter (other than positions of a temporary nature, such as those arising from fails to receive or deliver, errors, questioned trades, dividend or bond interest entries and other similar transactions); (4) the customer consents to the suspension of such statements in writing, and the member maintains such consents in a manner consistent with Rule 3110 and SEC Rule 17a-4;5 (5) the member undertakes to provide any particular statement or statements to the customer promptly upon request; and (6) the member promptly undertakes to reinstate the delivery of such statements to the customer upon request.

      The amendments to Rule 2340 do not qualify or condition the obligations of a member under SEC Rule 15c3-2 concerning quarterly notices of free credit balances on statements.6 By requiring the customer's affirmative consent, the customer's ability to receive quarterly statements is preserved, and the member is precluded from unilaterally terminating delivery of customer statements. In addition, customers are able to promptly receive particular account statements upon request, and promptly reinstate the delivery of account statements upon request.


      1 See Exchange Act Release No. 54811 (Nov. 22, 2006), 71 FR 69161 (Nov. 29, 2006) (Order Approving Proposed Rule Change; File No. SR-NASD-2006-066).

      This rule change is similar to a rule change proposed by the New York Stock Exchange, Inc. (now known as New York Stock Exchange LLC). See Exchange Act Release No. 53826 (May 18, 2006), 71 FR 30211 (May 25, 2006).

      2 For purposes of Rule 2340, a DVP/RVP account is defined in Rule 2340(b) as an arrangement whereby payment for securities purchased is made to the selling customer's agent and/or delivery of securities sold is made to the buying customer's agent in exchange for payment at time of settlement, usually in the form of cash.

      3 See SEC Rule 10b-10 (Confirmation of Transactions) and NASD Rule 11860 (Acceptance and Settlement of COD Orders).

      4 Prior to accepting an order in a DVP/RVP account, a member must comply with Rule 11860, which requires, among other things, that the member obtain certain information from the customer, including the name and address of the agent and the account number of the customer on file with the agent.

      5 Under NASD Rule 3110(a), NASD members are required, among other things, to make and preserve books and records as prescribed by SEC Rule 17a-3. Rule 3110 also states that the record keeping format, medium, and retention period must comply with SEC Rule 17a-4. Rule 17a-4 specifies the manner in which brokerdealers must maintain the records created in accordance with SEC Rule 17a-3, and certain other records produced by broker-dealers, and the required retention periods for these records.

      6 SEC Rule 15c3-2 requires broker-dealers to provide each of their customers for whom a free credit balance is carried, not less frequently than once every three months, a written statement informing the customer of the amount due to the customer, and written notice that the funds are not segregated and may be used in the broker-dealer's business operations, and that the funds are payable on the customer's demand.


      ATTACHMENT A

      * * * * *

      2300. TRANSACTIONS WITH CUSTOMERS

      * * * * *

      2340. Customer Account Statements

      (a) General

      Except as otherwise provided by paragraph (b), [E]each general securities member shall, with a frequency of not less than once every calendar quarter, send a statement of account ("account statement") containing a description of any securities positions, money balances, or account activity to each customer whose account had a security position, money balance, or account activity during the period since the last such statement was sent to the customer.
      (b) Delivery Versus Payment/Receive Versus Payment (DVP/RVP) Accounts

      Quarterly account statements need not be sent to a customer pursuant to paragraph (a) of this Rule if:
      (1) the customer's account is carried solely for the purpose of execution on a DVP/RVP basis;
      (2) all transactions effected for the account are done on a DVP/RVP basis in conformity with Rule 11860;
      (3) the account does not show security or money positions at the end of the quarter (provided, however that positions of a temporary nature, such as those arising from fails to receive or deliver, errors, questioned trades, dividend or bond interest entries and other similar transactions, shall not be deemed security or money positions for the purpose of this paragraph (b));
      (4) the customer consents to the suspension of such statements in writing. The member must maintain such consents in a manner consistent with Rule 3110 and SEC Rule17a-4;
      (5) the member undertakes to provide any particular statement or statements to the customer promptly upon request; and
      (6) the member undertakes to promptly reinstate the delivery of such statements to the customer upon request.
      Nothing in this Rule shall be seen to qualify or condition the obligations of a member under SEC Rule 15c3-2 concerning quarterly notices of free credit balances on statements.
      [(b)] (c) No change in text.
      [(c)] (d) Definitions

      For purposes of this Rule, the following terms will have the stated meanings:
      (1)–(5) No change in text.
      (6) a "DVP/RVP account" is an arrangement whereby payment for securities purchased is made to the selling customer's agent and/or delivery of securities sold is made to the buying customer's agent in exchange for payment at time of settlement, usually in the form of cash.
      [(d)] (e) Exemptions

      Pursuant to this Rule 9600 Series, [the Association] NASD may exempt any member from the provisions of this Rule for good cause shown.

      * * * * *

    • 06-67 SEC Approves Amendments to NASD Rules to Align Them with Regulation NMS; Effective Date: Regulation NMS Trading Phase Date, Currently Scheduled to Occur February 5, 2007.
      The SEC has extended the Trading Phase Date to March 5, 2007.

      View PDF File

      GUIDANCE

      Alignment of NASD Rules with Regulation NMS

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      ADF Trading Centers
      Alternative Display Facility (ADF)
      Regulation NMS
      Trade Reporting

      Executive Summary

      On September 28, 2006, the Securities and Exchange Commission (Commission or SEC) approved amendments to NASD Rules, including the rules governing the Alternative Display Facility (ADF),1 in order to align them with Regulation NMS.2 In addition, the SEC approved amendments to rules governing quoting, trade reporting, and clearing applicable to the ADF and extended this functionality to all NMS stocks, including stocks listed on the New York Stock Exchange (NYSE), American Stock Exchange (Amex), and certain other exchanges. Furthermore, the amendments reorganize ADF trade reporting rules and make changes to ADF rules to enhance their clarity. The SEC also approved changes to the ADF Trading Center Certification Record, which became effective upon SEC approval on September 28, 2006.

      The Rules, as amended (See Exhibit 5 of the rule filing), and the ADF Trading Center Certification Record (See Exhibit 3 of the rule filing) are available at www.nasd.com/RulesRegulation/RuleFilings/ 2006RuleFilings/NASDW_017057. The amendments to NASD Rules become effective on the Regulation NMS Trading Phase Date, currently scheduled to occur on February 5, 2007.

      Questions/Further Information

      Questions concerning this Notice may be directed to Kathleen A. O'Mara, Associate General Counsel, Office of General Counsel, at (202) 728-8071; Peter Santori, Chief Counsel, Market Regulation Department, at (240) 386-5126; or Chris Stone, Associate Chief Counsel, Transparency Services, at (202) 728-8457.

      Background and Discussion

      On June 29, 2005, the Commission published its release adopting Regulation NMS.3 Regulation NMS established substantive rules designed to modernize and strengthen the regulatory structure of the U.S. equities markets. For example, the Order Protection Rule (SEC Rule 611) requires "trading centers" to establish, maintain and enforce written policies and procedures reasonably designed to prevent the execution of trades at prices inferior to protected quotations displayed by automated trading centers, subject to applicable exceptions.4 For trades to be protected, a quotation must be immediately and automatically accessible. In this regard, Regulation NMS includes an Access Rule (SEC Rule 610), which requires fair and non-discriminatory access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers, and requires NASD and the exchanges to establish, maintain and enforce written rules that prohibit their members from engaging in a pattern or practice of displaying any quotation that locks or crosses a protected quotation, or a manual quotation that locks or crosses a quotation disseminated pursuant to an effective National Market System Plan (NMS Plan).5

      Aligning NASD Rules with Regulation NMS

      NASD is amending its ADF Rules to align them with the Regulation NMS Order Protection Rule and the Access Rule. NASD also is making conforming changes to certain NASD Rules to reflect the new numbering of SEC Rules in Regulation NMS. Moreover, NASD has filed its ADF Trading Center Certification Record with the SEC. ADF Trading Centers are required to complete the ADF Trading Center Certification Record, provide all relevant supporting documentation and complete the ADF certification process prior to being permitted to post quotations through the ADF.

      1. Implementation of the Order Protection Rule

      Consistent with the goals articulated by the Commission in adopting SEC Rule 611, NASD is amending Rule 4300A(e) to specify that an ADF Trading Center must submit automated quotations, as defined in SEC Rule 600(b)(3). Under Rule 4300A(e), manual quotations, as defined in SEC Rule 600(b)(37), cannot be submitted to the ADF. In furtherance of the provision, Rule 4300A(e) requires that each ADF Trading Center adopt policies and procedures to ensure only automated quotations are submitted to the ADF. Moreover, an ADF Trading Center is required to monitor its systems on a real-time basis to assess whether they are functioning properly.

      NASD also is amending the system outage procedures in Rule 4300A. A system outage now is defined in Rule 4300A(e)(2) as the inability to post automated quotations in the ADF6 and, in that regard, the inability to respond immediately and on an automated basis to orders. In light of the time frames that are pertinent in the Regulation NMS environment, NASD is amending Rule 4300A to address ADF Trading Center system outages. NASD will determine, in its discretion: (1) when three unexcused outages during a five-day period should result in the suspension of an ADF Trading Center from quoting in the ADF for a period of 20 days; and (2) whether an outage should be excused without limitation.7 NASD will strictly interpret the requirement under Rule 4300A that an ADF Trading Center submit only automated quotations. Moreover, if an ADF Trading Center experiences technical problems and is unable to submit automated quotations, it will have to withdraw its quotations from the ADF and notify NASD.

      NASD also is amending ADF transaction reporting requirements to expressly require reporting members to append certain new identifiers to enhance regulation of the Order Protection Rule and to facilitate transparency to the marketplace. There are nine express exceptions in the Order Protection Rule.8 NASD is revising its transaction reporting requirement in Rule 4632A to conform NASD trade report modifiers to the identified exceptions in SEC Rule 611.9 Specifically, NASD is adopting a new unique trade report modifier that will be appended to a last sale report if the trade would be a trade-through of a protected quotation, but for the trade being qualified for an exception from SEC Rule 611. Furthermore, in addition to using the new unique identifier, reporting members are required to append an additional modifier, specified by NASD, which would, in certain circumstances, identify the specific applicable exception or exemption from SEC Rule 611 upon which the member is relying. Moreover, NASD plans to issue another Notice providing further guidance on Regulation NMS-related trade reporting requirements.

      In addition, NASD is amending Rule 4632A to require separate trade report modifiers for certain trading situations that previously had been combined under one modifier. Additionally, NASD is creating several new trade report modifiers to supplement the amended modifiers. ADF order reporting requirements in Rule 4300A(b)(1)(N) and transaction reporting requirements in Rule 4632A(a)(4)(L) were amended to expressly require the reporting of "[a]ny other modifier as specified by NASD or the Securities and Exchange Commission." Further, NASD provided a comprehensive list of all required modifiers when it published ADF's technical specifications on October 16, 2006. The list is available at www.nasd.com/RegulatorySystems/ADF/FIXInformation/ index.htm.

      NASD will review the activities of ADF Trading Centers and other NASD member trading centers for compliance with the Order Protection Rule.10 To complement NASD's automated surveillance for member compliance with the Order Protection Rule and other NASD surveillance methods, NASD's Trading and Market Making Surveillance (TMMS) examination program will examine relevant NASD members for adequate written supervisory procedures and supervisory systems applicable to Regulation NMS and to determine the extent to which trading centers are reviewing compliance with such rules.
      2. Implementation of the Access Rule

      The Access Rule promotes fair and non-discriminatory access to quotations displayed by trading centers through a private linkage approach. In general, the Access Rule: (1) requires that self-regulatory organizations (SROs) not impose unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access through a member to the quotations in an NMS stock displayed through its SRO trading facility; (2) requires that each trading center that displays quotations in an NMS stock through an SRO display-only facility (such as the ADF) provide a level and cost of access to such quotations that is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities in that stock and ensure that it does not impose unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access to such quotations through a member, subscriber or customer of the trading center; (3) adopts limits on fees for accessing quotations; and (4) requires SROs to establish, maintain and enforce specific written rules that are generally aimed at limiting the display of quotations that lock or cross any protected quotations in an NMS stock.

      In approving Regulation NMS, the Commission articulated the expectation that NASD, as the SRO responsible for the OTC market, will act as "gatekeeper" of the ADF.11 In that regard, NASD will have to make an "affirmative determination" as to whether ADF Trading Centers are complying with the SEC Rule 610 access standard.12 NASD will fulfill this obligation in several ways. First, NASD is incorporating the Regulation NMS access standard into Rule 4300A. An ADF Trading Center will be expressly required to: (1) provide a level and cost of access to its quotations in an NMS stock displayed in the ADF that is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities in that NMS stock; (2) demonstrate that it has sufficient technology to update automatically its quotations and immediately respond to orders routed for execution directly against the individual ADF Trading Center's best bid or offer (i.e., sufficient technology to display automated quotations); and (3) ensure that it does not impose unfairly discriminatory terms that prevent or inhibit any person, through a registered broker-dealer, from obtaining efficient access to such quotations. Further, NASD is amending Rule 4300A to require ADF Trading Centers to provide direct electronic access to registered broker-dealers seeking such access.13

      Based on guidance provided by Commission staff, Rule 4300A(d)(1) is being amended to require each ADF Trading Center to use a communication service(s) that is deemed sufficient by NASD. To facilitate this effort, NASD staff has posted on the NASD Web site a list of NASD-approved private-sector connectivity providers (e.g., financial extranet services and direct market access firms). The list of providers is available at www.nasd.com/RegulatorySystems/ADF/Participants/index.htm. This list will be reviewed periodically and updated on an as-needed basis. As stated in the rule filing, NASD staff will not necessarily review the technical functionality of the various connectivity providers, but will assess the reliability, cost effectiveness, and extent to which the service is sufficiently prevalent among firms that require the ability to route orders to an ADF Trading Center to meet their Order Protection Rule obligations.

      In addition, while NASD staff will evaluate the level and cost of accessing an ADF Trading Center on a case-by-case basis, each ADF Trading Center is required to be accessible through at least two approved connectivity providers. It is important to note, however, that the approved private-sector connectivity provider list does not serve as an exclusive list of connectivity options for accessing an ADF Trading Center. For instance, an ADF Trading Center could approach NASD about adding a specific privatesector connectivity provider to the approved list that is not currently listed. In addition, to the extent a market participant deems it necessary, it could choose to connect to an ADF Trading Center via a dedicated telecommunications line. However, an ADF Trading Center will not be obligated to provide such dedicated access if it is accessible through at least two providers on the approved list. Also, in conformity with the guidance provided by the Commission in the Regulation NMS Approval Order, NASD expects an ADF Trading Center to defray connectivity costs to the extent that the level and cost of access offered by the ADF Trading Center is not substantially equivalent to the level and cost of access offered generally by SRO trading facilities.14

      Second, NASD is amending its Certification Record process to address the standards set forth in SEC Rule 610 and Regulation NMS generally, including requiring documentation that demonstrates that ADF Trading Center costs are substantially equivalent to the costs of accessing SRO trading facilities generally.15 The Certification Record process will specifically require each ADF Trading Center to make fully supported representations that it is able to comply with the various requirements of Regulation NMS. To that end, one of the goals of NASD's amended Certification Record process is to make certain that ADF Trading Centers possess technology capable of offering automated quotations (i.e., that ADF Trading Centers are capable of immediate internal order turnaround times). The Commission has tasked NASD with making an affirmative determination as to the extent to which each ADF Trading Center offers a substantially equivalent level and cost of access relative to SRO trading facilities. This requires NASD staff to consider the ADF Trading Center's system functionality, robustness, the ability of market participants to interface efficiently with the ADF Trading Center's system and the fee structure of the ADF Trading Center.

      Third, NASD is amending Rule 4400A to provide standing for all registered brokerdealers, not just members, to file a direct or indirect access complaint with NASD. This will ensure that there is a process in place for promptly addressing claims that an ADF Trading Center is preventing or inhibiting efficient access to its quotations.16 NASD will allow such complaints to be filed via facsimile, email, personal delivery, courier or overnight mail. Moreover, the process specified in Rule 4400A will allow NASD to promptly address such issues and, if it were determined that there has been or were an ongoing limitation or denial of access, NASD will limit, as appropriate and necessary, an ADF Trading Center's participation in ADF, including the withdrawal of its quotations from ADF, until access is provided.17

      Fourth, through the examination process and annual compliance questionnaires, NASD will review the activities of ADF Trading Centers. With regard to the Access Rule, NASD's automated surveillance for certain aspects of the Access Rule will be complemented through the review of relevant NASD members' written supervisory procedures through the TMMS examination program, among other investigative means. NASD also plans to use annual compliance questionnaires to determine ongoing compliance with requirements such as "substantially equivalent" access, access fees and conditions on access.

      Lastly, in adopting Rule 4130A (Prohibition from Locking or Crossing Quotations in NMS Stocks), NASD is requiring members to reasonably avoid displaying, and expressly prohibiting members from engage in a pattern or practice of displaying, any quotation that locks or crosses a protected quotation in an NMS stock during regular trading hours, unless it meets a specified exception, and to avoid displaying a manual quotation that locks or crosses any quotation in an NMS stock previously disseminated pursuant to an effective NMS Plan.18 Commission staff asked each of the SROs to ensure that its locking or crossing quotation rules are generally consistent among the SROs. Accordingly, new Rule 4130A is adopted in conformity with the SRO requirements set forth in the Access Rule. Further, NASD is amending Rule 4613A to delete provisions that currently prohibit locked or crossed intra-market quotations during regular trading hours. New Rule 4130A will now be applied during regular market hours, rather than Rule 4613A. However, the provisions in Rule 4613A that address locked or crossed quotation conditions in the ADF prior to the market opening will remain. Rule 4613A also is being modified to clarify the application of the rule in a Regulation NMS environment.
      3. Conforming Changes to Reflect New Numbering of SEC Rules in Regulation NMS

      NASD also is adopting conforming changes to certain NASD rules to reflect the new numbering of SEC rules in Regulation NMS. To simplify the structure of the rules adopted under Section 11A of the Exchange Act (NMS Rules), the Commission renumbered previously adopted NMS Rules, incorporated such rules into Regulation NMS and established a new definitional rule, Rule 600. Accordingly, NASD is updating all references to the NMS Rules to reflect the new SEC rule numbers.
      4. Overview of NASD Certification Record Process

      As noted above, critical to NASD's Regulation NMS compliance effort is the establishment of an enhanced Certification Record process for ADF Trading Centers.19 In light of the importance of the Certification Record process to NASD's Regulation NMS program, NASD filed with the Commission a copy of its proposed Certification Record.20 Each enumerated item on the ADF Trading Center Certification Record will have to be certified to by a duly authorized representative21 of the ADF Trading Center at the time of initial application to become an ADF participant. Moreover, recertification of the ADF Trading Center Certification Record is required within 30 days of the end of each ADF Trading Center fiscal year.22
      a. Order Protection Rule Certification

      Consistent with the Order Protection Rule, an ADF Trading Center is required to certify that it monitors in real time protected quotations, including the protected quotations of other ADF Trading Centers and SRO trading facilities. An ADF Trading Center also must certify that it has implemented a clock synchronization protocol such that the ADF Trading Center's internal clock used for Regulation NMS compliance purposes is set to Eastern Standard or Daylight Time, as appropriate, is synchronized to the NIST Atomic Clock and in no event deviates more than one second away from the NIST Atomic Clock.

      As noted above, and required by the amendment to Rule 4300A(e), each ADF Trading Center also is required to certify that it will submit only "automated quotations"23 for display on the ADF and that under no circumstances will a manual quotation be submitted (including a quotation that otherwise would be an automated quotation but for an ADF Trading Center system error, malfunction, latency, etc.). Moreover, each ADF Trading Center is required to certify that it offers immediate-or-cancel order execution functionality for execution against its protected quotations and that such functionality is offered to those required to be granted access to protected quotations. An ADF Trading Center must also certify that it will accept intermarket sweep orders and execute them in conformity with Regulation NMS. Each ADF Trading Center also is required to certify that its order response time will at least meet the response time required for its quotations to qualify as automated quotations under Regulation NMS. In addition, an ADF Trading Center must, among other things, certify that it will immediately transmit to NASD any notifications it receives from another trading center that has invoked the "Self-Help Exception" to the Order Protection Rule, or any notifications that it sends to another trading center that the ADF Trading Center has invoked the "Self-Help Exception" to the Order Protection Rule.24
      b. Access Rule Certifications

      NASD is amending its ADF Trading Center Certification Record process to ensure compliance with the Access Rule. In addition to access and order reporting requirements expressly set forth in Rule 4300A, many of the certifications seek to further ensure that each ADF Trading Center will "provide a level and cost of access" to quotations displayed through the ADF "that is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities."25 Each ADF Trading Center will be required to certify that it offers fair and non-discriminatory access. Moreover, each ADF Trading Center is required to provide documentation demonstrating that it is complying with these requirements. Further, each ADF Trading Center is required to certify its acknowledgment that, to the extent that NASD deems an ADF Trading Center not to be granting the requisite level and cost of access, an ADF Trading Center will defray the connectivity costs of those persons entitled to access the ADF Trading Center.
      In addition, each ADF Trading Center is required to certify that, if it charges a fee in excess of the fee cap for accessing orders other than protected quotations, it will provide functionality that prevents market participants that route orders for interaction only with protected quotes from inadvertently accessing a non-protected quotation and being charged a fee in excess of the fee cap. An ADF Trading Center also must acknowledge through the Certification Record process that NASD will not permit an ADF Trading Center's quotations to be displayed through the ADF, unless NASD determined that public notice has been provided of the ADF Trading Center's intention to display quotations through the ADF at least 60 days in advance of such activity and, at least initially, in conformity with the standard set forth by the Commission in its order extending certain Regulation NMS compliance dates.26 With regard to an ADF Trading Center that displays quotations in the ADF prior to the implementation of Regulation NMS and seeks to continue uninterrupted quoting on the ADF after Regulation NMS implementation, such ADF Trading Center also must comply with this 60-day public notice period in advance of Regulation NMS implementation.

      NASD requires that such advance public notice be given through reasonable means (e.g., through press releases, the NASD Web site and the ADF Trading Center's Web site). Further, each ADF Trading Center is required to certify as part of the pre-quotation notice period that it had made publicly available relevant connectivity and access technical specifications, including: (1) technical interface specifications (e.g., compatible system protocols, etc.); (2) testing schedules; (3) connectivity providers (e.g., extranet providers and direct market access firms) through which the ADF Trading Center's quotations may be accessed; and (4) all relevant subscriber and non-subscriber fees, access fees, port fees, connectivity fees and rebates.

      Extend ADF Quoting and Trade Reporting Functionality to All NMS Stocks

      NASD is amending rules that govern quoting, trade reporting and clearing applicable to the ADF and extending this functionality to all NMS stocks, as defined in SEC Rule 600(b)(47). Currently, the ADF accommodates the quoting, trade reporting and facilitation of clearing of only NASDAQ securities, but this rule amendment extends such rules and functionality to stocks listed on NYSE, Amex and certain other exchanges. Specifically, NASD is amending its rule to change the definition of "ADF-eligible security" to include all NMS stocks, as defined in SEC Rule 600(b)(47). In addition, NASD is amending ADF rules to adopt uniform rules governing quoting, trade reporting and comparison of NASDAQ, NYSE, Amex and certain other regionally listed securities. Since NASD is incorporating the requirements to quote and tradereport for all NMS stocks directly into the ADF rules, NASD no longer needs a separate set of rules (currently found in the Rule 6300 and 6400 Series) governing the quoting and trade reporting of NYSE, Amex and certain other regionally listed securities and is deleting these rule series.27

      Further, in conformity with the new standards articulated in Regulation NMS, NASD does not intend to be a participant of the Intermarket Trading System Plan (ITS Plan) or the new National Market System Linkage Plan (NMS Linkage Plan). Instead, ADF quotes in all NMS stocks will be accessible through private-connectivity providers in accordance with the quote and order access requirements set forth in Rule 4300A.This requires, among other things, that each ADF Trading Center provide direct electronic access to other ADF market participants and direct or indirect electronic access to all other registered broker-dealers seeking such access. Accordingly, because NASD does not intend to participate in the ITS Plan or the new NMS Linkage Plan, the Rule 5200 Series (containing ITS Rules) also is being deleted in its entirety.28

      Reorganize ADF Trade Reporting Rules to Enhance Clarity of the Rules

      NASD is amending the ADF trade reporting rules to enhance their clarity. Specifically, NASD is amending Rule 4630A to clarify that a transaction executed otherwise than on an exchange would have to be reported to TRACS, in accordance with Rule 4632A or another pertinent NASD rule, unless it were reported to another facility designated by the Commission as being authorized to accept trade reports for trades executed otherwise than on an exchange.29 In addition, NASD is amending Rule 4632A to reorganize the ADF trade reporting rules and to require members to report execution time in hours, minutes and seconds based on Eastern Time in military format, unless another provision of NASD rules requires that a different time be included on the report.30 In general, NASD is incorporating in Rule 4632A(a) the same requirements that were previously found in Rule 5430(a), with certain technical and clarifying changes.

      NASD also is amending Rule 4632A(b) to set forth which party is responsible for reporting transactions to NASD. These rules are simplified to delineate reporting responsibility between registered reporting members, non-registered reporting members, and customers or non-members. In general, Rule 4632A(b) requires the following: (1) in transactions between two registered reporting members, the sell side is required to report the trade; (2) in transactions between a registered reporting member and non-registered reporting member, the registered reporting member is required to report the trade; (3) in transactions between two non-registered reporting members, the sell side is required to report the trade; (4) in transactions between a member and a customer or non-member, the member is required to report the trade.31

      NASD also is amending Rule 4632A(f). Currently, Rule 4632A(f) allows for the aggregation of transaction reports under certain circumstances. NASD is amending Rule 4632A(f) to expressly prohibit aggregation of individual execution of orders in a security at the same price into a single transaction report (also referred to as "bunching"). NASD has determined that it no longer should allow members to bunch transactions for reporting purposes. By prohibiting bunching, NASD will ensure greater transparency of individual transactions. NASD also is amending Rule 4632A(l) to clarify a member's obligation under ADF rules to report cancelled trades in a timely manner. Lastly, NASD is amending the Rule 6100A Series concerning the TRACS Trade Comparison Service to use terminology consistent with the ADF rules found in the Rule 4000A Series.


      1 The ADF is a quotation collection, trade comparison and trade reporting facility developed by NASD in accordance with the Commission's SuperMontage Approval Order and in conjunction with NASDAQ's registration as a national securities exchange. The ADF, which currently is operating on a pilot basis, provides ADF market participants the ability to post quotations in NASDAQ securities and provides all members that participate in the ADF the ability to view quotations and report transactions in NASDAQ securities to the exclusive Securities Information Processor (SIP) for NASDAQ-listed issues for consolidation and dissemination of data to vendors and ADF market participants.

      2 Securities Exchange Act Release No. 54537 (September 28, 2006), 71 FR 59173 (October 6, 2006) (File No. SR-NASD-2006-91).

      3 17 CFR 242.600 et seq. See also Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) ("Regulation NMS Approval Order").

      4 A "trading center" is defined in SEC Rule 600(b)(78)as a national securities exchange or national securities association that operates an SRO trading facility, ATS, exchange market maker, OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing as agent. See Regulation NMS Approval Order, 70 FR at 37533. In accordance with SEC Rule 611, NASD members that meet the definition of a trading center, shall establish, maintain and enforce written policies and procedures designed to prevent trade-throughs on that trading center of protected quotations in NMS stocks that do not fall within an exeception.

      5 In addition, Regulation NMS adopted a subpenny rule that, in general, prohibits market participants from accepting, ranking or displaying orders, quotations or indications of interest in a pricing increment smaller than a penny, except for orders, quotations or indications of interest that are priced at less than $1.00 per share. Further, Regulation NMS adopted amendments to the market data rules to update the requirements for consolidating, distributing and displaying market information, as well as amendments to the joint industry plans for disseminating market information that modify the formulas for allocating plan revenue and broadening participation in plan governance. This Notice describes rule amendments that primarily address implementation of the Order Protection Rule and the Access Rule. Neither the rule filing nor this Notice address Regulation NMS issues related to the sub-penny rule or market data rules.

      6 NASD also is deleting IM-4613A that bans the automated update of certain quotations through the ADF. NASD originally adopted this IM to address capacity and operation concerns, but such a prohibition is no longer necessary.

      7 Currently, Rule 4300A(e)(4) permits only five excused system outages to be granted in a 30-day period.

      8 See 17 CFR 242.611(b). In addition, it should be noted that the SEC also adopted two new exemptions-one for "Qualified Contingent Trades" and another for "Certain Subpenny Trade-Throughs." See Securities Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) and Securities Exchange Act Release No. 54678 (October 31, 2006), 71 FR 65018 (November 6, 2006). To the extent that the Commission issues future exemptions or exceptions, NASD may require that additional modifiers be appended.

      9 However, a firm would be responsible for ensuring that the specific transaction falls expressly into the exception as set forth in SEC Rule 611. Accordingly, a firm could not rely on the identification of a transaction pursuant to NASD rules as a type of trade that is excepted from Regulation NMS without ensuring the specific trade meets all of the criteria set forth in SEC Rule 611.

      10 Specifically, NASD will oversee NASD ADF Trading Centers and other NASD members that meet the definition of a "trading center" set forth in 600(b)(78) to determine, among other things, if they have meet their SEC Rule 611 obligations to establish, maintain and enforce written policies and procedures designed to prevent trade-throughs on that trading center of protected quotations in NMS stocks that do not otherwise fall within an exeception.

      11 See Regulation NMS Approval Order, 70 FR at 37543.

      12 See id.

      13 NASD also is amending 4300A to add a new paragraph (g) to require each Registered Reporting ADF ECN to post at least one marketable quote/order through the ADF on each side of the market each 30 calendar days or lose its ADF certification.

      14 See Regulation NMS Approval Order, 70 FR at 37543 ("Under Rule 610(b)(1)…ADF participants will be required to bear the costs of the necessary connectivity to facilitate efficient access to their quotations").

      15 In this regard, NASD is required to evaluate "substantially equivalent" cost of access on a per transaction basis. As the Commission noted in the Regulation NMS Approval Order, this cannot be evaluated in terms of absolute dollars. For example, in evaluating access, a $1,000 port charge for an ECN participating in ADF that trades one million shares per day would not be substantially equivalent to a $1,000 port charge by an SRO trading facility trading 100 million shares per day. See Regulation NMS Approval Order, 70 FR at 37543. In evaluating "substantially equivalent" cost of access, NASD will look at cost related to directly accessing SRO trading facilities generally. Specifically, NASD will look at ADF Trading Center and SRO connectivity costs such as line costs and port charges. In addition, NASD also will consider costs associated with SRO membership in evaluating "substantially equivalent" costs.

      16 Rule 4400A, as amended, allows any registered broker-dealer to file a direct or indirect access complaint against an ADF Trading Center with NASD to allege a denial of or limitation on access. It should be noted, however, that the filing of a frivolous direct or indirect access complaint by an NASD member could constitute a violation of Rule 2110.

      17 The Commission noted in the Regulation NMS Approval Order that, if an ADF participant were not complying with these access standards, NASD would have a responsibility "to stop publishing the participant's quotations until the participant comes into compliance. See Regulation NMS Approval Order, 70 FR at 37543. Rule 4400A is being amended to expressly incorporate this authority.

      18 It should be noted that NASD expressly prohibits the display of manual quotations in the ADF, as specified in Rule 4300A.

      19 NASD is amending Rule 4200A to define the term "Certification Record." In addition, Rule 4300A is amended to expressly require compliance with the "terms agreed to in the Certification Record."

      20 The SEC approved changes to the ADF Trading Center Certification Record, which became effective upon SEC approval on September 28, 2006.

      21 This representative typically should be the Chief Compliance Officer or other principal with appropriate oversight responsibilities.

      22 Current ADF Trading Centers also are required to be re-certified prior to the implementation of Regulation NMS. Accordingly, there is no "grandfather" allowance for current ADF Trading Centers.

      23 See 17 CFR 242.600(b)(3).

      24 See Regulation NMS Approval Order for a description of the "Self-Help Exception."

      25 17 CFR 242.610.

      26 See Securities Exchange Act Release No. 53829 (May 18, 2006), 71 FR 30038 (May 24, 2006) (requiring ADF participants to meet the new automation requirements discussed above to qualify).

      27 While ADF rules are applied in a uniform manner to all NMS stocks to the extent possible, NMS stocks are subject to two separate transaction reporting plans. NASDAQ securities are governed by the Joint Self- Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for NASDAQ-Listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis (UTP Plan); and NYSE, Amex, and certain other regionally listed securities are governed by the Consolidated Quotation Plan (CQ Plan) and the Consolidated Tape Association Plan (CTA Plan).

      28 As noted above, the changes discussed in this Notice (including the adoption of the rules, as amended, discussed herein and the deletion of the Rule 6300 and 6400 Series) will occur on the Regulation NMS Trading Phase Date, currently scheduled to occur on February 5, 2007.

      29 See, e.g., Securities Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR-NASD-2005-087) (establishing, among other things, rules for the trade reporting of transactions otherwise than on an exchange through the new TRF).

      30 As described previously in the Order Protection Rule discussion, NASD also is changing the required modifiers set forth in Rule 4632A(a) to more closely align them with Regulation NMS and has inserted a general provision that requires a member to report "[a]ny other modifier as specified by NASD or the Securities and Exchange Commission."

      31 Rule 4200A definitions also are amended to define "registered reporting member" and "non-registered reporting member" as used in the transaction reporting rules.

    • 06-66 NASD Announces Election Results for District Committees, District Nominating Committees and the National Adjudicatory Council

      View PDF File

      INFORMATIONAL

      District and National Adjudicatory Council Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections

      Executive Summary

      Through this Notice, NASD announces the election results for the District Committees, the District Nominating Committees and the National Adjudicatory Council (NAC). The candidates nominated to the District Nominating Committees have been duly elected in all districts. In the 11 District Committee elections, additional candidates satisfied the requirements of Article VIII of the NASD Regulation By-Laws to contest each District Committee election. The newly elected District Committee members will serve until January 2010,1 and the newly elected District Nominating Committee members will serve until January 2008.

      In the NAC elections, additional candidates satisfied the requirements of Article VI of the NASD Regulation By-Laws to contest two regional industry seats (New York and West) on the NAC. The individual who received the largest number of votes cast in the New York Region has been declared the nominee from that region. Similarly, the individual who received the largest number of votes cast in the West Region has been declared the nominee from that region. The Regional Nominating Committees for each region will nominate these individuals to the National Nominating Committee for appointment by the NASD Regulation Board.

      The members of the incoming District Committees and District Nominating Committees, and the proposed NAC nominees, are identified in Attachment A. All petition candidates are identified as such. All other candidates were nominated by the District Nominating Committees.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Regional or District Director noted in Attachment A or to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8062 or via email at barbara.sweeney@nasd.com.


      1 Some District Committee members were elected to fill existing vacancies and therefore may serve less than a three-year term, as indicated on Attachment A.


      ATTACHMENT A

      District Committees and District Nominating Committees—2007 Incoming Members
      District 1
      Debra J. Pohlson, Acting District Director
      525 Market Street, Suite 300
      San Francisco, CA 94105-2711
      (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
      District 1 Committee Incoming Members
      Robert T. Angle
      (petition candidate)
      White Pacific Securities, Inc. San Francisco, CA
      Leonard R. Berry Backstrom McCarley Berry & Co., LLC San Francisco, CA
      James H. Williams James H. Williams San Rafael, CA
      District 1 Nominating Committee Incoming Members
      William A. Evans Stone & Youngberg, LLC San Francisco, CA
      Gerard P. Gloisten GBS Financial Corporation Santa Rosa, CA
      William P. Hayes Wells Fargo Investments, LLC San Francisco, CA
      Francis X. Roche, II RBC Dain Rauscher, Inc. San Francisco, CA
      William Svoboda Morgan Stanley Palo Alto, CA

      District 2
      Joseph M. McCarthy, Acting District Director
      300 South Grand Avenue, Suite 1600
      Los Angeles, CA 90071-3126
      (213) 229-2300
      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
      District 2 Committee Incoming Members
      Craig M. Biddick
      (petition candidate)
      Mission Securities Corporation San Diego, CA
      Mark S. Stewart
      (petition candidate)
      Mark Stewart Securities, Inc. Irvine, CA
      Craig R. Watanabe Western International Securities, Inc. Pasadena, CA
      District 2 Nominating Committee Incoming Members
      M. LaRae Bakerink WBB Securities, LLC San Diego, CA
      Stephen B. Benton Financial Network Investment Corp. El Segundo, CA
      Don S. Dalis UBS Financial Services, Inc. Newport Beach, CA
      James M. Dillahunty Fixed Income Securities, LLC San Diego, CA
      Neal E. Nakagiri NPB Financial Group, LLC Burbank, CA

      District 3
      Joseph M. McCarthy, District Director
      370 17th Street, Suite 2900
      Denver, CO 80202-5629
      (303) 446-3100
      Arizona, Colorado, New Mexico, Utah and Wyoming
      Michael E. Lewis, District Director
      601 Union Street, Suite 1616
      Seattle, WA 98101-2327
      (206) 624-0790
      Alaska, Idaho, Montana, Oregon and Washington
      District 3 Committee Incoming Members
      Chester J. Hebert CIM Securities LLC Greenwood Village, CO
      James W. Millegan
      (petition candidate)
      J.W. Millegan, Inc. Oswego, OR
      Douglas W. Schriner
      (petition candidate)
      Harrison Douglas, Inc. Aurora, CO
      District 3 Nominating Committee Incoming Members
      Bridget Gaughan AIG Financial Advisors, Inc.. Phoenix, AZ
      John Goodwin Goodwin Browning & Luna Securities, Inc. Albuquerque, NM
      Curtis Hammond Morgan Stanley DW Inc. Bellevue, WA
      J. Keith Kessel AFS Brokerage, Inc. Greenwood Village, CO
      Arlene Wilson D.A. Davidson Great Falls, MT

      District 4
      Thomas D. Clough, District Director
      120 West 12th Street, Suite 800
      Kansas City, MO 64105-1930
      (816) 421-5700
      Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota
      District 4 Committee Incoming Members
      Kenneth M. Cherrier1 Fintegra, LLC Minneapolis, MN
      Robert E. Hillard
      (petition candidate)
      Arlington Securities, Inc. St. Louis, MO
      Richard D. Link Edward Jones St. Louis, MO
      Daniel J. May Financial Network Investment Corporation Minneapolis, MN
      District 4 Nominating Committee Incoming Members
      Robert M. Chambers A.G. Edwards & Sons, Inc. West Des Moines, IA
      Joseph D. Fleming RBC Dain Rauscher Inc. Minneapolis, MN
      Mark T. Lasswell Wells Fargo Brokerage Services, LLC Minneapolis, MN
      Kevin P. Maas PrimeVest Financial Services, Inc. St. Cloud, MN
      Stephen S. Soden Country Club Financial Services, Inc. Mission Woods, KS

      District 5
      Keith E. Hinrichs, District Director
      1100 Poydras Street, Energy Center, Suite 850
      New Orleans, LA 70163-0802
      (504) 522-6527
      Alabama, Arkansas, Louisiana, Mississippi, Oklahoma and Tennessee
      District 5 Committee Incoming Members
      Robert Keenan, Jr.
      (petition candidate)
      St. Bernard Financial Services, Inc. Russellville, AR
      Michael J. Mungenast ProEquities, Inc. Birmingham, AL
      Gary K. Wunderlich, Jr. Wunderlich Securities, Inc. Memphis, TN
      District 5 Nominating Committee Incoming Members
      John J. Dardis Next Financial Group, Inc. Metairie, LA
      Henry M. Fyfe, III Duncan-Williams, Inc. Memphis, TN
      Charles C. Hollinger, Jr. Johnson Rice & Company, LLC New Orleans, LA
      Carolyn R. May Simmons First Investment Group, Inc. Little Rock, AR
      R. Patrick Shepherd Avondale Partners, LLC Nashville, TN

      District 6
      Virginia F. M. Jans, Regional Director
      12801 N. Central Expressway, Suite 1050
      Dallas, TX 75243-1778
      (972) 701-8554
      Texas
      District 6 Committee Incoming Members
      Caroline B. Austin
      (petition candidate)
      Evolve Securities, Inc. Dallas, TX
      Kennard (Ken) R. George VSR Financial Services, Inc. Dripping Springs, TX
      Fenner R. Weller, Jr. Weller Anderson & Co., Ltd. Houston, TX
      District 6 Nominating Committee Incoming Members
      Karen Banks Frost Brokerage Services, Inc. San Antonio, TX
      Cynthia E. Besek Maplewood Investment Adviors, Inc. Dallas, TX
      William D. Felder Southwest Securities, Inc. Dallas, TX
      Brent T. Johnson Multi-Financial Securities Corporation Houston, TX
      John R. Muschalek First Southwest Company Dallas, TX

      District 7
      Daniel J. Stefek, District Director
      One Securities Center, Suite 500
      3490 Piedmont Road, NE
      Atlanta, GA 30305-4808
      (404) 239-6100
      Georgia, North Carolina and South Carolina
      Mitchell C. Atkins, District Director
      2500 N. Military Trail, Suite 302
      Boca Raton, FL 33431-6324
      (561) 443-8000
      Florida, Puerto Rico, the Canal Zone and the Virgin Islands
      District 7 Committee Incoming Members
      Jed E. Bandes Mutual Trust Co. of America Securities Clearwater, FL
      Valerie G. Brown ING Financial Partners, Inc. Atlanta, GA
      Karen Z. Fischer
      (petition candidate)
      Hunter Scott Financial LLC Delray Beach, FL
      Raymond H. Smith, Jr.2 Smith, Brown & Groover, Inc. Macon, GA
      District 7 Nominating Committee Incoming Members
      Susan J. Hechtlinger Bank of America Investment Services, Inc. Charlotte, NC
      Landrum H. Henderson, Jr. Stephens, Inc. Charlotte, NC
      Dennis S. Kaminski Mutual Service Corporation West Palm Beach, FL
      James A. Klotz FMSBonds, Inc. North Miami Beach, FL
      Alan L. Maxwell Wachovia Capital Markets, LLC Charlotte, NC

      District 8
      Carla A. Romano, Regional Director
      55 West Monroe Street, Suite 2700
      Chicago, IL 60603-5052
      (312) 899-4400
      Illinois, Indiana, Kentucky, Michigan, Ohio and Wisconsin
      District 8 Committee Incoming Members
      Joel R. Blumenschein Freedom Investors Corp. Hartland, WI
      Thomas A. Bono David A. Noyes & Company Oak Park, IL
      Steven J. Greenwald Telemus Investment Brokers, LLC Southfield, MI
      District 8 Nominating Committee Incoming Members
      George E. Bates Bates Securities, Inc. Rockford, IL
      Michael E. Bosway City Securities Corporation Indianapolis, IN
      Mari Buechner Coordinated Capital Securities, Inc. Madison, WI
      Ruth C. Hannenberg Mesirow Financial, Inc. Chicago, IL
      Robert J. Michelotti Ferris, Baker Watts Incorporated Auburn Hills, MI

      District 9
      Gary K. Liebowitz, Regional Director
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095-1164
      (732) 596-2000
      New Jersey and New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City)
      Robert B. Kaplan, District Director
      1835 Market Street, Suite 1900
      Philadelphia, PA 19103-2929
      (215) 963-1992
      Delaware, the District of Columbia, Maryland, Pennsylvania, Virginia and West Virginia
      District 9 Committee Incoming Members
      Wayne F. Holly Sage, Rutty & Co., Inc. Rochester, NY
      Richard P. Seelaus
      (petition candidate)
      R. Seelaus & Co., Inc. Summit, NJ
      Timothy L. Smith Comprehensive Asset Management and Servicing, Inc. Parsippany, NJ
      District 9 Nominating Committee Incoming Members
      A. Louis Denton Peterson Investments, Inc. Blue Bell, PA
      Peter P. Jenkins Credit Suisse Securities (USA) LLC Baltimore, MD
      W. Dean Karrash Burke, Lawton, Brewer & Burke Spring House, PA
      Gregg A. Kidd Pinnacle Investments Inc. East Syracuse, NY
      Harold N. Peremel Mercantile Brokerage Services, Inc. Baltimore, MD

      District 10
      Hans L. Reich, Regional Director
      165 Broadway, 52nd Floor
      New York, NY 10006-1400
      (212) 858-4000
      New York (the counties of Nassau and Suffolk, and the five boroughs of New York City)
      District 10 Committee Incoming Members
      James A. Brodie, Jr.
      (petition candidate)
      Carr Securities Corporation Port Washington, NY
      Kathryn G. Casparian CIBC World Markets Corp. New York, NY
      Paul S. Ehrenstein
      (petition candidate)
      Zenith American Securities Corporation New York, NY
      Craig B. Jampol3 Caris & Company New York, NY
      James D. Lamke Bear Stearns & Co. Inc. New York, NY
      District 10 Nominating Committee Incoming Members
      Margaret M. Caffrey Schonfeld & Company, LLC Jericho, NY
      Lon T. Dolber American Portfolios Financial Services, Inc. Holbrook, NY
      George T. Mimura Nomura Securities International, Inc. New York, NY
      Richard J. Paley Carey Financial Corporation New York, NY
      Howard R. Plotkin Lehman Brothers Inc. New York, NY

      District 11
      Frederick F. McDonald, District Director
      99 High Street, Suite 900
      Boston, MA 02110
      (617) 532-3400
      Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont
      District 11 Committee Incoming Members
      Michael E. Callaghan Harvest Capital LLC Wethersfield, CT
      Tina Blakeley Maloney
      (petition candidate)
      Winslow, Evans & Crocker, Inc. Boston, MA
      Therese M. Squillacote ING Financial Advisors, LLC Hartford, CT
      District 11 Nominating Committee Incoming Members
      David K. Booth Jefferson Pilot Securities Corp. Concord, NH
      Mark R. Hansen Alta Capital Group, LLC Boston, MA
      Thomas F. Hollenbeck National Financial Services, LLC Wellesley Hills, MA
      Wilson G. Saville Barrett & Company Providence, RI
      National Adjudicatory Council—New York Region Seat
      Samuel F. Lek
      (petition candidate)
      Lek Securities Corporation New York, NY
      National Adjudicatory Council—West Region Seat
      David P. Alsup
      (petition candidate)
      North American Clearing, Inc. Laguna Hills, CA


      1 Mr. Cherrier has been elected to serve the remaining year of the term of Stephen R. Oliver, who resigned from the District Committee.

      2 Mr. Smith has been elected to serve the remaining year of the term of Erick R. Holt, who resigned from the District Committee.

      3 Mr. Jampol has been elected to serve the remaining year of the term of Jeffrey T. Letzler, who resigned from the District Committee.

    • 06-65 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory

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      GUIDANCE

      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 the annual Firm Element Advisory, a guide for firms to use when developing their continuing education Firm Element training plans. The Council suggests that firms use the Firm Element Advisory as part of the Firm Element Needs Analysis to help identify relevant training topics for all covered persons, including supervisors. Among the subjects you should consider for inclusion in Firm Element training are new rules and regulations, such as supervisory control amendments, business continuity plans and any new products or services the firm plans to offer.

      This year the Firm Element Advisory has been redesigned to identify each topic briefly and then provide links to relevant documents issued on the specified subjects. Although the Firm Element Advisory is now designed for use on the Web, the document can be printed. The Firm Element Advisory can now be directly accessed at www.securitiescep.com/TOC/publications/FEA2006.pdf, or by going to the Council's Web site at www.securitiescep.com. Starting in 2007, the Council plans to update the Firm Element Advisory twice a year to provide firms with updated material.

      In addition to the Firm Element Advisory material, the Council's Firm Element Organizer is a resource that can assist with developing Firm Element training plans. The Organizer is an easy-to-use software application that enables the search of an extensive database of regulatory resources related to specific investment products or services. The results of a search can then be edited into a document that may assist in developing a Firm Element training plan. The Firm Element Organizer also may be found on the Council's Web site.

      Questions/Further Information

      Questions concerning this Notice may be directed to Joseph McDonald, Associate Director, Testing and Continuing Education, at (240) 386-5065.

    • 06-64 SEC Approves Amendments to Rule 10308 Regarding the Classification of Arbitrators; Effective Date: January 15, 2007

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      GUIDANCE

      Dispute Resolution

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance Arbitration
      Arbitrators
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission has approved amendments to the arbitrator classification criteria set forth in Rule 10308 of the NASD Code of Arbitration Procedure (Code) to ensure that individuals with significant ties to the securities industry may not serve as public arbitrators in NASD arbitrations.1

      The text of the amendments is set forth in Attachment A. The amendments will be effective on January 15, 2007.

      Questions/Further Information

      Questions regarding this Notice may be directed to Barbara L. Brady, Vice President and Director of Neutral Management, at (212) 858-4352 or via email at barbara.brady@nasd.com; or John D. Nachmann, Counsel, at (202) 728-8273 or via email at john.nachmann@nasd.com.

      Discussion

      The Code classifies arbitrators as public or non-public. When investors have a dispute with broker-dealer firms or their associated persons in NASD's arbitration forum, the investors are entitled to have their cases heard by an arbitration panel consisting of either a single public arbitrator or a majority public panel consisting of two public arbitrators and one non-public arbitrator, depending on the amount of the claim.2

      Under Rule 10308(a)(4) of the Code, a person is classified as a non-public arbitrator if he or she:

      (A) is, or within the past 5 years, was:
      (i) associated with a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer);
      (ii) registered under the Commodity Exchange Act;
      (iii) a member of a commodities exchange or a registered futures association; or
      (iv) associated with a person or firm registered under the Commodity Exchange Act;
      (B) is retired from, or spent a substantial part of a career, engaging in any of the business activities listed in subparagraph (4)(A);
      (C) is an attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities listed in subparagraph (4)(A); or
      (D) is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.

      The criteria for public arbitrators are set forth in Rule 10308(a)(5) of the Code. Under this rule, an individual will be classified as a public arbitrator if he or she is qualified to serve as an arbitrator and:
      (i) is not engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D);
      (ii) was not engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D) for a total of 20 years or more;
      (iii) is not an investment adviser;
      (iv) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past 2 years from any persons or entities listed in paragraph (a)(4)(A); and
      (v) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D).

      In order to ensure that individuals with significant ties to the securities industry may not serve as public arbitrators in NASD arbitrations, NASD has amended the definition of public arbitrator in Rule 10308(a)(5) to exclude individuals who work for, or are officers or directors of, an entity that controls, is controlled by, or is under common control with, a partnership, corporation, or other organization that is engaged in the securities business.3 The revision to the rule also applies to individuals who have a spouse or immediate family member who works for, or is an officer or director of, an entity that is in such a control relationship with a partnership, corporation, or other organization that is engaged in the securities business.

      Lastly, NASD has revised the definition of non-public arbitrator to clarify that persons who are registered through a broker-dealer may not be classified as public arbitrators. As noted above, arbitrators who are associated with a broker or dealer are considered non-public. In the financial services industry, it is not uncommon for a person to be employed by one company (such as a bank or insurance company) and to be registered to sell securities through another company (such as an affiliated broker-dealer). NASD believes that there may be some uncertainty among arbitrators who work for entities in a control relationship with a broker-dealer as to whether they are associated with a broker-dealer for purposes of Rule 10308, even though they hold licenses through the broker-dealer. Since the definition of "person associated with a member" in the NASD By-Laws includes persons who are registered with a broker-dealer, regardless of their status as employees, such persons should be considered non-public arbitrators. Therefore, NASD has amended the definition of non-public arbitrator in Rule 10308(a)(4)(A)(i) to clarify this issue.

      Updating of Arbitrator Disclosures

      NASD will distribute a survey to all arbitrators on the active roster, asking them to update their disclosures in light of the above amendments to the arbitrator classification rules. Arbitrators who do not respond by the deadline will be made inactive for future appointments until they have responded, and those who do not respond within a reasonable period thereafter may be removed permanently. After the surveys are returned and reviewed, arbitrators' disclosure records will be updated to reflect their proper classification under the amendments. Parties should be aware that the arbitrator classification amendments apply only to arbitrators appointed on or after the effective date; therefore, arbitrators who are already serving on panels may continue to serve even if their classification would otherwise change due to the amendments. These arbitrators will retain their former classification for purposes of these ongoing cases. This will avoid disruption and allow parties to continue with the arbitrators they have selected to hear their cases. Therefore, challenges for cause based solely on an arbitrator's reclassification will not be granted. Challenges for cause still may be made based upon the disqualification and removal criteria in Rules 10308(d) and 10312(d).

      Effective Date

      The amendments described in this Notice will be effective on January 15, 2007, and will apply to arbitrator lists sent out pursuant to Rule 10308(b)(5) on or after January 15, 2007, and to arbitrators appointed on or after January 15, 2007.


      1. Securities Exchange Act Release No. 54607 (October 16, 2006), 71 Federal Register 62026 (October 20, 2006) (File No. SR-NASD-2005-094).

      2. See Rules 10302 and 10308. For intra-industry disputes (not involving any parties who are investors) the panel composition is governed by Rule 10202. Depending on the nature of the dispute, intra-industry panels may consist of all public arbitrators, all non-public arbitrators or a majority of public arbitrators. The arbitrator classification provisions of Rule 10308 apply to all types of panels.

      3. For purposes of this rule, the term "control" has the same meaning that it has for purposes of Form BD, which broker-dealers use to register with NASD and to make periodic updates. Specifically, control is defined as "[t]he power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that (i) is a director, general partner or officer exercising executive responsibility (or having similar status or functions); (ii) directly or indirectly has the right to vote 25% or more of a class of a voting security or has the power to sell or direct the sale of 25% or more of a class of voting securities; or (iii) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that company." See Uniform Application for Broker-Dealer Registration (Form BD).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      Code of Arbitration Procedure

      * * * * *

      Rule 10308. Selection of Arbitrators

      (a) Definitions
      (1)–(3) No change
      (4) "non-public arbitrator"

      The term "non-public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and:
      (A) is, or within the past 5 years, was:
      (i) associated with, including registered through, a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer);
      (ii) registered under the Commodity Exchange Act;
      (iii) a member of a commodities exchange or a registered futures association; or
      (iv) associated with a person or firm registered under the Commodity Exchange Act;
      (B) is retired from, or spent a substantial part of a career, engaging in any of the business activities listed in subparagraph (4)(A);
      (C) is an attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities listed in subparagraph (4)(A); or
      (D) is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.
      (5) "public arbitrator"
      (A) The term "public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and:
      (i) is not engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D);
      (ii) was not engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D) for a total of 20 years or more;
      (iii) is not an investment adviser;
      (iv) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past 2 years from any persons or entities listed in paragraph (a)(4)(A); [and]
      (v) is not employed by, and is not the spouse or an immediate family member of a person who is employed by, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business;
      (vi) is not a director or officer of, and is not the spouse or an immediate family member of a person who is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business; and
      (vii) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D).
      (B) No change
      (6)–(7) No change
      (b)–(f) No change

      * * * * *

    • 06-63 Amendments to Registration Rules Extending the Date by which Eligible Registrants must Complete Continuing Education Program before Engaging in Security Futures Activities; Effective Date: November 15, 2006

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      GUIDANCE

      Security Futures Rules

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Registered Principals
      Senior Management
      Continuing Education
      Rule 1022 (Categories of Principal
      Registration)
      Rule 1032 (Categories of
      Representative Registration)
      Security Futures

      Executive Summary

      On October 16, 2006, NASD filed with the Securities and Exchange Commission (SEC) for immediate effectiveness a rule change to amend Rule 1022 (Categories of Principal Registration) and Rule 1032 (Categories of Representative Registration) to extend to December 31, 2009 the date by which all eligible registrants must complete a firm-element continuing education program to qualify to engage in security futures activities.1 Rules 1022 and 1032, as amended, are set forth in Attachment A of this Notice. The implementation date of the amendments is November 15, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Patricia Albrecht, Assistant General Counsel, Office of General Counsel, at (202) 728-8026.

      Discussion

      In 2003, NASD modified the following registration categories to include the activities of engaging in and supervising securities futures: (1) Registered Options and Security Futures Principal (Series 4); (2) Limited Principal—General Securities Sales Supervisor (Series 9/10); (3) General Securities Representative (Series 7); and (4) Limited Representative—Options and Security Futures (Series 42). NASD also required that persons registered or becoming registered in these categories complete a firm-element continuing education requirement addressing security futures before conducting any security futures business.

      NASD instituted this continuing education requirement to ensure that registered personnel, who may not be familiar with the risks, trading characteristics, terms and nomenclature of these products, or the fact that they are subject to the joint jurisdiction of the SEC and CFTC, receive appropriate training. The rules specified, however, that any person that intends to qualify to engage in security futures activities by completing a firm-element continuing education program must complete such program by December 31, 2006.

      As noted in Notice to Members 02-73 (November 2002), NASD initially considered creating new, or revising existing, qualification examinations for the registration categories listed above that would qualify a registrant to engage in security futures activities. The December 31, 2006 date was intended to be a cutoff date for existing registrants, who were qualified in a registration category for which a qualification examination was going to be created or revised, to complete the firm-element continuing registration requirement in lieu of taking the new or revised qualification examination.

      However, there are no plans at present to create new or revised qualification examinations that would address security futures, and NASD believes that the continuing education requirement has been an effective method of ensuring that registered personnel are properly informed about security futures products. Accordingly, NASD has extended to December 31, 2009 the date by which all eligible registrants must complete a firm-element continuing education program to qualify to engage in security futures activities. Firms should be aware, however, that irrespective of the cutoff date, no eligible registrant may engage in any security futures business for which registration is required before completing the mandated firm-element continuing education requirement. The December 31, 2009 date serves merely as a cutoff date for eligible registrants to complete firm-element continuing education as an alternative to taking any new or revised qualification examinations addressing security futures that may be developed in the future.

      The implementation date of the amendment is November 15, 2006.


      1 See Exchange Act Rel. No. 54617 (Oct. 16, 2006), 71 FR 62498 (Oct. 25, 2006) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Extend the Date by Which Eligible Registrants Must Complete Firm- Element Continuing Education to Qualify to Engage in a Securities Futures Business; SR-NASD-2006-118).


      ATTACHMENT A

      New text is underlined; deletions are in brackets.

      * * * * *

      1022. Categories of Principal Registration

      (a) through (e) No change.
      (f) Limited Principal-Registered Options and Security Futures
      (1) through (4) No change.
      (5) Any person who is registered with NASD as a Registered Options and Security Futures Principal, or who becomes registered as a Registered Options and Security Futures Principal before a revised examination that includes security futures products is offered, must complete a firm-element continuing education program that addresses security futures and a principal's responsibilities for security futures before such person can supervise security futures activities. After a revised examination that includes security futures products is offered, a person associated with a member who passes such a revised Qualification Examination for Registered Options and Security Futures Principal (or any other examination covering security futures that is acceptable to NASD) is not required to complete a firmelement continuing education program that addresses security futures and a principal's responsibilities for security futures to supervise activities in such products, except as otherwise required by Rule 1120 generally or by the member firm. Any Registered Options and Securities Futures Principal who intends to qualify to supervise security futures activities by completing a firm-element continuing education program must complete such a program by December 31, 2009[6]. Any Registered Options and Securities Futures Principal who has not completed a firm-element continuing education program by that date will be required to pass an appropriate qualification examination covering security futures to supervise security futures activities.
      (g) Limited Principal-General Securities Sales Supervisor
      (1) through (2) No change.
      (3) Any person who is registered with NASD as a Limited Principal-General Securities Sales Supervisor, or who becomes registered as a Limited Principal-General Securities Sales Supervisor before a revised examination that includes security futures products is offered, must complete a firm-element continuing education program that addresses security futures and a principal's responsibilities for security futures before such person can supervise security futures activities. After a revised examination that includes security futures products is offered, a person associated with a member who passes such a revised Qualification Examination for Limited Principal-General Securities Sales Supervisor (or any other examination covering security futures that is acceptable to NASD) is not required to complete a firm-element continuing education program that addresses security futures and a principal's responsibilities for security futures to supervise such products, except as otherwise required by Rule 1120 generally or by the member firm. Any Limited Principal-General Securities Sales Supervisor who intends to qualify to supervise security futures activities by completing a firm-element continuing education program must complete such a program by December 31, 2009[6]. Any Limited Principal-General Security Sales Supervisor who has not completed a firm-element continuing education program by that date will be required to pass an appropriate qualification examination covering security futures to supervise security futures activities.
      (h) No change.

      * * * * *


      1032. Categories of Representative Registration

      (a) General Securities Representative
      (1) No change.
      (2) Except as provided in Rule 1031(c):
      (A) A person who is registered with the Association as a General Securities Representative, or who becomes registered as a General Securities Representative before a new examination that includes security futures is offered, must complete a firm-element continuing education program that addresses security futures products before such person can act as a General Securities Representative with regard to security futures products. After a new examination that includes security futures products is offered, a person associated with a member who passes such a new Qualification Examination for General Securities Representative (or any other examination covering security futures that is acceptable to NASD) is not required to complete a firm-element continuing education program that addresses security futures to act as a General Securities Representative with regard to such products, except as otherwise required by Rule 1120 generally or by the member firm. Once the new examination that includes security futures becomes available, persons seeking to become a General Securities Representative will be required to pass such new examination (or any other examination covering security futures that is acceptable to NASD) to act as a General Securities Representative with regard to security futures products. Only persons registered as a General Securities Representative prior to the time that the new examination is available ("eligible General Securities Representatives") will be eligible to use a firm-element continuing education program in lieu of passing the new examination or module to engage in a security futures business. Any eligible General Securities Representative who intends to qualify as a General Securities Representative with regard to security futures products by completing a firm-element continuing education program must complete such a program by December 31, 2009[6]. Any eligible General Securities Representative who has not completed a firm-element continuing education program by that date will be required to pass an appropriate qualification examination to engage in security futures activities.
      (B) through (D) No change.
      (3) No change.
      (b) through (c) No change.
      (d) Limited Representative-Options and Security Futures
      (1) through (3) No change.
      (4) Any person who is registered with the Association as a Limited Representative-Options and Security Futures, or who becomes registered as a Limited Representative-Options and Security Futures before a revised examination that includes security futures is offered, must complete a firm-element continuing education program that addresses security futures. After a revised examination that includes security futures products is offered, a person associated with a member who passes such a revised Qualification Examination for Limited Representative-Options and Security Futures (or any other examination covering security futures that is acceptable to NASD) is not required to complete a firm-element continuing education program that addresses security futures to act as a limited representative with regard to such products, except as otherwise required by Rule 1120 generally or by the member firm. Any Limited Representative-Options and Security Futures who intends to qualify as a Limited Representative with regard to security futures products by completing a firm-element continuing education program must complete such a program by December 31, 2009[6]. Any Limited Representative-Options and Security Futures who has not completed a firmelement continuing education program by that date will be required to pass an appropriate qualification examination covering security futures to engage in security futures activities.
      (e) through (h) No change.

      * * * * *

    • 06-62 SEC Approves Rule 3160 Regarding Submission and Reporting Requirements for Regulation T and SEC Rule 15c3-3 Extension of Time Requests; Effective Date: March 1, 2007

      View PDF File

      GUIDANCE

      Extension of Time Requests

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      Operations
      Extension of Time Requests
      NASD Rule 3160
      Regulation T
      SEC Rule 15c3-3

      Executive Summary

      On September 15, 2006, the Securities and Exchange Commission (SEC) approved new NASD Rule 3160 that requires: (1) all clearing firm members for which NASD is the designated examining authority (DEA) pursuant to Rule 17d-1 under the Securities Exchange Act of 1934 (Exchange Act) to submit to NASD requests for extensions of time under Regulation T promulgated by the Federal Reserve Board (FRB) or pursuant to Rule 15c3-3(n) under the Exchange Act; and (2) each clearing firm member for which NASD is the DEA to file a monthly report with NASD indicating all broker-dealers for which it clears that have overall ratios of requested extensions of time to total transactions for the month that exceed 2%.1

      In addition, this Notice serves to remind members that extensions of time under Regulation T and SEC Rule 15c3-3 may only be requested in exceptional circumstances.

      Rule 3160, as approved, is set forth in Attachment A of this Notice. The form of the new monthly report is set forth in Attachment B of this Notice. Rule 3160 will become effective on March 1, 2007.

      Questions/Further Information

      Questions regarding this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, Member Regulation, at (202) 728-8411; or Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, at (202) 974-2974.

      Background and Discussion

      Regulation T, issued by the Board of Governors of the FRB pursuant to the Exchange Act, among other things, governs the extension of credit to customers by brokerdealers for purchasing securities.2 Rule 15c3-3 under the Exchange Act, among other things, requires broker-dealers to promptly obtain and maintain physical possession or control of customer securities and designates periods of time within which brokerdealers must cure any deficiency by buying-in or otherwise obtaining possession or control of the securities.3

      Under SEC Rule 15c3-3(n), a self-regulatory organization (SRO) may extend certain specified periods to buy-in a security, for one or more limited periods commensurate with the circumstances, where the SRO: (1) is satisfied that the broker-dealer is acting in good faith in making the request; and (2) exceptional circumstances warrant such action.4 Regulation T has a similar standard to allow an extension of time for payment for purchases of securities.5

      Required Submissions of Requests for Extensions of Time to the DEA

      New Rule 3160(a) requires all clearing firm members for which NASD is the DEA to submit to NASD requests for extensions of time under Regulation T and SEC Rule 15c3- 3(n).6 Since the SRO designated as a member's DEA has responsibility for examining its members for compliance with applicable financial responsibility rules such as Regulation T and SEC Rule 15c3-3, requiring a member to submit extension requests to its DEA helps to ensure that the DEA receives complete extension information to assist it in performing this function. This information, among other things, can serve as an early indicator of operational or other difficulties.

      Monthly Reporting Requirement Regarding Introducing Firm Extensions

      New Rule 3160(b) requires each clearing firm member for which NASD is the DEA to file a monthly report with NASD indicating all broker-dealers for which it clears (i.e., introducing or correspondent firms) that have overall ratios of requests for extensions of time as contemplated by Sections 220.4(c) and 220.8(d) of Regulation T and SEC Rule 15c3-3(m)7 to total transactions for the month that exceed 2%.8 The monthly report will require clearing firms subject to Rule 3160(b) to identify, among other things: (1) the introducing broker-dealer's name; (2) the number of extension requests for the introducing broker-dealer for the calendar month; (3) the number of transactions for the introducing broker-dealer for the calendar month; and (4) the ratio of the number of extensions requested to total transactions.9 The monthly report must be submitted no later than five business days following the end of the preceding calendar month. For months when no introducing broker-dealer for which it clears exceeds the criteria, the clearing firm should submit a report indicating such.10

      NASD has a new template within its electronic filing platform to permit clearing firms to submit the required reports regarding their introducing firms' extension requests. The form is set forth in Attachment B of this Notice.

      Prohibition on Further Extensions when Thresholds are Exceeded

      NASD will monitor the number of Regulation T and SEC 15c3-3 extension requests for each firm to determine whether to impose prohibitions on further extensions of time. As further detailed below, NASD will prohibit further extensions of time for introducing firms that exceed a 3% ratio of the number of extension requests to total transactions for the month (notwithstanding the fact that the monthly report described above identifies introducing firms that have ratios of extensions of time requests to total transactions exceeding 2% for the month).11 In addition, NASD will prohibit further extensions of time for clearing firms that exceed a 1% ratio of extensions requested to transactions.12

      More specifically, to the extent that firms exceed the applicable threshold limits (1% for clearing firms and 3% for introducing firms), NASD will inform them that their ability to receive extensions for their customers will be stopped for a 90-day period if the firm does not reduce the number of subsequent requests below the applicable limit by the next reporting period.13 NASD, however, will not prohibit further extensions of time for any introducing firm that engages in less than 25 transactions for the reported month. NASD believes that these limits are appropriate in light of the standard set forth in Regulation T and SEC Rule 15c3-3 that extensions of time may only be granted under "exceptional circumstances." While NASD does not at this time contemplate any changes to the thresholds referenced herein, any future changes to these parameters will be published in a subsequent Notice to Members.

      Extension Requests Only in Exceptional Circumstances

      As noted above, extensions of time under Regulation T and SEC 15c3-3 may only be requested in exceptional circumstances. When a firm requests an extension of time due to a customer failing to pay for securities purchases or to deliver securities sold, a written record of the contact with the customer regarding the transaction and the basis for requesting an extension must be retained. Without such documentation, members will not be in a position to demonstrate why exceptional circumstances existed to warrant the extension request. Members are reminded that NASD may review this documentation during the course of NASD examinations or may periodically request this documentation.

      Customer Test Environment (CTE) Available

      The requirements referenced in this Notice will become effective on March 1, 2007. However, to assist members in preparing to submit this additional report, NASD will provide a Customer Test Environment (CTE) available for testing purposes beginning on February 1, 2007. Member may access CTE at https://regfilingtest.nasd.com. To access CTE, a user will need to have a Regulation Filing Applications user ID and password. Questions regarding CTE may be directed to (800) 321-NASD.

      Effective Date

      As noted, for purposes of implementation of Rule 3160(a), if any member requests an extension of time under Regulation T or SEC Rule 15c3-3 on or after March 1, 2007, the member must submit the request to NASD if it is the firm's DEA. For purposes of implementation of Rule 3160(b), the member will submit its first report to NASD by April 6, 2007 (i.e., within five business days of the end of the month) reflecting extensions to transactions for the month of March 2007; i.e., March 1, 2007 through March 31, 2007.


      1 See Exchange Act Release No. 54456 (September 15, 2006), 71 FR 56203 (September 26, 2006) (File No. SR-NASD-2006-064).

      2 12 CFR 220.4(c) and 220.8(d). Regulation T provides that a customer has one payment period (currently five business days) to submit payment for purchases of securities in a cash account or in a margin account.

      3 17 CFR 240.15c3-3.

      4 See SEC Rule 15c3-3(n), authorizing SROs to extend the periods of time to buy-in a security specified in SEC Rules 15c3-3(d)(2), (d)(3), (h), and (m).

      5 Under Regulation T, a firm's examining authority may grant an extension unless the examining authority believes that the brokerdealer is not acting in good faith or that the broker-dealer has not sufficiently determined that exceptional circumstances warrant such action.

      6 This is consistent with the New York Stock Exchange (NYSE) Rule 434 which requires each firm for which the NYSE is the DEA to submit extensions of time requests to the NYSE.

      7 SEC Rule 15c3-3(m) (Completion of Sell Orders on Behalf of Customers) requires that if a security sold long by a customer has not been delivered within 10 business days after the settlement date, the broker-dealer must either buy-in the customer or apply for and receive an extension from the SRO.

      8 Self-clearing firms that do not also clear for other firms are not required to file these reports because such firms do not have any introducing broker extension information to provide to NASD.

      9 Members should calculate the ratio by rounding to the nearest tenth of a percent. For example, if an introducing firm has 7 extension requests and 150 transactions in a calendar month, the ratio is equal to 4.7%.

      10 See the report form set forth in Attachment B. For a report when one or more introducing firm(s) exceeds the 2% threshold for the reported month, the member should answer "yes" to the Data to File field. The member should complete the required information only for an introducing firm(s) that exceeded the 2% extensions to transactions ratio for the reported month. For a report where no introducing firm exceeds the 2% threshold, the member must still submit the report, however, the firm would answer "no" in the Data to File field.

      11 The 2% threshold provides NASD with an "early warning" notice as to the concentrations of extension requests for introducing firms. NASD will use the information submitted by the clearing firms in the Rule 3160(b) monthly report to monitor introducing firms' compliance with the 3% threshold.

      12 NASD will calculate the 1% ratio using the number of extensions requested pursuant to Regulation T and SEC Rule 15c3-3(m) to transactions as reported by the clearing firm on field 4980 of the FOCUS II Report.

      13 For example, if an introducing firm exceeds the applicable threshold for the month of March 2007, its clearing firm would report that fact to NASD by April 6, 2007 (i.e., the date that is five business days after the end of the month). NASD would advise the introducing firm that it had exceeded its threshold and that it must reduce the number of subsequent requests below the limit by the end of April 2007. If the introducing firm exceeds the applicable threshold for the month of April 2007, its clearing firm would report that fact to NASD by May 7, 2007 (i.e., the date that is five business days after the end of the month) and the 90-day suspension would start at that time.


      ATTACHMENT A

      New language is underlined.

      * * * * *

      3160. Extensions of Time Under Regulation T and SEC Rule 15c3-3

      (a) When NASD is the designated examining authority pursuant to SEC Rule 17d-1 for a member that is a clearing firm, such member must submit requests for extensions of time as contemplated by Sections 220.4(c) and 220.8(d) of Regulation T of the Federal Reserve Board and SEC Rule 15c3-3(n) to NASD for approval, in such format as NASD may require.
      (b) Each member that is a clearing firm for which NASD is the designated examining authority is required to file a monthly report with NASD in such format as NASD may require, indicating all broker-dealers for which it clears that have overall ratios of requests for extensions of time as contemplated by Sections 220.4(c) and 220.8(d) of Regulation T of the Federal Reserve Board and SEC Rule 15c3-3(m) to total transactions for the month that exceed a percentage specified by NASD. The report is due to NASD within five (5) business days following the end of each reporting month.

      * * * * *

      ATTACHMENT B

    • 06-61 SEC Approves Rule 3170 Requiring Members to Electronically File with or Otherwise Submit to NASD Specified Regulatory Notices or Other Documents; Effective Date: December 6, 20061

      View PDF File

      ACTION REQUIRED

      Electronic Filing Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Electronic Filing Requirements
      NASD Rule 3170

      NASD Advises Firms That Certain Notices Required under the Securities Exchange Act of 1934 Must Be Filed Electronically Starting on January 1, 2007

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved the adoption of NASD Rule 3170 (Mandatory Electronic Filing Requirements), which gives NASD the authority to require firms to file or submit electronically any regulatory notice or other document that a member is required to file with (or otherwise submit to) NASD.2 This Notice also advises firms that NASD will require certain notices required under the Securities Exchange Act of 1934 to be filed electronically starting on January 1, 2007.

      The effective date of this rule change is December 6, 2006. Included with this Notice is Attachment A, the text of Rule 3170.

      Questions/Further Information

      Questions concerning this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411.

      Adoption of Mandatory Electronic Filing Requirements under Rule 3170

      Rule 3170 gives NASD authority to require firms to file or submit electronically any regulatory notice or other document that a member is required to file with (or otherwise submit to) NASD. NASD will issue a Notice to Members and other member communications, as appropriate, to advise its members as to each regulatory notice or document that members will be required to file with or submit in electronic format to NASD, and the date on which electronic filing or submission for these notices or documents will be required. NASD will also specify the electronic format to be used. These communications will advise members that as of the specified date, electronic filing or submission of the specified regulatory notices or documents will be mandatory, and NASD will no longer accept facsimile or other non-electronic transmissions of these notices or documents.3

      NASD Announces New Electronic Filing Requirements Starting on January 1, 2007

      Starting on January 1, 2007, NASD will require members to file electronically certain notices required to be filed under the Securities Exchange Act of 1934 (Exchange Act) via an electronic, Internet-based receiving and processing system (System), using templates developed by NASD for each notice.4 NASD members can access the templates for these regulatory notices on NASD's Web site. All members that file FOCUS reports will have access to the System, which will be available to members on NASD's Web site as part of NASD's infrastructure for Web-based regulatory form filing.5

      Starting on January 1, 2007, the following notices must be filed with NASD electronically:

      •  Rule 15c3-1(e) Withdrawals of equity capital
      •  Rule 15c3-3(i) Special Reserve Bank Account
      •  Rule 17a-4(f)(2)(i);
      Rule 17a-4(f)(3)(vii) Electronic storage media6
      •  Rule 17a-5(f)(4) Replacement of accountant7
      •  Rule 17a-11(b) Net capital deficiency
      •  Rule 17a-11(c)(1) Aggregate indebtedness is in excess of 1200 percent of net capital
      •  Rule 17a-11(c)(2) Net capital is less than 5 percent of aggregate debit items
      •  Rule 17a-11(c)(3) Net capital is less than 120 percent of required minimum dollar amount
      •  Rule 17a-11(d) Failure to make and keep current books and records
      •  Rule 17a-11(e) Material inadequacy in accounting systems, internal controls, or practices and procedures



      1 Although this rule change becomes effective on December 6, 2006, members are not required to file electronically the notices specified in this Notice until January 1, 2007.

      2 See Exchange Act Release No. 54654 (Oct. 26, 2006) (Order Approving Proposed Rule Change to Require Members to File Regulatory Notices with NASD Electronically; File No. SR-NASD-2006-060) (SEC Approval Order).

      3 The notices required by SEC Rules 17a-4(f)(2)(i) and 17a-4(f)(3)(vii) (electronic storage media) and the notice required by SEC Rule 17a-5(f)(4) (replacement of accountant) require PDF attachments. Accordingly, NASD's Web site will advise firms that do not have access to PDF to contact NASD staff for alternate filing instructions.

      4 Electronic filing of these notices with NASD does not affect requirements in those rules to file notices with the SEC or other securities regulatory agencies.

      5 Currently, NASD members use this infrastructure to report, among other things, data required by Rule 3070 (reporting requirements), Rule 3150 (reporting requirements for clearing firms), Rule 3360 (short interest reporting), FOCUS reports as required by Exchange Act Rule 17a-5, and extension requests under Regulation T of the Federal Reserve Board and Exchange Act Rule 15c3-3.

      6 See supra note 3.

      7 See supra note 3.


      ATTACHMENT A

      3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION

      * * * * *

      3170. Mandatory Electronic Filing Requirements

      Each member shall be required to file with NASD, or otherwise submit to NASD, in such electronic format as NASD may require, all regulatory notices or other documents required to be filed or otherwise submitted to NASD, as specified by NASD.

      * * * * *

    • 06-60 SEC Approves Amendments to Rule 2340 Requiring Customer Account Statements to Include a Statement Reminding Customers to Report Inaccuracies in Their Accounts in Writing; Effective Date: March 6, 2007

      NTM 06-60 is superseded by NTM 06-72

      View PDF File

      GUIDANCE

      Customer Account Statements

      SUGGESTED ROUTING

      KEY TOPICS

      Individual Investors
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Clearing Firms
      Customer Account Statements
      Introducing Firms
      NASD Rule 2340
      SIPA (Securities Investor
      Protection Act)
      SIPC (Securities Investor
      Protection Corporation)

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to Rule 2340 requiring customer account statements to include a statement advising customers to promptly report any inaccuracy or discrepancy in their account to the introducing firm and clearing firm (where these are different firms) and to re-confirm any oral communication in writing.1

      The effective date of this rule change is March 6, 2007. Included with this Notice is Attachment A, the text of amended Rule 2340.

      Questions/Further Information

      Questions concerning this Notice may be directed to Susan DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411.

      Background and Discussion

      In May 2001, the GAO (the U.S. General Accounting Office, now known as the Government Accountability Office) issued a report in which it made recommendations to the SEC and the Securities Investor Protection Corporation (SIPC) about ways to improve the information available to the public about SIPC and the Securities Investor Protection Act (SIPA). Among other things, the GAO recommended that self-regulatory organizations, such as NASD, explore actions to include information on periodic statements to inform investors that they should document any unauthorized trading in writing.2 This is important because, in the event a firm goes into SIPC liquidation, SIPC and the trustee generally will assume that the firm's records are accurate unless the customer is able to prove otherwise. In this regard, the SIPC Brochure states that if customers ever discover an error in a confirmation or account statement, they should immediately bring the error to the attention of the brokerage firm in writing and keep a copy of the writing.3 The SIPC Brochure also advises customers that if there is something wrong with the brokerage firms' records, the customer will have to prove that the records are inaccurate, or the SIPC trustee will assume that the firm's records are correct.

      Consistent with GAO's recommendation, NASD has amended Rule 2340 to require general securities firms to include in monthly account statements a statement advising each customer to report promptly any inaccuracy or discrepancy in that person's account to his or her brokerage firm. Where the customer's account receives services from both an introducing and clearing firm, the advisory should state that the reports should be made to both firms. This statement should also advise customers that any oral communications should be re-confirmed in writing to further protect the customer's rights, including rights under SIPA. Where account statements are delivered electronically, this statement may also be delivered electronically, provided it is on the same screen as the account statement, and the customer is not required to use a "click-through process" to bring it up on the screen. This statement will emphasize to customers the importance of promptly reporting, in writing, any suspected inaccuracy or discrepancy in their accounts and will remind customers of the importance of creating the written documentation that could prove helpful in the event of a SIPC liquidation to further evidence an assertion that the broker-dealer's records are incorrect.

      The statement required by Rule 2340, as amended, does not impose any limitation whatsoever on a customer's right to raise concerns regarding inaccuracies or discrepancies in his or her account at any time, either in writing or orally, and to bring these concerns to his or her brokerage and/or clearing firm or, in the course of a liquidation proceeding, to SIPC. Further, although firms that issue account statements are required by this amendment to advise customers to "promptly" report their concerns to their firm(s) and reconfirm any conversations with their firms in writing, Rule 2340 does not impose any time limit during which customers may report inaccuracies in their accounts.

      NASD reminds its members that an SEC interpretation requires them to include in each account statement the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding his or her account.4 In addition, the SEC, in approving the rule change, noted that it would be more beneficial for firms to include on account statements both introducing and clearing firm contact information sufficient to allow investors to timely report unauthorized transactions or other account discrepancies to both firms (if the firms are different).5


      1 See Exchange Act Release No. 54411 (Sept. 7, 2006) 71 FR 54105 (Sept. 13, 2006) (Order Granting Approval of Proposed Rule Change Relating to Rule 2340 Concerning Customer Account Statements; File No. SR-NASD-2004-171) (SEC Approval Order), as corrected by Exchange Act Release No. 54411A (Oct. 6, 2006).

      2 See Securities Investor Protection: Steps Needed to Better Disclose SIPC Policies to Investors (GAO-01-653).

      3 The SIPC Brochure, entitled Understanding the Securities Investor Protection Corporation, is published on SIPC's Web site. The Brochure provides a basic explanation of SIPC and SIPA and answers questions about SIPc liquidations.

      4 In its November 24, 1992 release announcing "Final Rule Amendments" to its net capital rule, the SEC's Division of Market Regulation stated that it has interpreted the net capital rule and SEC Rule 15c3-3 to require that, among other things, clearing firms must issue account statements directly to customers, and that each statement must contain the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding the customer's account. See Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992) (S7-28-89). See also supra note 1, 71 FR at 54107, footnote 24, as corrected by Exchange Act Release No. 54411A.

      5 See supra note 1, 71 FR at 54107. Firms that are members of both NASD and the New York Stock Exchange should also review the requirements of NYSE Rule 409 in the NYSE Interpretation Handbook at 4105, which states that "Statements of accounts to customers must clearly and prominently disclose on the front of the statement the identity of the introducing and carrying organization and their respective phone numbers for service[.]" The Handbook further advises that the phone number of the carrying organization may appear on the back of the statement, but if it does, it must be in "bold" or "highlighted" letters.


      ATTACHMENT A

      * * * * *

      2340. Customer Account Statements

      (a) General

      Each general securities member shall, with a frequency of not less than once every calendar quarter, send a statement of account ("account statement") containing a description of any securities positions, money balances, or account activity to each customer whose account had a security position, money balance, or account activity during the period since the last such statement was sent to the customer. In addition, each general securities member shall include in the account statement a statement that advises the customer to report promptly any inaccuracy or discrepancy in that person's account to his or her brokerage firm. (In cases where the customer's account is serviced by both an introducing and clearing firm, each general securities member must include in the advisory a reference that such reports be made to both firms.) Such statement also shall advise the customer that any oral communications should be re-confirmed in writing to further protect the customer's rights, including rights under the Securities Investor Protection Act (SIPA).
      (b) through (d) No change

      * * * * *

    • 06-59 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative Renewals for 2007; Payment Deadline: December 8, 2006

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      ACTION REQUIRED

      Broker-Dealer and Investment Adviser Renewals

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registered Representative
      Registration
      Senior Management
      IARDSM
      Maintenance Fees
      Renewals
      Registration
      Web CRD®

      Executive Summary

      The 2007 NASD Registration Renewal Program will begin on November 6, 2006, when online Preliminary Renewal Statements are made available to all firms on Web CRD/IARD. This annual program simplifies the registration renewal process for more than 27,000 broker-dealer (BD) and investment adviser (IA) firms, and over 800,000 registered representatives and investment adviser representatives with the payment of one amount to NASD by the published deadline. Beginning this year, other regulators may also choose to renew branch registrations via Web CRD/IARD.

      Firms should note the following key dates in the 2007 renewal process:

      October 23, 2006 Firms may start submitting post-dated Forms U5 via Web CRD.
      November 1, 2006 Firms may start submitting post-dated Form BDW and BR Closing/Withdrawal filings via Web CRD, as well as Forms ADV-W via IARD.

      * Post-dated filings that are submitted by 11 p.m., Eastern Time (ET) November 3, 2006 will not appear on the firm's Preliminary Renewal Statement. December 31, 2006 is the only date that can be used for a post-dated form filing.
      November 6, 2006 Preliminary Renewal Statements available on Web CRD
      December 8, 2006 Full payment of Preliminary Renewal Statements due
      January 2, 2007 Final Renewal Statements available

      Members are advised that failure to return full payment of their Preliminary Renewal Statement to NASD by the December 8, 2006 deadline could cause a member to become ineligible to do business in the jurisdictions effective January 1, 2007.

      In addition to this Notice to Members (NTM or Notice), member firms should review instructions posted on the NASD Web site (www.nasd.com/renewals), especially the 2007 Renewal Program Bulletin, the Investment Adviser Web site (if applicable) at www.iard.com/renewals.asp for the IARD Renewals Bulletin, and any mailed information to ensure continued eligibility to do business as of January 1, 2007. Any renewal processing changes, subsequent to the publishing of this Notice, will be provided to you in a Special Notice.

      Questions/Further Information

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

      Preliminary Renewal Statements

      Beginning November 6, 2006, Preliminary Renewal Statements will be available for viewing and printing on Web CRD. The statements will include the following fees: Web CRD system processing fees; NASD branch office fees; NASD branch renewal processing fees; New York Stock Exchange (NYSE), American Stock Exchange (Amex), Chicago Board Options Exchange (CBOE), International Securities Exchange (ISE), Pacific Exchange (PCX), Philadelphia Stock Exchange (PHLX) and NASDAQ (NQX) maintenance fees; state agent renewal fees; state broker-dealer renewal fees; state BD branch fees and, if applicable, investment adviser firm and representative renewal fees, and investment adviser branch renewal fees. NASD must receive full payment of the Preliminary Renewal Statement no later than December 8, 2006.

      If payment is not received by the December 8, 2006, payment due date, the firm will be assessed a Renewal Payment Late Fee. This late fee will be included as part of the firm's Final Renewal Statement and will be calculated as follows: 10 percent of a member firm's cumulative final renewal assessment or $100, whichever is greater, with a cap of $5,000. Please see NTM 02-48 for details. Firms also risk failing to renew if fees are not received in time.

      Fees

      A fee of $30 will be assessed for each person who renews his/her registration with any regulator through Web CRD. Firms can access a listing of agents for whom their firm will be assessed by requesting the Renewals—Firm Renewal Roster.

      For 2007, any investment adviser fees that are assessed for state-registered investment adviser firms and investment adviser representatives (RA) by the North American Securities Administrators Association (NASAA) that renew through the IARD Program will be also be included on the Preliminary Renewal Statement.

      The NASD branch renewal processing fee of $75 per branch, based on the number of active NASD branches as of December 31, 2006, will be assessed. One branch office assessment fee will be waived per firm.

      The NASD branch renewal processing fee of $20 per branch, based on the number of active NASD branches as of December 31, 2006 will be assessed. One branch renewal processing fee will be waived per firm.

      NASD personnel assessment fees are not assessed through the annual Renewal Program. NASD will mail all NASD member firms a separate billing for this fee during the first quarter of 2007. Firms can access a listing of agents for whom the firm will be assessed the Personnel Assessment Fee by requesting the Renewals—Firm Renewal Roster.

      Renewal fees for NYSE, Amex, CBOE, PCX, ISE, PHLX, NQX and state registrations are also assessed in the Preliminary Renewal Statement on Web CRD. NYSE, Amex, CBOE, PCX, ISE, PHLX and NQX maintenance fees and state renewal fees collected by NASD for firms that are registered with those exchanges and jurisdictions, as well as NASD renewal fees, are based on the number of NASD, NYSE, Amex, CBOE, PCX, ISE, NQX and PHLX and state-registered personnel employed by the member firm.

      Branch office renewal fees will also be collected for those regulators who choose to renew branches registered with them via Web CRD/IARD.

      Some participating states may require steps beyond the payment of renewal fees to NASD to complete the broker-dealer or investment adviser renewal process. Firms should contact each jurisdiction directly for further information on state renewal requirements. A regulator directory can be found at www.nasaa.org/QuickLinks/ ContactYourRegulator.cfm.

      For detailed information regarding 2007 investment adviser renewals, see the investment adviser Web site, www.iard.com. A matrix of investment adviser renewal fees for states that participate in the 2007 IARD Investment Adviser Renewal Program is posted at www.iard.com/pdf/rep_fee_sch.pdf.

      Renewal Payment

      Firms have four (4) payment methods available to pay 2007 renewal fees:

      1. Web E-Pay
      2. Check
      3. Wire transfer
      4. Request a transfer of the entire amount from the firm's daily to renewal account

      Note: The entire amount of the payment must be available.

      Web E-Pay Instructions:

      The Web E-Pay application is accessible from both the Preliminary and Final Renewal Statements and the NASD (www.nasd.com/crd) or IARD (www.iard.com) Web sites and allows firms to make an ACH payment from a designated bank account to their Web CRD/IARD renewal Account. Please note that in order for funds to be posted to your firm's renewal account by December 8, 2006, payment must be submitted electronically, no later than 8:00 p.m. ET on December 6, 2006.

      Check Instructions:

      The check should be drawn on the member firm's account, with the firm's CRD number included on the front of the check, along with "Renewal" in the memo line.

      Firms should mail their renewal payment, along with a print-out of the first page of their online renewal statement, directly to:

      U.S. Mail
      NASD, CRD-IARD
      P.O. Box 7777-W8705
      Philadelphia, PA 19175-8705

      (Note: This box will not accept courier or overnight deliveries.)

      or

      Express/Overnight Delivery
      NASD, CRD-IARD
      W8705
      701 Market Street 199-3490
      Philadelphia, PA 19106
      Telephone: (301) 869-6699

      Member firms should use the blue, pre-addressed renewal payment envelope that they are scheduled to receive in early November, or should use the full address, as noted in this NTM, to ensure prompt processing.

      Please note: The addresses for renewal payments are different than the addresses for funding your firm's CRD or IARD Daily Account.

      To ensure prompt processing of your renewal payment check:

      •  Include a printout of the first page of your Preliminary Renewal Statement with payment.
      •  Do not include any other forms or fee submissions.
      •  Write your firm's CRD number and "Renewal" on the check memo line.
      •  Be sure to send your payment either in the pre-addressed renewal payment envelope that will be mailed to you or write the address on the envelope exactly as noted in this NTM.

      Wire Payment Instructions:

      Firms may wire full payment of the Preliminary Renewal Statement by requesting their bank to initiate the wire transfer to: "Mellon Financial, Philadelphia, PA." Firms should provide their bank the following information:

      Transfer funds to: Mellon Financial, Philadelphia, PA
      ABA Number: 031 000 037
      Beneficiary: NASD
      NASD Account Number: 8-234-353
      Reference Number: Firm CRD number and "Renewal"

      To ensure prompt processing of a renewal payment by wire transfer:

      •   Remember to inform the bank that the funds are to be credited to the NASD bank account.
      •   Provide the firm's CRD number and "Renewal" as reference only.
      •   Record the confirmation number of the wire transfer provided by the bank.

      Transfer of Funds Instructions:

      Firms may also call the NASD Gateway Call Center at (301) 869-6699 and request that a transfer of the full renewal balance be transferred from the firm's daily account to its renewal account.

      Note: The firm must have the available funds in order for the transfer to be processed.

      Members are advised that failure to return full payment of their Preliminary Renewal Statement to NASD by the December 8, 2006 deadline could cause a member to become ineligible to do business in the jurisdictions effective January 1, 2007.

      Renewal Reports

      Beginning November 6, 2006, the renewal reports are available to request, print and/or download via Web CRD. Three reports are available for reconciliation with the Preliminary Renewal Statement and will also be available as downloads:

      •  Firm Renewal Report—applicable to broker-dealer and investment adviser firms. This report lists individuals included in the 2007 Renewal Program processing and includes billing codes if they have been supplied by the firm.
      •   Branches Renewal Report—applicable to broker-dealer and investment adviser firms. This report lists each branch registered with NASD and/or with any other regulators who renew branches registered with them through Web CRD/IARD and for which the firm is being assessed a fee. Firms should use this report to reconcile their records for renewal purposes.
      •  Approved AG Reg Without NASD Approval Report—applicable to NASD members. This report contains all individuals who are not registered with NASD but are registered with one or more jurisdictions. The report should be used throughout the year, including during the annual Renewal Program, as an aid for firms to reconcile personnel registrations. Firms should request this report as soon as possible to determine if any NASD registrations need to be requested or jurisdictions terminated prior to renewal processing for the Preliminary Renewal Statement available on November 6. Note, any post-dated termination filings submitted by 11 p.m., ET, on November 3, 2006, will not appear on the firm's Preliminary Renewal Statement.

      Filing Form U5

      Firms may begin submitting post-dated U5 filings on October 23, 2006. If Forms U5 (either full or partial) are filed electronically via Web CRD by 11 p.m., ET, on November 3, 2006, for agents (AGs)/investment adviser representatives (RAs) terminating in one or more jurisdiction affiliations, those individuals' renewal fees will not be included on the Preliminary Renewal Statement.

      The deadline for electronic filing of Form U5 for firms that want to terminate an agent affiliation before year-end 2006 is 6 p.m., ET, on December 20, 2006. Firms may file both partial and full Forms U5 with a post-dated termination date of December 31, 2006. This is the only date that can be used for post-dated Forms U5. The deadline for submission of all EFT (electronic file transfer) filings is 2 p.m., ET, December 20, 2006.

      Post-Dated Form Filings

      This functionality allows firms to file a termination form with a termination date of December 31, 2006. If a Form U5, BDW, BR Closing/Withdrawal or ADV-W indicates a termination date of December 31, 2006, an agent (AG), broker-dealer and/or investment adviser (firm) and investment adviser representative (RA) may continue doing business in the jurisdiction until the end of the calendar year without being assessed 2007 renewal fees. December 31, 2006 is the only date that can be used for a post-dated form filing.

      Firms can begin electronically filing post-dated Forms U5 via Web CRD on October 23, 2006. Firms can begin electronically filing post-dated Forms BDW, ADV-W and BR Closing/Withdrawal via CRD/IARD on November 1, 2006. Firms that submit post-dated termination filings by 11 p.m., ET, on November 3, 2006, will not be assessed renewal fees for the terminated registrations on their Preliminary Renewal Statements. Firms that submit post-dated termination filings on, or after, November 6, 2006, will not be assessed renewal fees for the terminated jurisdictions on the Final Renewal Statement in January 2007. Those firms should see a credit balance on their Final Renewal Statements if the firm has not requested additional registrations during that time period to offset the credit balance.

      Firms should query individual, branch and/or firm registrations after a termination filing has been submitted to ensure that electronic Forms U5, BDW, BR Closing/Withdrawal and ADV-W are filed by the renewal filing deadline date of 6 p.m., ET, on December 20, 2006.

      Firms should exercise care when submitting post-dated Forms U5, BDW, BR Closing/Withdrawal and ADV-W. NASD will systematically process these forms as they are submitted and cannot withdraw a post-dated termination once submitted and processed. A firm that files a post-dated termination in error will have to file a new Form U4, BD Amendment, Form BR or Form ADV when Web CRD/IARD resume filing processing on January 2, 2007. New registration fees would be assessed as a result.

      Filing Form 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 file either a full or partial Form BDW by 11 p.m. ET November 3, 2006 will avoid the assessment of the applicable renewal fees on their Preliminary Renewal Statement, provided that the regulator is a CRD Phase II participant. Currently, there are only 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 2006 is 6 p.m. ET, December 20, 2006. This same date applies to the filing of Forms BDW with regulators that are not Phase II participants.

      Filing Forms ADV to Cancel Notice Filings or Forms ADV-W to Terminate Registrations

      Firms that file either a Form ADV Amendment, unmarking a state (generating the status of "Removal Requested at End of Year") or a full or partial Form ADV-W by 11 p.m., ET, November 3, 2006, will avoid the assessment of the applicable renewal fees on their 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 2006 is 6 p.m. ET, December 20, 2006.

      Removing Open Registrations

      Throughout the year, firms have access to the "Approved AG Reg Without NASD Approval" report via Web CRD. This report identifies agents whose NASD registrations are either terminated or have been changed to a "purged" status due to the existence of a deficient condition (i.e., exams or fingerprints) but still maintain an approved registration with a state. Member firms should use this report to terminate obsolete state registrations through the submission of Forms U5 or reinstate the NASD licenses through the filing of a Form U4 Amendment. This report should aid firms in the reconciliation of personnel registrations prior to year's end and should be requested as soon as possible. Requesting this report will enable firms to identify individuals who can be terminated by November 3, 2006, to avoid being charged for those individuals on their Preliminary Renewal Statement. The Approved AG Reg Without NASD Approval report will also advise a firm if there are no agents at the firm within this category.

      Final Renewal Statements

      Beginning January 2, 2007, NASD will make available Final Renewal Statements via Web CRD and IARD. These statements will reflect the final status of broker-dealer, registered representative (AG), investment adviser firm and investment adviser representative (RA) registrations and/or notice filings as of December 31, 2006. Any adjustments in fees owed as a result of registration terminations, approvals, notice filings or transitions subsequent to the processing/posting of the Preliminary Renewal Statement will be made in the Final Renewal Statement on Web CRD and IARD.

      •   If a firm has more agents, branch offices or jurisdictions registered and/or notice filed at year-end than it did when the Preliminary Renewal Statement was generated, additional renewal 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. Please note that overpayments will be systemically transferred to firms' daily accounts as of January 2, 2007. Firms that have a credit (sufficient) balance in their daily account may request a refund by faxing or mailing a written request signed by the designated signatory to the Finance Department, 9509 Key West Avenue, Rockville, MD 20850, (301) 869-6699, Fax number: (240) 386-5344. The request should include a printout of the firm's credit balance as reflected on Web CRD.

      On or after January 2, 2007, NASD member firms and "joint" firms should access the Web CRD Reports function for the Firm Renewal report, which will list all renewed personnel with the NASD, NYSE, Amex, CBOE, PCX, ISE, PHLX, NQX and each jurisdiction. Agents and investment adviser representatives whose registrations are "approved" in any of these jurisdictions during November and December will be included in this roster. Registrations that are "pending approval" or are "deficient" at year's end will not be included in the 2007 Renewal Program. Firms will also be able to request the Branches Renewal report that lists all branches for which they have been assessed renewal fees. Versions of these reports will also be available for download.

      Firms have until February 2, 2007, to report any discrepancies on the renewal reports. This is also the deadline for receipt of final payment. Specific information and instructions concerning the Final Renewal Statement and renewal reports will be available in a January 2007 NTM.

    • 06-58 SEC Approves Amendments to Rule 2320(a) Regarding Best Execution and New Interpretive Material 2320; Effective Date: November 8, 2006

      View PDF File

      GUIDANCE

      Best Execution

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading and Market Making
      Best Execution
      Interpretive Material 2320
      Rule 2320

      Executive Summary

      On August 21, 2006, the Securities and Exchange Commission (SEC) approved amendments to Rule 2320(a), the Best Execution Rule, to require that a "recipient member," as that term is defined herein, provide best execution to all transactions for or with a customer of another broker-dealer. NASD also is amending the reasonable diligence factors in Rule 2320(a) and deleting the term "interdealer" in order to modernize the text of the Best Execution Rule. Further, NASD is adopting new Interpretive Material 2320 to codify interpretive guidance concerning the applicability of the Best Execution Rule.1

      The rules, as amended, are set forth in Attachment A. The amendments become effective on November 8, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to Kathleen A. O'Mara, Associate General Counsel, Office of General Counsel at (202) 728-8071; and Peter D. Santori, Chief Counsel, Market Regulation, Regulatory Policy & Oversight, at (240) 386-5098.

      Background and Discussion

      The Best Execution Rule currently requires a member, in any transaction for or with a customer, to use reasonable diligence to ascertain the best inter-dealer market for a security and to buy or sell in such a market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. NASD has received many questions regarding the application of the term "customer" in the context of best execution. Rule 0120(g) defines "customer" to exclude a broker or dealer, unless the context requires otherwise. For example, prior to these amendments, if a firm that received an order from a customer ("originating broker-dealer") and routed the order to a member firm ("recipient member") and the recipient member executed the order in a manner inconsistent with the Best Execution Rule, the recipient member could have argued that it had not violated the Best Execution Rule because the transaction was not "for or with a customer," but rather for or with a broker-dealer. NASD believes that not applying the Best Execution Rule to recipient members that receive customer orders from other broker-dealers is contrary to the interests of the investing public as well as the general intent of the Best Execution Rule.

      As amended, Rule 2320(a) now requires that a recipient member provide best execution to all transactions for or with a customer of another broker-dealer. Specifically, NASD has amended the Best Execution Rule to state that the rule governs "any transaction for or with a customer or a customer of another broker-dealer." NASD believes this change will better ensure that customer orders receive equivalent best execution protections, irrespective of whether a customer order is executed by the originating broker-dealer or routed to a recipient member. It is important to note, however, that this expansion of the application of the Best Execution Rule to recipient members does not change the obligations of an originating broker-dealer member to examine regularly and rigorously execution quality likely to be obtained from different markets trading a security.2

      NASD also has modernized the text of the Best Execution Rule. Rule 2320(a) currently requires a member to ascertain the best "inter-dealer" market for a security and to buy or sell in such a market so that the price to the customer is as favorable as possible under the prevailing market conditions. As a result of changes in market structure, NASD has deleted the term "inter-dealer" from Rule 2320(a). This change clarifies that member requirements to ascertain the best market for a security are not limited to "inter-dealer" markets, but may include all markets in which a security is traded.

      Additionally, NASD has amended the reasonable diligence factors to reflect current market structure. To that end, NASD has (1) replaced the diligence factor of "the number of primary markets checked" with "the number of markets checked"; (2) replaced the diligence factor of "location and accessibility to the customer's broker-dealer of primary markets and quotation sources" with "accessibility of the quotation"; and (3) added an additional diligence factor that that takes into account "the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member" to reflect the importance of this consideration in assessing best execution.

      Interpretive Material 2320

      NASD has adopted new Interpretive Material 2320 (IM-2320) to codify interpretive guidance relating to Rule 2320(a). First, IM-2320 provides that, for purposes of Rule 2320, the term "market" or "markets" should be interpreted broadly to include a variety of different venues, including, but not limited to, market centers that are trading a particular security. Such an expansive interpretation is for the purposes of both informing broker-dealers as to the scope of venues that must be considered in the furtherance of their best execution obligations and promoting fair competition among broker-dealers, exchange markets and markets other than exchange markets, as well as any other trading venues that may emerge. In sum, the purpose of this change is to signal that no trading venues have less relevance than others in the course of best execution.

      IM-2320 also clarifies that a member's duty to provide best execution in any transaction "for or with a customer of another broker-dealer" does not apply in instances when another broker-dealer is simply executing a customer order against the member's quote. The duty to provide best execution to customer orders received from other broker-dealers arises only when an order is routed from the originating broker-dealer to the recipient member for the purpose of order handling and execution. The duty of best execution does not apply in instances when another broker-dealer is simply executing a customer order against a member's quote; that circumstance is distinct from those circumstances in which a recipient member is accepting order flow from an originating broker-dealer for the purpose of facilitating the handling and execution of such orders. The duty to provide best execution to customer orders received from other broker-dealers arises only when an order is routed from the broker-dealer to the member for the purpose of order handling and execution. This duty is subject to the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member (for example, a recipient member is not responsible for complying with the terms and conditions of an order that are incorrectly communicated by the originating broker-dealer either because such order contains the wrong terms and conditions or fails to include certain terms and conditions).

      Finally, members should understand that, in the context of debt, the term "quotation" in the reasonable diligence factor in IM-2320 as to the "accessibility of the quotations" will be considered by NASD as referring to either dollar (or other currency) pricing or yield pricing.3


      1 See Securities Exchange Act Release No. 54339 (August 21, 2006), 71FR 50959 (August 28, 2006) (Order Approving Proposed Rule Change and Amendment Nos. 1-5; File No. SR-NASD- 2004-026).

      2 See Notice to Members 01-22 (April 2001), which reiterates the best execution obligations that apply to member firms when they receive, handle, route for execution, or execute customer orders, and that also provides guidance to members concerning a broker-dealer's obligation, as articulated on numerous occasions by the SEC, to examine regularly and rigorously execution quality likely to be obtained from the different markets or market makers trading a security.

      3 NASD notes, however, that accessibility is only one of the non-exhaustive reasonable diligence factors set out in Rule 2320. In the absence of accessibility, members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders.


      ATTACHMENT A

      New language is underlined; deleted language is in brackets.

      2320. Best Execution and Interpositioning

      (a) In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best [inter-dealer] market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Among the factors that will be considered in determining whether a member has used "reasonable diligence" are:
      (1) [T]the character of the market for the security, e.g., price, volatility, relative liquidity, and pressure on available communications;
      (2) the size and type of transaction;
      (3) the number of [primary] markets checked;
      (4) accessibility of the quotation[location and accessibility to the customer's broker/dealer of primary markets and quotations sources.]; and
      (5) the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.
      (b) through (g) No change.

      IM-2320. Interpretive Guidance with Respect to Best Execution Requirements

      Rule 2320(a) requires, among other things, that a member or person associated with a member comply with Rule 2320(a) when customer orders are routed to it from another broker/dealer for execution. This Interpretive Material addresses certain interpretive questions concerning the applicability of the best execution rule.

      The term "market" has been in the text of Rule 2320 since its adoption, but it is an undefined term. For the purposes of Rule 2320, the term "market" or "markets" is to be construed broadly and it encompasses a variety of different venues, including, but not limited to, market centers that are trading a particular security. This expansive interpretation is meant to both inform broker/dealers as to the breadth of the scope of venues that must be considered in the furtherance of their best execution obligations and to promote fair competition among broker/dealers, exchange markets, and markets other than exchange markets, as well as any other venue that may emerge, by not mandating that certain trading venues have less relevance than others in the course of determining a firm's best execution obligations.

      Rule 2320(a)(4) provides that one of the factors used to determine if a member has used reasonable diligence in exercising best execution is the "location and accessibility to the customer's broker/dealer of primary markets and quotations sources." In the context of the debt market, this means that, when quotations are available, NASD will consider the ''accessibility of such quotations'' when examining whether a member has used reasonable diligence. For purposes of debt securities, the term "quotation" refers to either dollar (or other currency) pricing or yield pricing. NASD notes, however, that accessibility is only one of the non-exhaustive reasonable diligence factors set out in Rule 2320. In the absence of accessibility, members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders.

      Lastly, NASD is clarifying that a member's duty to provide best execution in any transaction "for or with a customer of another broker/dealer" does not apply in instances when another broker/dealer is simply executing a customer order against the member's quote. Stated in another manner, the duty to provide best execution to customer orders received from other broker/dealers arises only when an order is routed from the broker/dealer to the member for the purpose of order handling and execution. This clarification is intended to draw a distinction between those situations in which the member is acting solely as the buyer or seller in connection with orders presented by a broker/dealer against the member's quote, as opposed to those circumstances in which the member is accepting order flow from another broker/dealer for the purpose of facilitating the handling and execution of such orders.

    • 06-57 SEC Approves Exemption to NASD Rule 5100 (Short Sale Rule) for Securities Included in the NASDAQ-100 Index; Effective Date: October 9, 2006

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      GUIDANCE

      Short Sales

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      Rule 5100
      Short Sales

      Executive Summary

      On October 2, 2006, the Securities and Exchange Commission (SEC) approved an exemption to NASD Rule 5100 (Short Sale Rule) for securities included in the NASDAQ-100 Index.1 Rule 5100, as amended, is set forth in Attachment A of this Notice. The rule becomes effective on October 9, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or the Office of General Counsel, at (202) 728-8071.

      Background and Discussion

      On October 2, 2006, the SEC approved an exemption to Rule 5100 for securities included in the NASDAQ-100 Index. Rule 5100 provides that, with respect to trades reported to the Alternative Display Facility (ADF) or a Trade Reporting Facility (TRF), no member shall effect a short sale in a NASDAQ Global Market (NGM) Security (as defined in Rule 4200) otherwise than on an exchange at or below the current national best (inside) bid when the current national best (inside) bid is below the preceding national best (inside) bid.2 All short sales in NGM securities effected otherwise than on an exchange must comply with Rule 5100 or qualify for an exception to or exemption from the rule. As amended, Rule 5100 provides an exemption, among others, for securities included in the NASDAQ-100 Index.

      The SEC also recently approved a similar rule change that exempts all securities included in the NASDAQ-100 Index from NASDAQ Exchange Rule 3350, which governs short sales in NGM securities executed on or reported to the NASDAQ Exchange.3 To ensure uniform application of NASD Rule 5100 and NASDAQ Exchange Rule 3350 with respect to the new exemption for securities included in the NASDAQ-100 Index, the exemptions to both rules become effective on October 9, 2006.


      1 See Securities Exchange Act Release No. 54558 (October 2, 2006) (File No. SR-NASD-2006-076). A list of securities included in the NASDAQ-100 Index is available on NASDAQ's Web site: www.nasdaq.com.

      2 SR-NASD-2005-087 amended former Rule 3350 to renumber it as Rule 5100 and apply it uniformly to short sales of over-the-counter (OTC) transactions reported to the ADF or a TRF. SR-NASD-2005-087 became effective on August 1, 2006, the date upon which NASDAQ began operation as an exchange for NASDAQ-listed securities. See Securities Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006).

      NASD also amended Rule 5100 to allow members to use, for a transitional period ending on November 3, 2006, the NASDAQ Exchange best (inside) bid rather than the national best (inside) bid for the purposes of the application of the rule. See Exchange Act Release No. 54203 (July 25, 2006), 71 FR 43256 (July 31, 2006) (SR-NASD-2006-089).

      3 See Securities Exchange Act Release No. 54435 (September 13, 2006), 71 FR 55042 (September 20, 2006) (SR-NASDAQ-2006-031).


      ATTACHMENT A

      New language is underlined.

      5100. Short Sale Rule

      (a)–(b) No Change.
      (c) The provisions of paragraph (a) shall not apply to:
      (1)–(9) No Change.
      (10) Sales of securities included in the Nasdaq-100 Index.
      (d)–(l) No Change.

    • 06-56 SEC Approves Amendments to the Safe Harbor for Business Expansions; Effective Date: November 3, 2006

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      GUIDANCE

      Business Expansions

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Senior Management
      Business Expansions
      IM-1011-1
      Material Change in Business
      Operations
      Rule 1017
      Safe Harbor

      Executive Summary

      On August 7, 2006, the Securities and Exchange Commission (SEC) approved amendments to Interpretative Material 1011-1 (Safe Harbor for Business Expansions) (IM-1011-1) to limit the types of violations of Rule 2110 (Standards of Commercial Honor and Principles of Trade) that would result in a member being ineligible to use the safe harbor for business expansions and made certain technical changes.1 IM-1011-1, as amended, is set forth in Attachment A of this Notice. The amendments become effective on November 3, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 974-2974.

      Background and Discussion

      Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) requires that a member submit an application to NASD for approval prior to, among other things, making a "material change in business operations," which is defined in Rule 1011.2 IM-1011-1 creates a safe harbor for certain types of expansions that are presumed not to be a "material change in business operations" and therefore do not require NASD approval.3

      However, the safe harbor in IM-1011-1 is not available to any member that, among other things, has a "disciplinary history" as defined in IM-1011-1.4 For purposes of IM-1011-1, disciplinary history means a finding of a violation by a member or a principal of the member in the past five years by the SEC, a self-regulatory organization or a foreign financial regulatory authority of one or more specified provisions (or comparable foreign provisions) or rules or regulations thereunder,5 including Rule 2110.6

      When a member or individual is charged with violating an NASD rule, NASD frequently charges a violation of Rule 2110 as part of NASD's action (in both settled and litigated matters).7 Thus, the inclusion of Rule 2110 in IM-1011-1, without any limitation, often results in members being ineligible to use the safe harbor if they (or any of their principals) have violated any other NASD rule, which was not the intended effect. Rather, the safe harbor specifically included a finite list of rules, the violation of which would preclude the member firm from using the safe harbor, and was not intended to capture violations of all NASD rules.

      Accordingly, with respect to violations of Rule 2110, NASD has amended IM-1011-1 to provide that a member is ineligible to use the safe harbor only where the finding of a violation of Rule 2110 by the member or a principal of the member raises significant investor protection issues by involving unauthorized trading, churning, conversion, material misrepresentations or omissions to a customer, front-running, trading ahead of research reports or excessive markups.8 Therefore, a member will not be eligible to rely on the safe harbor for material changes in business operations if the member or any of its principals have been found, within the past five years, to have violated Rule 2110 in the context of these enumerated activities (or to have violated any of the other rules specified in IM-1011-1).

      In addition, NASD made a technical correction to the rule text with respect to the inclusion of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 (Act) in the list of rules the violation of which would preclude a member from relying on the safe harbor under IM-1011-1. The amendment clarifies that a member would be ineligible to use the safe harbor in the event that a member or any of its principals has been found to have engaged in one or more violations of the type specified in Section 15(b)(4)(E) of the Act in the past five years.

      The amendments become effective on November 3, 2006.


      1 Exchange Act Release No. 54279 (August 7, 2006), 71 FR 46533 (August 14, 2006) (Approval Order of SR-NASD-2006-070).

      2 A "material change in business operations" is defined in Rule 1011(i) and includes, but is not limited to: removing or modifying a membership agreement restriction; market making, underwriting or acting as a dealer for the first time; and adding business activities that require a higher minimum net capital under SEC Rule 15c3-1.

      3 The safe harbor permits, within a one year period, (1) an increase of 10 persons if the firm has 10 or less associated persons in sales, or an increase of 10 persons or a 30 percent increase, whichever is greater, if the firm has 11 or more associated persons in sales; (2) an increase of three offices if the firm has five or less offices, or an increase of three offices or a 30 percent increase, whichever is greater, if the firm has six or more offices; and (3) an increase of 10 markets to be made if the firm makes 10 or less markets, or an increase of 10 markets or a 30 percent increase, whichever is greater, if the firm makes 11 or more markets.

      As a reminder, Notice to Members (NTM) 00-73 (October 2000) states: "If a proposed expansion is outside of the safe harbor provisions, it does not necessarily mean that the expansion is a 'material change in business operations.' The safe harbor provisions are meant to provide guidance on what changes will not be considered material." Please refer to NTM 00-73 for further guidance on how to assess if a proposed change is material.

      4 The safe harbor is also generally not available to members with membership agreements that contain certain restrictions on number of personnel, offices and markets that may be made.

      5 The applicable provisions are Sections 15(b)(4)(E) and 15(c) of the Securities Exchange Act of 1934; Section 17(a) of the Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD Rules 2110, 2120 (Use of Manipulative, Deceptive or Other Fraudulent Devices), 2310 (Recommendations to Customers (Suitability)), 2330 (Customers' Securities or Funds), 2440 (Fair Prices and Commissions), 3010 (Supervision-failure to supervise only), 3310 (Publication of Transactions and Quotations) and 3330 (Payment Designed to Influence Market Prices, Other than Paid Advertising); and MSRB Rules G-19, G-30 and G-37(b) and (c).

      6 Rule 2110 requires that "a member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade."

      7 See Joseph Abbondante, Exchange Act Rel. No. 53066 (Jan. 6, 2006), 2006 SEC Lexis 23 at 36 ("It is well settled that a violation of a rule promulgated by the SEC or by NASD also violates Conduct Rule 2110.").

      8 The limits on violations of Rule 2110 mirror the limits on Rule 2110 with respect to the public release of disciplinary complaints. See IM-8310-2 (Release of Disciplinary and Other Information Through BrokerCheck) and the related NTM 97-42 (July 1997).


      ATTACHMENT A

      New language is underlined, deletions are in brackets.

      * * * * *

      IM-1011-1. Safe Harbor[s] for Business Expansions

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

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

      The safe harbor is not available to any member that has disciplinary history. For purposes of this Interpretation, "disciplinary history" means a finding of a violation by the member or a principal of the member in the past five years by the Securities and Exchange Commission, a self-regulatory organization, or a foreign financial regulatory authority of one or more of the following provisions (or a comparable foreign provision) or rules or regulations thereunder: violations of the types enumerated in Section[s] 15(b)(4)(E) [and 15(c)] of the Securities Exchange Act of 1934; Section 15(c) of the Securities Exchange Act of 1934; Section 17(a) of the Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD Rules 2110 (only if the finding of a violation is for unauthorized trading, churning, conversion, material misrepresentations or omissions to a customer, front-running, trading ahead of research reports or excessive markups), 2120, 2310, 2330, 2440, 3010 (failure to supervise only), 3310, and 3330; and MSRB Rules G-19, G-30, and G-37(b) & (c).

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

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

      Number of Associated Persons Involved in Sales
      Period Without Rule 1017 Application
      Safe Harbor — Increase Permitted Within One Year
      1–10 10 persons
      11 or more 10 persons or a 30 percent increase, whichever is greater

      Number of Offices (registered or unregistered)  
      1–5 3 offices
      6 or more 3 offices or a 30 percent increase, whichever is greater

      Number of Markets Made  
      1–10 10 markets
      11 or more 10 markets or a 30 percent increase, whichever is greater

      * * * * *

    • 06-55 NASD Revises Sanction Guidelines to Further Address Consideration of a Firm's Size

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      GUIDANCE

      NASD Sanction Guidelines

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management
      Systems
      NASD Sanction Guidelines

      Executive Summary

      This Notice advises NASD member firms of modifications to the NASD Sanction Guidelines (Guidelines). NASD has amended the General Principles Applicable to All Sanction Determinations (General Principles) to clarify that adjudicators should consider a firm's size and available resources when imposing monetary sanctions. In particular, as revised, the Guidelines state that, in determining sanctions for violations that are not egregious and do not involve fraud, adjudicators should take into account a firm's revenues, as well as other factors indicative of firm size. The revisions also state that, as a result of adjudicators' consideration of size and available resources, a fine that is below the minimum level otherwise recommended in the Guidelines may be imposed. The revisions to the General Principles are effective immediately and are available on NASD's Web site at www.nasd.com/sanctionguidelines.

      Questions/Further Information

      Questions concerning this Notice may be directed to Carla Carloni, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8019.

      Discussion

      NASD's Guidelines are designed to address a wide variety of potential violations of NASD's rules and provide fact-specific guidance for crafting appropriately remedial sanctions. NASD's adjudicators rely on the Guidelines to determine appropriately remedial sanctions, and NASD's Departments of Enforcement and Market Regulation, as well as the defense bar, rely on the Guidelines in negotiating settlements in disciplinary matters.

      With these revisions to the General Principles, NASD reiterates and reinforces its dedication to ensuring that the sanctions imposed in litigated and settled matters are proportionately remedial and are not punitive. The revisions remind users of the Guidelines that it is appropriate in certain cases to consider a respondent member firm's size when determining monetary sanctions.

      With these revisions, NASD expands on the concept in General Principle No. 1 that adjudicators factor a firm's size into monetary sanction considerations. Prior to these revisions, the Guidelines pointed to the following facts to consider, among others, in determining firm size: the number of individuals associated with the firm; the level of trading activity at the firm; and other entities under common control with the firm. As revised, the Guidelines specifically include firm revenues as a factor to consider in assessing sanctions. The Guidelines now state that, in assessing whether to reduce sanctions based on firm size, adjudicators can consider, among other factors:

      the amount of the firm's revenues; the financial resources of the firm; the nature of the firm's business; the number of individuals associated with the firm; the level of sales and trading activity at the firm; other entities that the firm controls, is controlled by, or is under common control with; the firm's contractual relationships; and prior disciplinary actions against the firm (see General Principle No. 2 regarding recidivists).

      The revised Guidelines also state that, in imposing a sanction that is proportionately scaled to the firm's size, adjudicators may reduce the level of the sanction below the minimum level otherwise recommended in the Guidelines. Adjudicators' consideration of a firm's size is limited to violations that are neither egregious nor involve fraud.

      NASD also amended General Principle No. 3 to reinforce for adjudicators, in connection with the determination of appropriately remedial sanctions, that it is appropriate to consider a firm's size and available resources. As revised, the Guidelines emphasize that, when considering reduction of a monetary sanction for a firm, adjudicators should aim to achieve a remedial sanction that is proportionately scaled to the firm's size and that may result in a reduction of the sanction below the minimum level that is otherwise indicated in the Guidelines.

      The amendments to the Sanction Guidelines are effective immediately.

    • 06-54 Amendments to Option Disclosure Documents Delivery Requirements in Rule 2860; Implementation Date: October 26, 2006

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      GUIDANCE

      Option Disclosure Documents

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Options
      Institutional
      Senior Management
      Trading
      Disclosure Documents Delivery
      Characteristics and Risks of
      Standardized Options
      Special Statement for Uncovered
      Option Writers
      Options
      Rule 2860

      Executive Summary

      On August 17, 2006, NASD filed with the Securities and Exchange Commission (SEC) for immediate effectiveness a rule change to Rule 2860 (Options) to (1) require that a copy of each amendment to the options disclosure document, Characteristics and Risks of Standardized Options, be distributed to each customer not later than the time of the delivery of a confirmation of a transaction in the category of options issued by The Options Clearing Corporation (OCC) to which the amendment pertains, and (2) clarify that revisions to the Special Statement for Uncovered Option Writers be distributed to each customer approved for writing uncovered short options not later than the time of the delivery of a confirmation of a transaction in options issued by the OCC.1 Rule 2860, as amended, is set forth in Attachment A of this Notice. The amendments will be implemented on October 26, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Gary Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-8104; or Kathryn M. Moore, Assistant General Counsel, OGC, RPO, at (202) 974-2974.

      Background and Discussion

      NASD has amended the requirement to deliver amendments and/or revisions to the options disclosure documents in Rule 2860 to conform to similar rules of other selfregulatory organizations.2 Specifically, NASD has amended the rule to more clearly delineate the particular delivery requirements applicable to the Characteristics and Risks of Standardized Options (commonly known as the ODD) and the Special Statement for Uncovered Option Writers (the Special Written Statement).

      Rule 2860(b)(11)(A) previously required that amendments and revisions to both disclosure documents be distributed to each customer not later than the time a confirmation of a transaction is delivered to each customer who enters into a transaction in options issued by the OCC. As amended, the delivery of an amendment to the ODD is triggered by a customer transaction in an options contract to which such amendment pertains. The rule change harmonizes NASD's rule for amendments to the ODD with the corresponding rules of the Options Exchanges.

      In addition, through a new subparagraph (2), NASD clarified that revisions to the Special Written Statement must be distributed to each customer having an account approved for writing uncovered short options not later than the time a confirmation of a transaction is delivered to each customer who enters into a transaction in options issued by the OCC.

      The amendments to Rule 2860 will be implemented on October 26, 2006.


      1 See Exchange Act Release No. 54463 (September 15, 2006), 71 FR 55814 (September 25, 2006) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-2006-100). Under Section 19(b) of the Securities Exchange Act of 1934 (Act), the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 See Rule 9.15 of the CBOE; Rule 616 of the ISE; Rule 1029 of the PHLX; Rule 926 of the AMEX; Rule 726 of the NYSE; and Chapter XI, Section 17 of the BOX (collectively referred to as the Options Exchanges).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      * * * * *

      2860. Options

      (a) No Change.
      (b) Requirements
      (1) through (10) No Change.
      (11) Delivery of Current Disclosure Documents[(s)]
      (A) (1) Characteristics and Risks of Standardized Options (the "ODD"). Every member shall deliver the [appropriate] current ODD [disclosure document(s)] to each customer at or prior to the time such customer's account is approved for trading [in the category of] options issued by The Options Clearing Corporation [to which such disclosure document relates]. Thereafter, a copy of each amendment to the ODD shall be distributed to each customer to whom the member previously delivered the ODD not later than the time a confirmation of a transaction in the category of options to which the amendment pertains is delivered to such customer.
      (2) Special Statement for Uncovered Option Writers ("Special Written Statement"). In the case of customers approved for writing uncovered short options transactions, the Special Written Statement [disclosure document] required by paragraph (b)(16) shall be in a format prescribed by [the Association]NASD and delivered to customers in accordance with paragraph (b)(16). [Thereafter,] A copy of each new or revised Special Written Statement [current disclosure document(s)] shall be distributed to [every]each customer having an account approved for writing uncovered short options [such trading or in the alternative, shall be distributed] not later than the time a confirmation of a transaction is delivered to each customer who enters into a transaction in options issued by The Options Clearing Corporation.
      (3) [The Association] NASD will advise members when a new or revised current disclosure document meeting the requirements of SEC Rule 9b-1 of the Act is available.
      (B) and (C) No Change.
      (12) through (24) No Change.

    • 06-53 Guidance on the Requirements for Availability of Bona Fide Market Making Activity Exception to NASD Rule 5100

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      GUIDANCE

      Short Sales

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Trading
      Bona Fide Market Making
      Short Sales
      Rule 5100
      IM-5100

      Executive Summary

      Rule 5100 generally prohibits a member from effecting short sales in NASDAQ Global Market (NGM) securities1 otherwise than on an exchange for a customer account, or the member's own account, at or below the current national best (inside) bid, when the current national best (inside) bid is below the preceding national best (inside) bid (the bid test).2 Rule 5100(c)(1) provides an exception to the bid test for short sales by a market maker registered in the security in connection with bona fide market making activity. NASD is issuing this Notice to remind member firms of the requirements to qualify for the bona fide market making activity exception to NASD's short sale rule contained in Rule 5100.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126 or the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.

      Discussion

      Rule 5100 generally prohibits a member from effecting short sales3 in NGM securities otherwise than on an exchange for a customer account, or the member's own account, at or below the current national best (inside) bid, when the current national best (inside) bid is below the preceding national best (inside) bid. All short sales in NGM securities must comply with Rule 5100 or qualify for an exception to, or exemption from, the rule. Among others, Rule 5100 provides an exception to the bid test for certain bona fide market making activity.

      NASD is issuing this Notice to remind member firms of the circumstances under which the bona fide market making exception is available. To qualify for the exception, Rule 5100(c)(1) requires that the broker-dealer be a market maker registered in the security and that the short sale activity constitutes bona fide market making activity. The rule also specifically provides that bona fide market making activity does not include transactions unrelated to normal market making activity, such as index arbitrage and risk arbitrage that are independent from a member's market making functions. Although such activity may be part of the firm's overall hedging or risk management strategy, they do not warrant an exception from Rule 5100.

      IM-5100(a) provides further guidance as to what constitutes bona fide market making, noting that the bona fide market making exception was established to recognize those short sale transactions engaged in to maintain continuous, liquid markets in NGM securities. IM-5100 further provides that bona fide market making activity would not include activity related to the speculative selling strategies of the member or investment decisions of the firm that is disproportionate to the usual market making patterns or practices of the member in that security.

      Market Making Exception to Regulation SHO "Locate" Requirements

      The uniform "locate" requirements in Regulation SHO provide a similar exception for short sales effected by a market maker in connection with bona fide market making activities.4 Although the Regulation SHO bona fide market making exception applies to the locate requirements, NASD believes the standards set forth are equally applicable to the bona fide market making exception to NASD Rule 5100. Accordingly, NASD applies and interprets the bona fide market making exception to Rule 5100 consistent with the SEC's application and interpretation of the exception to the Regulation SHO locate requirements.

      In this regard, the SEC staff has indicated that while the determination of whether activity would qualify for the bona fide market making exception will depend on the facts and circumstances of the particular activity, there are clear examples of what types of activities would not be deemed bona fide market making activities.5 Specifically, in its Regulation SHO Adopting Release, the SEC indicated that bona fide market making does not include activity that is related to speculative selling strategies or investment purposes of the broker-dealer and is disproportionate to the usual market making patterns or practices of the broker-dealer in that security.6 Likewise, where a market maker posts continually at or near the best offer, but does not also post at or near the best bid, the market maker's activities would not generally qualify as bona fide market making for purposes of the exception.7 Moreover, a market maker that continually executes short sales away from its posted quotes would generally not be able to rely on the bona fide market making exception.8

      Further, the SEC stated that bona fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker's exception for the purpose of avoiding compliance with the locate requirement by the other broker-dealer or customer.9 For example, to the extent that a member engages in short selling activity under the pretext of market maker status to establish short positions at the direction of customers who would otherwise not be able to comply with the locate requirements, such activity would not constitute bona fide market making activity and, thus, not be exempt from the locate requirements of Regulation SHO.10 Accordingly, members are reminded that short sale positions taken to facilitate a short sale position of a customer that do not comply with Regulation SHO generally will not be deemed to fall within the bona fide market making exception.

      Surveillance and Examination of the Rule 5100 Requirements

      NASD closely monitors member activity for violations of Rule 5100, including use of the market making exception and schemes that attempt to avoid application of the rule. Rule 3010 requires members to establish and maintain a supervisory system that is designed to ensure compliance with NASD rules and federal securities laws. Members' supervisory systems should include reviews designed to ensure that reliance upon the bona fide market making exception is justified.

      Further, NASD is reminding members that intend to rely on the bona fide market making exception to Rule 5100 that they will be expected to be able to demonstrate, upon request, how the short sale transaction meets the bona fide market making exception. Thus, members availing themselves of this exception must have a reasonable basis to believe that each short sale transaction satisfies the terms of the exception and must be able to provide documentation in support of such position.


      1 Note: NASDAQ National Market securities were renamed NASDAQ Global Market securities. See Securities Exchange Act Release No. 54071 (June 29, 2006), 71 FR 38922 (July 10, 2006) (File No. SR-NASD-2006-068).

      2 On June 30, 2006, the SEC approved SR-NASD- 2005-087, which amends certain NASD rules to reflect the separation of NASDAQ from NASD upon the operation of the NASDAQ Exchange as a national securities exchange. See Securities Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006). Among other amendments, NASD's rule change amended Rule 3350 to renumber it as Rule 5100 and apply it uniformly to short sales of over-the-counter (OTC) transactions reported to the Alternative Display Facility (ADF) or the Trade Reporting Facility (TRF). SR-NASD-2005-087 became effective on August 1, 2006, the date upon which NASDAQ began operation as an exchange for NASDAQ-listed securities.

      3 The term "short sale" has the meaning contained in Rule 200 of Regulation SHO.

      4 Rule 203(b)(1) of Regulation SHO requires that broker-dealers, prior to effecting short sales in all equity securities, locate securities available for borrowing. To comply with the Regulation SHO locate requirements, a broker-dealer must borrow the security, enter into an arrangement to borrow the security or have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. See Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004) ("Regulation SHO Adopting Release").

      5 See Division of Market Regulation: Responses to Frequently Asked Questions Concerning Regulation SHO (Question 4.8). For purposes of Regulation SHO, the term "market maker" is defined in Section 3(a)(38) of the Exchange Act as "any specialist permitted to act as a dealer, any dealer acting in the capacity of a block positioner, and any dealer who, with respect to a security, holds itself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for its own account on a regular or continuous basis." Moreover, the SEC has previously stated that "a bona fide market maker is a broker-dealer that deals on a regular basis with other broker-dealers, actively buying and selling the subject security as well as regularly and continuously placing quotations in a quotation medium on both the bid and ask side of the market." See Securities Exchange Act Release No. 32632 (July 14, 1993), 58 FR 39072, 39074 (July 21, 1993). It is important to note, however, that NASD Rule 5100(c)(1) also requires that the market maker be registered in the security to be eligible for the bona fide market making exception.

      6 See Regulation SHO Adopting Release at 48015.

      7 Id.

      8 See Regulation SHO Adopting Release at footnote 68.

      9 See Regulation SHO Adopting Release at 48015.

      10 NASD expelled a member firm and barred its principal for creating and maintaining short positions in OTC equity securities on behalf of the firm's clients who were unable to sell the stocks short themselves because they could not satisfy the locate requirements under former NASD Rule 3370. See Department of Market Reg. v. Ryan & Co., LLP, Discip. Proceeding No. CLG050062.

    • 06-52 NASD Requests Comment on Proposed Amendments to Rules Governing Conflicts of Interest in Public Offerings of Securities; Comment Period Expires October 30, 2006

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      REQUEST FOR COMMENT

      Proposed Amendments to Rule 2720

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Financing
      Legal & Compliance
      Senior Management
      Trading & Market Making
      Affiliate
      Conflicts of Interest
      Equity & Debt Offerings
      Investment Banking
      Qualified Independent Underwriter
      Rule 2710
      Rule 2720
      Underwriting Compensation

      Executive Summary

      NASD is issuing this Notice to Members to solicit comments from members and other interested parties on a proposal to modernize and simplify Rule 2720 (Distributions of Securities of Members and Affiliates—Conflicts of Interest). Rule 2720 governs public offerings of securities issued by participating members or their affiliates, public offerings in which a member or any of its associated persons or affiliates has a conflict of interest, and public offerings that result in a member becoming a public company. The more significant amendments that are proposed in this Notice would:

      •  exempt from the filing requirements and the qualified independent underwriter (QIU) requirements of Rule 2720 public offerings with a book-running lead manager or dealermanager that does not have a conflict of interest and that can meet the disciplinary history requirements for a QIU and public offerings of investment-grade rated debt and securities that have a bona fide public market;
      •  change the definition of "conflict of interest" so that the Rule covers public offerings in which at least five percent of the offering proceeds are directed to a participating member or its affiliates and eliminates ownership of subordinated debt as a basis for a conflict of interest;
      •   modify the Rule's disclosure requirements so that more information relating to conflicts of interest is prominently disclosed in offering documents;
      •  amend the Rule's provisions regarding the use of a QIU to focus on the QIU's due diligence responsibilities and eliminate the requirement that the QIU render a pricing opinion;
      •  amend the QIU qualification requirements to focus on the experience of the firm rather than its board of directors, prohibit a member that would receive more than five percent of the proceeds of an offering from acting as a QIU, and lengthen from five to ten years the amount of time that a person involved in due diligence in a supervisory capacity must have a clean disciplinary history;
      •  eliminate provisions in the Rule that do not apply to public offerings and instead address an issuer's corporate governance responsibilities; and
      •  eliminate a provision that applies certain disclosure requirements to intrastate offerings.

      Action Requested

      NASD requests comment on the proposed amendments. Comments must be received by October 30, 2006. Members and interested persons can submit their comments using the following methods:

      •   E-mailing written comments to pubcom@nasd.com
      •  Submitting written comments online at the NASD Web Site (www.nasd.com)
      •  Mailing hardcopy written comments to:
      Barbara Z. Sweeney
      NASD
      Office of the Corporate Secretary
      1735 K Street, NW
      Washington, D.C. 20006-1506

      Important Notes:

      The only comments that will be considered are those submitted in writing via one of the methods set forth above. All comments received in response to this Notice will be made available to the public on the NASD Web site. Generally, comments will be posted on the NASD Web site one week after the end of the comment period.1

      Before becoming effective, any rule change developed as a result of comments received must be adopted by 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 Notice should be directed to Thomas M. Selman, Senior Vice President, Corporate Financing/Investment Companies, Regulatory Policy and Oversight (RPO), at (240) 386-4623; Joseph E. Price, Vice President, Corporate Financing Department, RPO, at (240) 386-4623; Gary L. Goldsholle, Vice President and Associate General Counsel, Office of the General Counsel (OGC), RPO, at (202) 728-8104; or Lisa C. Horrigan, Assistant General Counsel, OGC, RPO, at (202) 728-8190.

      Background

      A. Rule 2720

      Rule 2720 generally requires members to file public offerings for NASD review and imposes certain substantive requirements when members participate in offerings: (i) of their own or their affiliates' securities; (ii) in which they or their affiliates have a "conflict of interest"; or (iii) that result in a member becoming a public company. The Rule defines "affiliate" to include companies under common control or that control one another.

      One of the principal substantive requirements in Rule 2720 is the requirement that the underwriting syndicate retain a QIU in certain circumstances. This requirement is discussed in greater detail below.
      B. Rule 2710

      Rule 2710 generally requires members to file public offerings for NASD review of proposed underwriting terms and arrangements. The underwriting terms and arrangements must comply with the substantive requirements in Rule 2710, including limits on the compensation that can be charged for performing underwriting services.

      Rule 2710 contains certain exemptions to its filing requirements, including exemptions for public offerings of the securities of seasoned issuers and offerings of investmentgrade debt.2 These exemptions, however, are inapplicable to offerings that fall within the scope of Rule 2720 because Rule 2720(m) specifically directs that such offerings must be filed with NASD, notwithstanding any express exemption in Rule 2710. Thus, for example, while a public offering of the securities of a seasoned issuer is exempt from filing under Rule 2710, it must nevertheless be filed and comply with Rule 2710 if a member participating in the offering has a conflict of interest, as defined in Rule 2720, with the seasoned issuer.

      Discussion

      A. Offerings Governed by Rule 2720 and Rule 2710

      Under existing Rule 2720, a "conflict of interest" is presumed to exist if the member or any of its associated persons or affiliates owns ten percent or more of the common or preferred stock or subordinated debt of the issuer, or participates in ten percent of the profits or losses of the issuer. The proposed amendments would eliminate ownership of subordinated debt as a basis for a conflict of interest.

      In addition, the proposed amendments would expand the definition of "conflict of interest" to include a member's participation in an offering in which at least five percent of the proceeds are intended to be directed to the member, its affiliates or its associated persons. Rule 2710(h) requires that public offerings in which ten percent or more of the offering proceeds (not including the underwriting discount) will be paid to participating members must comply with Rule 2720's QIU requirements. The proposed amendments would eliminate Rule 2710(h). The new five percent threshold for proceeds directed to a member in Rule 2720 would apply to each participating member individually (including the member's affiliates and its associated persons), not on an aggregate basis for all participating members, as is currently the case. Thus, for example, a conflict of interest would exist if a member received five percent of the proceeds, but not if two unaffiliated members each received three percent of the proceeds.

      The proposed amendments would also amend the definition of "conflict of interest" to expressly include instances in which the issuer is controlled by or under common control with the member or any of its affiliates or associated persons. Control under the current Rule is presumed at ten percent beneficial ownership of voting securities, ten percent interest in a partnership's profits or losses, or the power to direct management or policies of the entity. The proposed amendments would expand the definition of "control" to include not only voting shares beneficially owned by a participating member, but also the right to receive voting securities within 60 days of the effective date of the public offering. Accordingly, warrants or rights for voting securities that are exercisable within 60 days of the effective date of the public offering would be included in the calculation of voting securities when determining whether a member, company or natural person will be presumed to control an entity.
      B. Scope of Rule 2720

      Rule 2720 requires that all public offerings within the scope of the Rule comply with its provisions and the provisions of Rule 2710, including the Rule 2710 filing requirement. Under the current Rule, public offerings of investment-grade rated securities and offerings of equity securities for which there is a "bona fide independent market"3 are exempt from the Rule's QIU requirement, but subject to all other requirements.

      The proposed amendments would establish an exemption from the QIU and filing requirements of Rule 2720 for two types of offerings: (1) an offering with a bookrunning lead manager or dealer-manager that does not have a conflict of interest, is not an affiliate of any member that does have a conflict of interest, and can meet the disciplinary history requirements for a QIU; or (2) an offering of investment-grade rated securities or equity securities for which there is a "bona fide public market."4 While these two types of offerings would be exempt from the filing requirements, they would be subject to Rule 2720's disclosure requirements and, if applicable, the Rule's escrow and discretionary account requirements.5

      If an offering does not meet either of these two exemptions, a QIU must participate in the preparation of the offering documents and perform due diligence, and the offering must meet Rule 2720's disclosure requirements and, if applicable, the Rule's escrow and discretionary account requirements.
      C. Disclosure Requirement

      Rule 2720(d) requires disclosure in the registration statement or offering circular regarding the date the offering will be completed and the terms upon which proceeds will be released from the escrow account. The Rule requires the following disclosure in the underwriting section of the registration statement or offering circular:

      •   The fact that the offering is being made pursuant to Rule 2720;
      •   The member's status in the offering; and
      •   Disclosure about the QIU, if one is required.
           In lieu of these disclosure requirements, the proposed amendments would require prominent disclosure of the nature of the conflict of interest in offerings in which a participating member has a conflict of interest, but the Rule does not require a QIU (i.e., offerings falling into either of the two QIU and filing exemptions discussed above).

      For offerings that require a QIU, the proposed amendments would require prominent disclosure of the following:

      •  The nature of the conflict of interest;
      •  The name of the member acting as QIU; and
      •  The fact that the QIU will assume due diligence responsibilities.
      D. QIU Requirement

      Rule 2720 requires that a QIU provide an opinion that the price at which equity securities are offered to the public is no higher, or the yield for debt securities is no lower, than that recommended by the QIU. The Rule also requires the QIU to participate in the preparation of the registration statement, prospectus or offering circular and perform due diligence. A QIU is not required under the existing Rule if there is a bona fide independent market for the equity or the securities are rated investment grade.

      The proposed amendments would eliminate the requirement that the QIU provide a pricing opinion. In an offering in which a participating member has a conflict of interest, but the book-running lead manager or dealer-manager does not have a conflict of interest, a QIU would not be required because the book-running lead manager or dealer-manager could be expected to perform the necessary due diligence.6 The proposed amendments would retain the current exemption from the QIU requirement for offerings of securities with an investment grade rating or for which there is a bona fide public market.7 For offerings in which a QIU is required, the QIU must participate in the preparation of the registration statement, prospectus and offering circular and perform due diligence.
      E. QIU Qualifications

      Rule 2720 contains lengthy requirements for a member firm to qualify to act as a QIU. The Rule currently permits a member to serve as a QIU only if (i) the member is "actively engaged" in the investment banking or securities business and has been so engaged for at least five years immediately preceding the filing of the registration statement and (ii) a majority of its board of directors or general partners has been similarly engaged in the investment banking or securities business. The proposed amendments would eliminate the requirement regarding board or partner experience, since NASD staff believes that the experience of the firm is more relevant.

      The Rule also currently requires that a QIU must have acted as a managing underwriter for offerings of a similar size and type for at least five years. The proposed amendments would shorten this period from five years to three years but impose the additional requirement that a QIU must have acted as a managing underwriter in at least three similar offerings during that time.

      The Rule currently prohibits an associated person's involvement in the due diligence process in a supervisory capacity if that person has been subject to certain criminal and disciplinary actions pertaining to the offering of securities within five years prior to the filing of the registration statement. The proposed amendments would lengthen this period from five to ten years.

      The Rule currently prohibits a member from acting as a QIU if it is an affiliate of the issuer or if it beneficially owns at least five percent of the equity, subordinated debt or partnership interest of the issuer. The proposed amendments would delete the provision that makes ownership of subordinated debt a basis for disqualification of a QIU. NASD specifically requests comment on whether the five percent ownership threshold should apply to securities held not only by the QIU, but also by its affiliates and natural control persons. If so, should the determination of beneficial ownership incorporate the principles of Securities Exchange Act Section 13(d)?8

      Finally, the Rule currently does not disqualify or prohibit a QIU from receiving proceeds from an offering. The proposed amendments would prohibit a QIU from receiving more than five percent of the offering proceeds. The receipt of such proceeds would disqualify a member from acting as a QIU because it would fall within the proposed expansion of the definition of "conflict of interest," which is discussed above.
      F. Corporate Governance and Periodic Reporting

      Rule 2720 currently includes certain provisions that do not apply to the public offering itself and instead require the issuer to adopt corporate governance policies relating to an audit committee and public directors and to issue periodic reports to shareholders.

      The proposed amendments would delete these requirements. Congress recently passed corporate governance legislation and the Securities and Exchange Commission recently passed comprehensive new rules that govern reporting requirements.9 The Sarbanes- Oxley Act addresses the role of public directors and audit committees for U.S. companies. and the Securities Offering Reform rules address periodic reporting requirements for United States issuers. Accordingly, NASD believes that separate Rule 2720 requirements for corporate governance and periodic reporting are unnecessary.
      G. Intrastate Offerings

      Rule 2720 currently requires any member offering its securities pursuant to the intrastate offering exemption under the Securities Act to include in the offering documents information required in a release that the SEC published in 1972. The proposed amendments would delete this requirement from Rule 2720. NASD requests comment on whether NASD should propose a new rule that would govern disclosure requirements in offering documents used in intrastate offerings.

      1 See Notice to Members 03-73 (Nov. 2003) (NASD Announces Online Availability of Comments). Personal identifying information, such as names or email addresses, will not be edited from submissions. Persons commenting on this proposal should submit only information that they wish to make publicly available.

      2 A "seasoned issuer" is eligible for an exemption from filing under Rule 2710(b)(7) if it has a three-year reporting history and either $150 million float or $100 million float plus annual trading volume of three million shares.

      3 A "bona fide independent market" is currently defined as a market in a security that is listed on a national securities exchange or NASDAQ with a market price of $5 per share, aggregate trading volume of 500,000 shares over 90 days and a public float of 5 million shares. The proposed amendments would eliminate the definition of "bona fide independent market" and replace it with a new definition of "bona fide public market."

      4 The proposed amendments would define "bona fide public market" as a market for a security issued by a company that has been reporting under the Securities Exchange Act for at least 90 days, is current in its reporting requirements, and whose securities are listed on a national securities exchange with an average daily trading volume of at least $1 million, provided that the issuer's common equity securities have a public float value of at least $150 million. These numerical standards are derived from Regulation M under the Securities Exchange Act of 1934. NASD requests comment on whether the proposed bona fide public market definition's listing requirement should include OTC-traded equity securities of foreign issuers listed on a foreign exchange deemed comparable to a national securities exchange and, if so, what criteria should be used to determine the eligible foreign exchanges.

      5 The proposed amendments would provide that offerings of investment-grade rated securities include securities that have not received an individual rating but are of the same class or series and are considered "pari passu" with other investment-grade rated securities issued by the same company.

      6 All syndicate members have due diligence responsibility, but typically the book-runner hires outside counsel to help all syndicate members meet their due diligence obligations.

      7 The bona fide independent market standards would be replaced with new standards in the definition of "bona fide public market."

      8 SEC Rule 13d-3 provides the basis for determining "beneficial ownership" under Securities Exchange Act Section 13(d), which includes voting power, investment power and the power to divest or prevent the vesting of beneficial ownership as part of a plan to evade the reporting requirements of Section 13(d). 9 Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (2002); Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005), 70 FR 44722 (August 3, 2005).


      ATTACHMENT A

      2710. Corporate Financing Rule—Underwriting Terms and Arrangements

      Rule 2710 is proposed to be amended by deleting paragraph (h) and renumbering the remaining paragraphs.

      2720. Public Offering of Securities With Conflicts of Interest

      (a) Requirements for Participation in Certain Public Offerings

      No member that has a conflict of interest may participate in a public offering unless the offering complies with paragraphs (1) or (2).
      (1) The registration statement, prospectus, offering circular or similar document for the public offering prominently discloses the nature of the conflict of interest and either:
      (A) the book-running lead-manager or dealer manager does not have a conflict of interest, is not an affiliate of any member that does have a conflict of interest, and meets the requirement of paragraph (f)(8)(E);
      (B) the securities offered have a bona fide public market; or
      (C) the securities offered are debt or preferred securities that have been rated investment grade (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 NASD) or debt or preferred securities that rank pari passu with such rated securities.
      (2)
      (A) A qualified independent underwriter has participated in the preparation of the registration statement and the prospectus, offering circular, or similar document and has exercised the usual standards of "due diligence" in respect thereto; and
      (B) the registration statement, prospectus, offering circular or similar document for the offering prominently discloses:
      (i) the nature of the conflict of interest;
      (ii) the name of the member acting as qualified independent underwriter; and
      (iii) the fact that the qualified independent underwriter is assuming the responsibilities of a qualified independent underwriter in conducting due diligence.
      (b) Escrow of Proceeds; Net Capital Computation
      (1) All proceeds from an offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by a member in any manner until the member has complied with subparagraph (2) hereof.
      (2) Any member offering its securities pursuant to this Rule shall immediately notify NASD when the offering has been terminated and settlement effected and it shall file with NASD a computation of its net capital computed pursuant to the provisions of SEC Rule 15c3-1 under the Act (the net capital rule) as of the settlement date. If at such time its net capital ratio as so computed is more than 10:1 or, net capital fails to equal 120 percent of the minimum dollar amount required by Rule 15c3-1 or, in the event the provisions of Rule 15c3-1(f) are utilized in making such computation, the net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the Commission a specific exemption from the net capital rule. Proceeds from the sales of securities in the offering may be taken into consideration in computing net capital ratio for purposes of this paragraph.
      (c) Discretionary Accounts

      Notwithstanding Rule 2510, no member that has a conflict of interest may sell any security to a discretionary account unless the member has received specific written approval of the transaction from the account holder and retains documentation of the approval in its records.
      (d) Application of Rule 2710

      Any offering subject to paragraph (a)(2) is subject to Rule 2710, whether or not the offering would be otherwise exempted from the filing or other requirements of that rule.
      (e) Requests for Exemption from Rule 2720

      Pursuant to the Rule 9600 Series, NASD may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of this rule that it deems appropriate.
      (f) Definitions

      For purposes of this Rule, the following words shall have the stated meanings:
      (1) Affiliate

      An entity that controls, is controlled by or is under common control with another entity or member.
      (2) Beneficial Ownership

      The right to the economic benefits of a security.
      (3) Bona Fide Public Market

      A market for a security issued by a company that has been reporting under the Exchange Act for at least 90 days, is current in its reporting requirements, and whose securities are traded on a national securities exchange with an ADTV (as provided by Regulation M under the Securities Exchange Act of 1934) of at least $1 million, provided that the issuer's common equity securities have a public float value of at least $150 million.
      (4) Conflicts of Interest

      A member's participation in a public offering of securities if any of the following applies:
      (A) the securities are to be issued by the member or its affiliate;
      (B) the issuer controls, is controlled by or is under common control with the member, its affiliates or the member's associated persons;
      (C) at least five percent of the offering proceeds are intended, as of the effective date of the registration statement, to be:
      (i) used to reduce or retire the balance of a loan or credit facility extended by the member, its affiliates and its associated persons, in the aggregate; or
      (ii) otherwise directed to the member, its affiliates and associated persons, in the aggregate; or
      (D) as a result of the public offering and any transactions contemplated at the time of the public offering:
      (i) the member will be an affiliate of the issuer;
      (ii) the member will become publicly owned; or
      (iii) the issuer will become a member or form a broker-dealer subsidiary.
      (5) Control
      (A) A member, entity, or associated person controls another member or entity if the member, entity or associated person:
      (i) beneficially owns 10 percent or more of the outstanding voting securities of an entity that is a corporation, including any right to receive such securities within 60 days;
      (ii) beneficially owns 10 percent or more of the distributable profits or losses of an entity that is a partnership or similar vehicle, including any right to receive within 60 days any interests in such distributable profits or losses; or
      (iii) has the power to direct or cause the direction of the management or policies of the member or entity.
      (B) A member,and entity are under common control if the same natural person or entity controls both of them.
      (6) Entity

      For purposes of the definitions of affiliate and control under this Rule, an entity:
      (A) includes a company, corporation, partnership, trust, association or organized group of persons; and
      (B) excludes the following:
      (i) an investment company registered under the Investment Company Act of 1940;
      (ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940;
      (iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code
      (iv) a "direct participation program" as defined in Rule 2810; or
      (v) a corporation, trust, partnership or other entity issuing financing instrumentbacked securities which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
      (7) Public Offering

      Any primary or secondary offering of securities made pursuant to a registration statement or offering circular including exchange offers, rights offerings, offerings made pursuant to a merger or acquisition, and all other securities offerings of any kind whatsoever, except any offering made pursuant to:
      (A) an exemption from registration under Sections 4(1), 4(2), or 4(6) of the Securities Act of 1933;
      (B) SEC Rule 504, if the securities are "restricted securities" under SEC Rule 144(a)(3), SEC Rules 505 or 506; or
      (C) SEC Regulation S.
      (8) Qualified Independent Underwriter

      The term "qualified independent underwriter" means a member:
      (A) that does not have a conflict of interest and is not an affiliate of any member that does have a conflict of interest;
      (B) that does not beneficially own as of the date of filing of the registration statement and the effective date of the offering, more than 5% of the class of securities that would give rise to a conflict of interest, including any right to receive any such securities exercisable within 60 days; and
      (C) that has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 thereof.
      (D) that has served as underwriter in at least three public offerings of a similar size and type during the three-year period immediately preceding the filing of the registration statement. This requirement will be deemed satisfied if, during the past three years, the member:
      (i) with respect to a proposed debt offering, has acted as sole underwriter or bookrunning lead-or co-manager of at least three public offerings of debt securities each with gross proceeds of not less than 25% of the anticipated gross proceeds of the proposed offering; and
      (ii) with respect to a proposed equity offering, has acted as sole underwriter or book-running lead- or co-manager of at least three public offerings of equity securities (or of securities convertible into equity securities), each with gross proceeds of not less than 50% of the anticipated gross proceeds of the proposed offering.
      (E) none of whose associated persons in a supervisory capacity who are responsible for organizing, structuring or performing due diligence with respect to corporate public offerings of securities:
      (i) has been convicted within ten years prior to the filing of the registration statement of a violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder, in connection with a registered or unregistered offering of securities;
      (ii) is subject to any order, judgment, or decree of any court of competent jurisdiction entered within ten years prior to the filing of the registration statement permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder in connection with a registered or unregistered offering of securities; or
      (iii) has been suspended or barred from association with any member by an order or decision of the Commission, any state, NASD or any other self-regulatory organization within ten years prior to the filing of the registration statement for any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules, or regulations promulgated thereunder, or the anti-fraud rules of any self-regulatory organization in connection with a registered or unregistered offering of securities.

    • 06-51 Amendments to Option Exercise Procedures in Rule 2860; Effective Date: October 12, 2006

      View PDF File

      GUIDANCE

      Options

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Institutional
      Senior Management
      Operations
      Trading
      Options
      Contrary Exercise Advice
      Exercise-by-Exception
      Exercise Procedures
      Options
      Rule 2860
      Rule 11850

      Executive Summary

      On August 10, 2006, NASD filed with the Securities and Exchange Commission (SEC) for immediate effectiveness a rule change to amend Rule 2860(b)(23) (Tendering Procedures for Exercise of Options) to: (1) simplify the manner in which a Contrary Exercise Advice (CEA) is submitted; (2) extend by one hour the cut-off time by which members must submit CEA notices; (3) add procedures for exercising a standardized equity option when a modified close of trading is announced; and (4) consolidate all provisions pertaining to the exercise of standardized options contracts into Rule 2860(b)(23) instead of having additional and overlapping provisions in Rule 11850 (Tendering Procedures for Exercise of Options).1

      Rule 2860 and Rule 11850, as amended, are set forth in Attachment A of this Notice. The implementation date of the amendments is October 12, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight (RPO), at (202) 728-8104, or Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, RPO, at (202) 974-2974.

      Background and Discussion

      Rule 2860(b)(23) and Rule 11850 set forth the procedures to exercise options, including procedures that address The Options Clearing Corporation's (OCC) exercise-by-exception procedure (Ex-by-Ex) for standardized options. The Ex-by-Ex procedure in OCC Rule 805 provides for the automatic exercise of certain options that are in-the-money by a specified amount. Under the Ex-by-Ex procedure, option holders with an option contract that is in-the-money by the requisite amount and who wish to have their contracts automatically exercised need to take no further action. However, under OCC Rule 805, option holders who do not want their options automatically exercised, or who want their options to be exercised under different parameters than that of the Ex-by-Ex procedure, must file a CEA and instruct OCC of their "contrary intention." The option exercise procedures and CEA delivery requirements contained in the analogous rules of the Options Exchanges2 have recently been amended3 and NASD has made the conforming changes to its rules.

      The amendments to Rule 2860(b)(23) modify CEA delivery requirements, add exercise procedures for standardized equity options in the event of a modified close of trading and consolidate all provisions pertaining to the exercise of standardized options contracts into Rule 2860(b)(23) from Rule 11850.

      Rule 2860(b)(23)(A)(i) was amended to mirror the provisions of Rule 11850(a)(1) and provides that members may establish fixed procedures as to the latest time they will accept exercise instructions from customers for tender to OCC.

      Rule 2860(b)(23)(A)(ii) was amended to integrate the provisions of Rule 11850(b)(1)(A) regarding the cut-off time to submit final exercise decisions. In order to conform to similar amendments to the rules of the Options Exchanges, NASD has extended the cutoff time for members to submit CEAs to the appropriate venue from 5:30 pm ET to 6:30 pm ET. Please note, however, that option holders continue to be required to submit exercise decisions to members no later than 5:30 pm ET. This one-hour extension applies only to members submitting CEAs for customer accounts and non-customer accounts where the member employs an electronic procedure with time stamp recording for the submission of exercise instructions by options holders. Members must establish fixed procedures to ensure secure time stamps in connection with the utilization of the electronic stamp provision for their non-customer accounts. If a member does not employ an electronic time stamp and appropriate procedures to ensure secure time stamps, the member will have to submit CEAs for non-customer accounts by 5:30 pm ET.

      Rule 2860(b)(23)(A)(iii) was amended to incorporate the provisions of Rule 11850(b)(1)(A) and contains the particulars of the Ex-by-Ex procedure, including when and where exercise notices and CEAs must be filed, together with conforming language and definitional changes to harmonize the rule with the rules of the Options Exchanges.

      A new subparagraph (iv) was added to Rule 2860(b)(23)(A), which includes provisions parallel to the provisions of Rule 11850(b)(1)(B) and details the procedures to be followed in the event the Ex-by-Ex procedure has been waived. New subparagraph (iv) also tracks the amended rules of the Options Exchanges that provide that when the Exby- Ex procedure has been waived, no CEA is required to be filed if the option holder does not wish to exercise the expiring standardized equity option.

      Rule 2860(b)(23)(A)(v) provides (as previously provided in Rule 11850(b)(1)(C)) that members that maintain proprietary or public customer positions in expiring standardized equity options must take necessary steps to ensure that final exercise decisions are properly indicated to the relevant national options exchange with respect to such positions. In addition, members that have accepted the responsibility to indicate final exercise decisions on behalf of another member also must take necessary steps to ensure that such decisions are properly indicated to the relevant national options exchange.

      Rule 2860(b)(23)(A)(vi) retains the provision (as previously provided in Rule 2860(b)(23)(A)(ii) and Rule 11850(b)(2)) that allows members to make final exercise decisions after the exercise cut-off time, but before expiration of the standardized equity option, subject to the same exceptions as Rule 11850 previously provided, which are also consistent with the rules of the Options Exchanges. Specifically, exercise decisions may be effected after the exercise cut-off time: (1) in order to remedy mistakes or errors made in good faith; (2) to take appropriate action as the result of a failure to reconcile unmatched option transactions; or (3) where extraordinary circumstances restricted a customer's or member's ability to inform the respective member of such decisions (or a member's ability to receive such decisions) by the cut-off time. Rule 2860(b)(23)(B) also retains the requirements for reporting and record keeping obligations when a member relies on these exceptions and incorporates provisions from Rule 11850(b)(3) that require members to submit to NASD a copy of the memorandum describing the circumstances that gave rise to any exception.

      NASD also added to Rule 2860, in subparagraph (vii), a similar provision as found in the rules of the Options Exchanges that addresses when a national options exchange or OCC establishes a different time for the close of trading.4 Under such circumstances, the deadline for making a final decision to exercise or not to exercise will be one hour and 28 minutes following the time announced for the close of trading. With respect to the submission of a CEA by members, the cut-off time will be two hours and 28 minutes after the close of trading for customer accounts and non-customer accounts where the member firm employs an electronic procedure with time stamp for the submission of exercise instructions. Members that do not employ an electronic submission procedure for exercise instructions will be required to submit a CEA within one hour and 28 minutes after the close of trading for non-customer accounts.

      New subparagraphs (viii), (ix) and (x) of Rule 2860(b)(23)(A), wholly incorporate the provisions previously contained in Rule 11850(b)(4), (5) and (6), respectively. Specifically, subparagraph (viii) provides that the filing of a final exercise decision, exercise instruction, exercise advice, CEA or Advice Cancel does not serve as a substitute to the effective notice required to be submitted to OCC for the exercise or non-exercise of expiring standardized equity options. Subparagraph (ix) provides that submitting or preparing an exercise instruction after the exercise cut-off time in any expiring standardized equity option on the basis of material information released after the exercise cut-off time is activity inconsistent with just and equitable principles of trade. Subparagraph (x) provides that the exercise cut-off requirements do not apply to any currency option or standardized index option products listed on a national options exchange.

      Finally, paragraphs (C) and (D) of Rule 2860(b)(23) govern the allocation of exercise assignment notices and delivery and payment, respectively, which are the same as the corresponding provisions in Rule 11850(c) and (d). Accordingly, these provisions are deleted from Rule 11850.

      The implementation date of the amendment is October 12, 2006.


      1 See Exchange Act Release No. 54313 (August 14, 2006), 71 FR 47850 (August 18, 2006) (Notice of Filing and Immediate Effectiveness of SR-NASD- 2006-099). Under Section 19(b) of the Securities Exchange Act of 1934, the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 See Rule 980 of the AMEX; Rule 1042 of the PHLX; Rule 6.24 of the NYSE Arca (formerly the PCX); Rule 11.1 and related Regulatory Circulars RG03-41 and RG 03-54 of the CBOE; Rule 1100 of the ISE; and Chapter VII Section 1 of the BOX (collectively referred to as the Options Exchanges).

      3 See Exchange Act Release No. 47885 (May 16, 2003), 68 FR 28309 (May 23, 2003) (Approval Order of SR-AMEX-2001-92); Exchange Act Release No. 48639 (October 16, 2003), 68 FR 60764 (October 23, 2003) (Notice of Filing and Immediate Effectiveness of SR-PHLX-2003-65); Exchange Act Release No. 48640 (October 16, 2003), 68 FR 60757 (October 23, 2003) (Notice of Filing and Immediate Effectiveness of SR-PCX- 2003-47); Exchange Act Release No. 49275 (February 18, 2004), 69 FR 8713 (February 25, 2004) (Notice of Filing and Immediate Effectiveness of SR-CBOE-2003-47); Exchange Act Release No. 48505 (September 17, 2003), 68 FR 55680 (September 26, 2003) (Notice of Filing and Immediate Effectiveness of SR-ISE-2003-20) and Exchange Act Release No. 49191 (February 4, 2004), 69 FR 7055 (February 12, 2004) (Notice of Filing and Immediate Effectiveness of SR-BSE- 2004-04).

      4 See id.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      2860. Options

      (a) No Change.
      (b) Requirements
      (1) through (22) No Change.
      (23) Tendering Procedures for Exercise of Options
      (A) Exercise of Options Contracts
      (i) Subject to the restrictions established pursuant to paragraph (b)(4) and (b)(8) hereof and such other restrictions that may be imposed by [the Association]NASD, The Options Clearing Corporation or an options exchange pursuant to appropriate rules, an outstanding option contract issued by The Options Clearing Corporation may be exercised during the time period specified in the rules of The Options Clearing Corporation by the tender to The Options Clearing Corporation of an exercise notice in accordance with rules of The Options Clearing Corporation. An exercise notice may be tendered to The Options Clearing Corporation only by the clearing member in whose account the option contract is carried. [Exercise instructions of their customers relating to exchange listed option contracts shall not be accepted by members after 5:30 p.m. (Eastern Time) on the business day immediately prior to the expiration date of any option contract. Exercise instructions in respect of such option contracts carried in any proprietary account of a member shall similarly not be accepted by any other member with which such member maintains an account after 5:30 p.m. (Eastern Time) on the business day immediately prior to the expiration date of any option contract.]Members may establish fixed procedures as to the latest time they will accept exercise instructions from customers.
      [(ii) Notwithstanding the provisions of subparagraph (A)(i) hereof, members may receive and act on exercise instructions after the cut-off time for the acceptance of exercise instructions but prior to 5:00 p.m. (Eastern Time) on the expiration date of an option contract:]
      [a. in the case of option contracts carried in an account maintained for another member in which only positions of customers of such other member are carried;]
      [b. in order to remedy mistakes or errors made in good faith;]
      [c. to take appropriate action as the result of a failure to reconcile unmatched option transactions; or]
      [d. where extraordinary circumstances relating to a public customer's ability to communicate exercise instructions to the member (or the member's ability to receive exercise instructions) prior to such cut-off time warrant such action.]
      [(iii) This subparagraph (A) is intended as a means of providing for relatively uniform procedures in respect of exercise instructions and not to alter or affect in any way the expiration times for an option which are fixed in accordance with the rules of The Options Clearing Corporation or any other provisions of an options contract, and the exercise prior to expiration of an option contract in contravention of this subparagraph (A) shall neither affect the validity of such exercise nor modify or otherwise affect any right or obligation of any holder or writer of any option contract of such series of options.]
      (ii) Final exercise decisions of options holders to either exercise or not to exercise an expiring standardized equity option must be indicated to an options exchange that is a national securities exchange (national options exchange) that lists and trades the option, either directly to such national options exchange or via a member of such national options exchange if it is not a member of such exchange, by the respective member no later than 5:30 p.m. Eastern time ("ET") on the business day immediately prior to the expiration date. For customer accounts, members may not accept exercise instructions after 5:30 p.m. ET but have until 6:30 p.m. ET to submit a Contrary Exercise Advice (as defined below). For non-customer accounts, members may not accept exercise instructions after 5:30 p.m. ET but have until 6:30 p.m. ET to submit a Contrary Exercise Advice if such member employs an electronic submission procedure with time stamp for the submission of exercise instructions by option holders. Members are required to submit a Contrary Exercise Advice by 5:30 p.m. ET for non-customer accounts if such members do not employ an electronic submission procedure with time stamp for the submission of exercise instructions by option holders. Each member shall establish fixed procedures to ensure secure time stamps in connection with their electronic systems employed for the recording of submissions to exercise or not exercise expiring options. For purposes of this Rule 2860(b)(23)(A), the terms "customer account' and non-customer account" shall have the meanings as defined in The Options Clearing Corporation By-laws.
      (iii) Special procedures apply to the exercise of standardized equity options on the last business day before their expiration ("expiring options"). Unless waived by The Options Clearing Corporation, expiring standardized equity options are subject to the Exercise-by- Exception ("Ex-by-Ex") procedure under The Options Clearing Corporation Rule 805. This rule provides that, unless contrary instructions are given, standardized equity option contracts that are in-the-money by specified amounts shall be automatically exercised. In addition to The Options Clearing Corporation rules, the following NASD requirements apply with respect to expiring standardized equity options. Option holders desiring to exercise or not exercise expiring standardized equity options must either:
      a. take no action and allow exercise determinations to be made in accordance with The Options Clearing Corporation's Ex-by-Ex procedure where applicable; or
      b. submit a "Contrary Exercise Advice" by the deadline specified in paragraph (ii) above. A Contrary Exercise Advice is a form approved by the national options exchanges, NASD or The Options Clearing Corporation for use by a member to submit a final exercise decision committing an options holder to either: (1) not exercise an option position which would automatically be exercised pursuant to The Options Clearing Corporation's Ex-by-Ex procedure; or (2) to exercise a standardized equity option position which would not automatically be exercised pursuant to The Options Clearing Corporation's Ex-by-Ex procedure. A Contrary Exercise Advice may be canceled by filing an "Advice Cancel" or resubmitted at any time up to the submission cut-off times specified in paragraph (ii) above. Contrary Exercise Advices and/or Advice Cancels may be submitted by any member to:
      1. a place designated for that purpose by any national options exchange of which it is a member and where the standardized equity option is listed;
      2. a place designated for that purpose by any national options exchange that lists and trades the standardized equity option via a member of such exchange if the member is not a member of such exchange;
      3. any national options exchange of which it is a member and where the standardized equity option is listed via The Options Clearing Corporation in a form prescribed by The Options Clearing Corporation; or
      4. any national options exchange where the standardized equity option is listed via The Options Clearing Corporation in a form prescribed by The Options Clearing Corporation, provided the member is a member of The Options Clearing Corporation.
      (iv) In those instances when The Options Clearing Corporation has waived the Ex-by-Ex procedure for an options class, members must either:
      a. submit to any of the places listed in paragraphs (iii)b.1. through 4. above, a Contrary Exercise Advice, within the time limits specified in paragraph (ii) above if the holder intends to exercise the standardized equity option, or
      b. take no action and allow the standardized equity option to expire without being exercised.
           The applicable underlying security price in such instances will be as described in The Options Clearing Corporation Rule 805(1), which is normally the last sale price in the primary market for the underlying security. In cases where the Ex-by-Ex procedure has been waived for an options class, The Options Clearing Corporation rules require that members wanting to exercise such options must submit an affirmative Exercise Notice to The Options Clearing Corporation, whether or not a Contrary Exercise Advice has been filed.
      (v) Members that maintain proprietary or public customer positions in expiring standardized equity options shall take necessary steps to ensure that final exercise decisions are properly indicated to the relevant national options exchange with respect to such positions. Members that have accepted the responsibility to indicate final exercise decisions on behalf of another member also shall take necessary steps to ensure that such decisions are properly indicated to the relevant national options exchange. Members may establish a processing cut-off time prior to NASD's exercise cut-off time at which they will no longer accept final exercise decisions in expiring standardized equity options from customers.
      (vi) Members may effect or amend exercise decisions for standardized equity options after the exercise cut-off time (but prior to expiration) under the following circumstances:
      a. in order to remedy mistakes or errors made in good faith;
      b. to take appropriate action as the result of a failure to reconcile unmatched option transactions; or
      c. where extraordinary circumstances restricted a customer's or member's ability to inform the respective member of such decisions (or a member's ability to receive such decisions) by the cut-off time.
      The burden of establishing an exception for a proprietary or customer account of a member rests solely on the member seeking to rely on such exception.
      (vii) In the event a national options exchange or The Options Clearing Corporation provides advance notice on or before 5:30 p.m. ET on the business day immediately prior to the last business day before the expiration date indicating that a modified time for the close of trading in standardized equity options on such last business day before expiration will occur, then the deadline to make a final decision to exercise or not exercise an expiring option shall be 1 hour 28 minutes following the time announced for the close of trading on that day instead of the 5:30 p.m. ET deadline found in paragraph (ii) above. However, members may deliver a Contrary Exercise Advice or Advice Cancel to the places specified in paragraphs (iii)b.1. through 4. above within 2 hours 28 minutes following the time announced for the close of trading in standardized equity options on that day instead of the 6:30 p.m. ET deadline found in paragraph (ii) above for customer accounts and noncustomer accounts where such member firm employs an electronic submission procedure with time stamp for the submission of exercise instructions. For non-customer accounts, members that do not employ an electronic procedure with time stamp for the submission of exercise instructions are required to deliver a Contrary Exercise Advice or Advice Cancel within 1 hour and 28 minutes following the time announced for the close of trading on that day instead of the 5:30 p.m. ET deadline found in paragraph (ii) above.
      (viii) The filing of a final exercise decision, exercise instruction, exercise advice, Contrary Exercise Advice or Advice Cancel required by paragraph (A) hereof does not serve as a substitute to the effective notice required to be submitted to The Options Clearing Corporation for the exercise or non-exercise of expiring standardized equity options.
      (ix) Submitting or preparing an exercise instruction after the exercise cut-off time in any expiring standardized equity option on the basis of material information released after the exercise cut-off time is activity inconsistent with just and equitable principles of trade.
      (x) The exercise cut-off requirements contained in this paragraph (A) do not apply to any currency option or standardized index option products listed on a national options exchange.
      (B) [Each member shall prepare a memorandum of every exercise instruction received from a customer showing the time such instruction was received. Such memoranda shall be subject to the requirements of SEC Rules 17a-3(a)(6) and 17a-4(b) under the Act.] In the event a member receives and acts on an exercise instruction (for its own proprietary account or on behalf of a customer's account) pursuant to an exception set forth in subparagraphs a, b., or c. of subparagraph (A)[(ii)](vi) hereof, the member shall maintain a memorandum setting forth the circumstances giving rise to such exception and shall file a copy of the memorandum with the Market Regulation Department of the national options exchange trading the option, if it is a member of such exchange, or NASD's Market Regulation Department if it is not a member of such exchange, no later than 12:00 p.m., ET on the business day following that expiration. Such memorandum must additionally include the time when such final exercise decision was made or, in the case of a customer, received, and shall be subject to the requirements of SEC Rules 17a-3(a)(6) and 17a-4(b). [If the member is relying on subparagraph b. or subparagraph d. as the basis for an exception, it shall promptly file a copy of the memorandum with the Association.]
      (C) through (D) No Change.
      (24) No Change.

      * * * * *

      [11850. Tendering Procedures for Exercise of Options]

      [(a) Exercise of Option Contracts]
      [(1) Subject to the restrictions established pursuant to Rule 2860 of the Association's Rules, and such other restrictions which may be imposed by the Association, the Options Clearing Corporation (OCC) or an options exchange pursuant to appropriate rules, an outstanding exchange listed option contract may be exercised during the time period specified in the OCC rules by the tender to OCC of an exercise notice in accordance with OCC rules. An exercise notice may be tendered to OCC only by the clearing member in whose account the option contract is carried. Members may establish fixed procedures as to the latest time at which they will accept exercise notices from their customers.]
      [(b) Exercise Cut-Off for Expiring Equity Options ]
      [(1)
      (A) Final exercise decisions of options holders to either exercise or not to exercise an expiring equity option must be indicated to an options exchange that is a national securities exchange (national options exchange) that lists and trades the option, either directly to such national options exchange or via a member of such national options exchange if it is not a member of such exchange, by the respective member no later than 5:30 p.m., Eastern Time on the business day immediately prior to the expiration date ("the exercise cut-off time") in either of the following manners:]
      [(i) take no action and allow exercise determinations to be made in accordance with OCC's Rule 805 exercise-by-exception procedure where applicable; or]
      [(ii) submit a Contrary Exercise Advice. A Contrary Exercise Advice is a form approved by the national options exchanges and the Association for use by a member to submit a final exercise decision committing an options holder to not exercise an option position which would automatically be exercised pursuant to OCC's exercise-by-exception procedure, or to exercise an equity option position which would not automatically be exercised pursuant to OCC's exercise-by-exception procedure. Contrary Exercise Advices may be submitted by any member:]
      [a. to a place designated for that purpose by any national options exchange of which they are a member and where the equity option is listed;]
      [b. to a place designated for that purpose by any national options exchange that lists and trades the equity option via a member of the such exchange if the member is not a member of such exchange;]
      [c. to any national options exchange of which they are a member and where the equity option is listed via OCC in a form prescribed by OCC; or]
      [d. to any national options exchange where the equity option is listed via OCC in a form prescribed by OCC, provided the member is a member of OCC.]
      [(B) In those instances when OCC has waived the exercise-by-exception procedure, a Contrary Exercise Advice is still required to be submitted by members wanting to exercise an option that would not have been automatically exercised, or not to exercise an option that would have been automatically exercised, had the exercise-by-exception procedure been in effect. The applicable underlying security price in such instances will be as described in OCC Rule 805(1), which is normally the last sale price in the primary market for the underlying security. In cases where the exercise-by-exception procedure has been waived for an options class, OCC rules require that OCC members and member organizations wanting to exercise such options must submit an affirmative Exercise Notice to OCC, whether or not a Contrary Exercise Advice has been filed.]
      [(C) Members that maintain proprietary or public customer positions in expiring options shall take necessary steps to ensure that final exercise decisions are properly indicated to the relevant national options exchange with respect to such positions. Members who have accepted the responsibility to indicate final exercise decisions on behalf of another member also shall take necessary steps to ensure that such decisions are properly indicated to the relevant national options exchange. Members may establish a processing cut-off time prior to the Association's exercise cut-off time at which they will no longer accept final exercise decisions in expiring options from customers.]
      [(2) Members may effect or amend exercise decisions for standardized equity options after the exercise cut-off time (but prior to expiration) under the following circumstances:]
      [(A) in order to remedy mistakes or errors made in good faith;]
      [(B) to take appropriate action as the result of a failure to reconcile unmatched option transactions; or]
      [(C) where extraordinary circumstances restricted a customer's or member's ability to inform the respective member of such decisions (or a member's ability to receive such decisions) by the cut-off time.]
           [The burden of establishing an exception for a proprietary or customer account of a member rests solely on the member seeking to rely on such exception.]
      [(3) In the event a member makes a final exercise decision (for its own proprietary account or on behalf of a customer's account) after the exercise cut-off time pursuant to an exception set forth in clauses (A), (B), or (C) of paragraph (b)(2) hereof, the member shall maintain a memorandum setting forth the circumstances regarding such exception and shall file a copy of the memorandum with the Market Regulation Department of the national options exchange trading the option, if it is a member of such exchange, or the Association's Market Regulation Department if it is not a member of such exchange, no later than 12:00 p.m., Eastern Time on the business day following that expiration. Such memorandum must additionally include the time when such final exercise decision was made or, in the case of a customer, received, and shall be subject to the requirements of SEC Rules 17a-3(a)(6) and 17a-4(b).]
      [(4) The filing of a final exercise decision required by paragraph (b)(1) hereof does not serve as a substitute to the effective notice required to be submitted to OCC for the exercise or nonexercise of expiring options.]
      [(5) Submitting or preparing an exercise instruction after the exercise cut-off time in any expiring option on the basis of material information released after the exercise cut-off time is activity inconsistent with just and equitable principles of trade.]
      [(6) The exercise cut-off requirements contained in this paragraph (b) do not apply to any currency option or standardized index option products listed on a national options exchange.]
      [(c) Allocation of Exercise Assignment Notices]
      [(1) Each member shall establish fixed procedures for the allocation to customers of exercise notices assigned in respect of a short position in option contracts in such member's customer accounts. Such allocation shall be on a "first in—first out" or automated random selection basis that has been approved by the Association or on a manual random selection basis that has been specified by the Association. Each member shall inform its customers in writing of the method it uses to allocate exercise notices to its customer's accounts, explaining its manner of operation and the consequences of that system.]
      [(2) Each member shall report its proposed method of allocation to the Association and obtain the Association's prior approval thereof, and no member shall change its method of allocation unless the change has been reported to and been approved by the Association. The requirements of this paragraph shall not be applicable to allocation procedures submitted to and approved by another self-regulatory organization having comparable standards pertaining to methods of allocation.]
      [(3) Each member shall preserve for a three-year period sufficient workpapers and other documentary materials relating to the allocation of exercise assignment notices to establish the manner in which allocation of such exercise assignment notices is in fact being accomplished.]
      [(d) Delivery and Payment]

      [Delivery of the shares of an underlying security upon the exercise of an option contract and payment of the aggregate exercise price in respect thereto, shall be effected in accordance with the rules of the Options Clearing Corporation. As promptly as practicable after the exercise of an option contract by a customer, the member shall require the customer to make full cash payment of the aggregate exercise price in the case of a call option contract or to deposit the underlying stock in the case of a put option contract, or, in either case, to make the required margin deposit in respect thereto if such transaction is effected in a margin account, in accordance with the applicable regulations of the Federal Reserve Board and Rule 2520 of the Association's Conduct Rules. As promptly as practicable after the assignment to a customer of an exercise notice, the member shall require the customer to deposit the underlying stock in the case of a call option contract if the shares of the underlying security are not carried in the customer's account, or to make full cash payment of the aggregate exercise price in the case of a put option contract, or, in either case, to make the required margin deposit in respect thereof, if such transaction is effected in a margin account, in accordance with Rule 2520 and the applicable regulations of the Federal Reserve Board.]
      * * * * *

    • 06-50 NASD Reminds Members of Their Obligation to Provide Accurate Information to Services that Disseminate Trading Volume and Trading Interest

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      GUIDANCE

      Trading Volume and Interest

      SUGGESTED ROUTING

      KEY TOPICS

      Advertising
      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      Communications with the Public
      Manipulative and Deceptive
      Quotations
      Publication of Transactions and
      Quotations
      Rule 2120
      Rule 2210
      Rule 3310
      Trading Interest
      Trading Volume
      Use of Manipulative, Deceptive or
      Other Fraudulent Devices

      Executive Summary

      NASD is publishing this Notice to remind members of their obligation to communicate accurate information when using services to communicate trading volume and trading interest to the marketplace.

      Questions

      Questions concerning this Notice should be directed to Peter Santori, Chief Counsel, Market Regulation, at 240-386-5098; David Chapman, Deputy Director, Market Regulation, at 240-386-4995; or the Office of General Counsel, at 202-728-8071.

      Background and Discussion

      Members have the ability to communicate or advertise their trading activity or interest to the marketplace through several service providers that disseminate this information to subscribers and/or the marketplace. For example, some of these services allow members to publicize their current trading interest, as well as their historical trading volume, in a particular security. A member may choose to advertise such activity in order to inform other market participants that it is active in a particular security or market sector, with a view toward attracting order flow, underwriting activity or other business to its firm. While there is no prohibition on the use of such services for this or other proper, lawful purposes, members are reminded that, to the extent that they use such services to communicate or advertise trading activity or interest, such information must be truthful, accurate and not misleading.

      The communication of untruthful, inaccurate or misleading information would be considered conduct inconsistent with high standards of commercial honor and just and equitable principles of trade.1 In addition, depending on the nature and content of the communication, such communications may also violate NASD Rule 3310 (Publication of Transactions and Quotations) and IM-3310 (Manipulative and Deceptive Quotations), as well as Rule 2120 (Use of Manipulative, Deceptive or Other Fraudulent Devices), Rule 2210 (Communications with the Public) and the anti-fraud provisions of the federal securities laws.

      NASD also is reminding members that use such services that they must establish, maintain and enforce written supervisory procedures and supervisory systems that are reasonably designed to ensure, among other things, that the information communicated or advertised by the member or its associated persons is truthful, accurate and not misleading.


      1 See Rule 2110.

    • 06-49 NASD to Close Mid-Atlantic Dispute Resolution Office October 6, 2006

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      INFORMATIONAL

      Dispute Resolution

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Arbitration
      Dispute Resolution Regional Offices
      Mediation

      Executive Summary

      Effective October 6, 2006, NASD will close its Mid-Atlantic Dispute Resolution Office. All arbitration cases currently assigned to the Mid-Atlantic Region will continue to be administered by that office until parties are notified in writing that the case has been reassigned. On June 12, 2006, NASD realigned the regional office assignments for several of its 68 hearing locations. All new cases filed on or after June 12, 2006 have been assigned according to the new hearing location assignment plan. A map and complete listing of the new hearing location assignments can be found at www.nasd.com/arbitration_mediation/hearing_locations.

      NASD will continue to offer 68 hearing venues, including one in each state of the United States, Puerto Rico and London, UK. We will not be closing any of our remaining four regional offices.

      Questions/Further Information

      Questions regarding this Notice may be directed to Shari L. Sturm, Associate Vice President and Director of the Mid-Atlantic Region, at (202) 728-8828.

      Discussion

      As of June 12, 2006, all new arbitration cases that would have been assigned to the Mid-Atlantic Region in the past were assigned to the Southeast, Midwest and Northeast regional offices. In addition, existing cases are being shifted to the other regional offices in phases. Hearing locations have been allocated as follows:

      •   Southeast Region will administer cases with venues in:

      Baltimore, MD; Charlotte, NC; Columbia, SC; Memphis, TN; Nashville, TN; Norfolk, VA; Raleigh, NC; Richmond, VA; Washington, DC; and Wilmington, DE.
      •   Midwest Region will administer cases with venues in:

      Charleston, WV and Pittsburgh, PA.
      •   Northeast Region will administer cases with a venue in: Philadelphia, PA.

      NASD looks forward to continuing to provide quality dispute resolution services to the investing public, members, arbitrators and mediators.

    • 06-48 SEC Approves Amendments to NASD Rules 2210 and 2211 to Require Disclosure of Fees and Expenses in Mutual Fund Performance Sales Material; Effective Date: April 1, 2007

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      GUIDANCE

      Mutual Fund Performance Sales Material

      SUGGESTED ROUTING

      KEY TOPICS

      Advertising
      Executive Representatives
      Investment Companies
      Legal & Compliance
      Mutual Funds
      Registered Representatives
      Senior Management
      Mutual Fund Performance Advertising
      Fees and Expenses
      Rule 2210
      Rule 2211

      Executive Summary

      On July 5, 2006, the Securities and Exchange Commission (SEC) approved amendments to NASD Rules 2210 and 2211 that impose certain disclosure and presentation requirements on member communications with the public, other than institutional sales material and public appearances, that present non-money market mutual fund performance data (performance sales material).1 Such communications must disclose: (1) the standardized performance information mandated by Rule 482 under the Securities Act of 1933 (Rule 482) and Rule 34b-1 under the Investment Company Act of 1940 (Rule 34b-1); and (2) to the extent applicable, the fund's maximum front-end or back-end sales charge and annual operating expense ratio. The rule requires that all of this information be presented prominently and, in any print advertisement, in a prominent text box.

      The effective date of this rule change is April 1, 2007. Included with this Notice is Attachment A (text of rule amendments).

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Joseph P. Savage, Associate Vice President, Investment Companies Regulation, Regulatory Policy and Oversight (RPO), at (240) 386- 4534; or Philip A. Shaikun, Associate Vice President and Associate General Counsel, Office of General Counsel, RPO, at (202) 728-8451.

      Questions about individual performance sales material should be directed to the NASD Advertising Regulation Department analyst assigned to review the member's sales material.

      Background and Discussion

      Current Performance Advertising Standards

      The content of mutual fund performance advertising is governed primarily by NASD Rules 2210 and 2211, Rule 482 under the Securities Act of 1933 and Rule 34b-1 under the Investment Company Act of 1940 (1940 Act). These rules help ensure that these communications are fair, balanced and not misleading.

      Rule 2210 governs member communications with the public, including performance advertising. Rule 2210(d) provides that all member communications with the public must be based on principles of fair dealing and good faith, and should provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service. The rule further provides that "no member may omit any material fact or qualification" if the omission would cause the communication to be misleading. Rule 2210(e) provides in part that any member violation of an SEC rule applicable to member communications will be deemed a violation of Rule 2210.

      Rule 2211 sets forth separate standards for institutional sales material and correspondence. Rule 2211(d)(1) provides that all institutional sales material and correspondence are subject to the content standards of Rule 2210(d)(1) and the applicable Interpretive Materials under Rule 2210.

      Rule 482 and Rule 34b-1 permit the inclusion of performance information in investment company sales material. If performance information is included, Rule 482 requires disclosure of the fund's maximum sales charges and its average annual total return for the most recent one-, five- and 10-year periods, as of the most recent calendar quarter.2 The total return must be calculated according to standards set by the SEC, taking into account sales charges and expenses.3 These returns are generally referred to as standardized performance. These rules also require that the standardized performance figures be presented at least as prominently as any non-standardized performance information included in the sales material.4 Rule 482 does not require a mutual fund performance advertisement to disclose the fund's expense ratio.

      Prior to this rule change, NASD had not interpreted Rule 2210 or Rule 2211 to require performance advertising to include a fund's expense ratio. However, NASD believes that such information is just as important in evaluating whether to invest in a fund as the fund's maximum sales charge, since a fund's total annual operating expenses will impact its performance for as long as an investor holds shares in the fund.

      New Performance Advertising Standards

      On July 5, 2006, the SEC approved amendments to Rules 2210 and 2211 to impose certain disclosures and presentation requirements on performance sales material.5 Specifically, Rule 2210(d)(3)(A) requires that such performance sales material disclose the standardized performance mandated by SEC Rule 482 and Rule 34b-1, and to the extent applicable, the maximum sales charge imposed on purchases or the maximum deferred sales charge, and the expense ratio, gross of any fee waivers or expense reimbursements. Both the sales charges and the expense ratio should reflect the amounts stated in the investment company's prospectus fee table, current as of the date of submission of an advertisement for publication, or as of the date of distribution of other communications with the public. And if performance sales material appears in a print advertisement, the required information must be presented in a prominent text box.

      These rule changes become effective on April 1, 2007. Accordingly, all member performance sales material that is used on or after April 1, 2007 must comply with the new requirements of Rule 2210(d)(3).

      During the comment process for this rule, four principal issues arose. First, a number of commenters had questions about the rule's prominence requirements. Second, members inquired as to the application of the text box requirement to member advertisements. Third, commenters had questions concerning the expense ratio that must be disclosed in performance sales material. Fourth, questions have arisen regarding the use of previously filed performance sales material that is revised to meet the requirements of Rule 2210(d)(3) on or after April 1, 2007. We address and give guidance on each of these issues below.

      Prominence Requirements

      Rule 2210(d)(3)(B) provides that all of the information required by paragraph (A) must be set forth "prominently." NASD will apply the same prominence and proximity standards for disclosure of the expense ratio as those used for standardized performance and sales charges under the SEC rules.

      For example, the quotations of the standardized average annual total returns for one-, five- and 10-year periods must be set forth with equal prominence, and any quotations of non-standardized performance may not be set forth in greater prominence than the standardized performance.6 Similarly, the disclosures of a fund's maximum sales load and expense ratio generally would have to be presented in print advertisements "in a type size at least as large as and of style different from, but at least as prominent as, that used in the major portion of the advertisement …"7 When fund performance data is presented on a Web site, members may present standardized performance through the use of a hyperlink, provided that the standardized performance is presented prominently and is consistent with the standards of SEC Rule 482.

      Text Box Requirement

      Rule 2210(b)(3)(B) also provides that, in any print advertisement, the information required by paragraph (A) must be set forth in a prominent text box that contains only the required information and, at the member's option, comparative performance and fee data and other disclosures that are required to be in the advertisement under Rule 482 and Rule 34b-1. Thus, for example, a text box may include the prospectus disclosure language required by Rule 482, the performance of a relevant benchmark index, or a comparison of the fund's expense ratio to the average expense ratio of similar funds.

      The text box requirement applies only to advertisements that appear in print advertisements, such as a print newspaper, magazine or other periodical. The text box requirement does not apply to printed sales literature, such as fund fact sheets, brochures or form letters, nor does it apply to Web sites, television or radio commercials, or any other electronic communication.

      Annual Fund Operating Expense Ratio

      Rule 2210(d)(3)(A)(ii)(b) requires performance sales material to disclose a fund's total annual operating expense ratio, gross of any fee waivers or expense reimbursements (the unsubsidized expense ratio), as stated in the fee table of the fund's prospectus. This requirement to disclose the unsubsidized expense ratio applies even if a fund's prospectus also discloses its expense ratio net of fee waivers or reimbursements (the subsidized expense ratio). NASD requires the disclosure of the unsubsidized expense ratio because fund advertisements, like prospectuses, are directed to prospective investors. The required expense ratio disclosure does not reflect fee waivers or reimbursements because they may not be available to fund shareholders in the future, and thus may mislead an investor without further explanation.

      The rule does not preclude performance sales material from also presenting a fund's subsidized expense ratio, as long as the member presents both expense ratios in a fair and balanced manner in accordance with the standards of NASD Rule 2210. In this regard, NASD expects a member that also presents a subsidized expense ratio to disclose in the sales material whether the fee waivers or expense reimbursements were voluntary or mandated by contract, and the time period during which the fee waiver or expense reimbursement obligation, if any, remains in effect. In print advertisements, a member may show the subsidized expense ratio in the text box with the unsubsidized expense ratio as long as they are presented in a fair and balanced manner.

      Use of Performance Sales Material on or after April 1, 2007

      Performance sales material used on or after April 1, 2007 will be required to meet the disclosure standards of Rule 2210(d)(3). At a minimum, members will be required to disclose the unsubsidized total annual fund operating expense ratio unless the sales material already discloses this ratio in a manner that meets the prominence requirements of Rule 2210(d)(3). Members will not be required to re-file with the Advertising Regulation Department (the Department) previously filed sales material if the only revision is the addition of the expense ratio.

      All performance print advertisements also will be required to include a prominent text box and must be re-filed with the Department. The addition of the text box to previously filed advertisements alters the content and presentation of the performance information, requiring that the advertisement be re-filed with the Department.

      Members that have questions about whether they must re-file previously filed performance sales material that has been revised to comply with Rule 2210(d)(3) should contact the Department staff.


      1 SEC Rel. No. 34-54103 (July 5, 2006), 71 Fed. Reg. 39379 (July 12, 2006) (File No. SR-NASD- 2004-043).

      2 SEC Rules 482(b)(3)(ii) and 482(d)(3).

      3 SEC Rule 482(d)(3)(i).

      4 SEC Rule 482(d)(5)(iv).

      5 The rule does not apply to member sales material that includes only mutual fund rankings and does not include performance data, since sales material containing fund rankings is governed by IM-2210-3.

      6 See SEC Rules 482(d)(3)(iii) and 482 (d)(5)(iv).

      7 See SEC Rule 482(b)(5). Rule 482(b)(5) also provides that when performance data is presented in a print advertisement in a type size smaller than that of the major portion of the advertisement, the maximum sales load may appear in a type size no smaller than that of the performance data.


      ATTACHMENT A

      Text of Rule Change

      New text is underlined; deletions are in brackets.

      * * * *

      2210. Communications With the Public

      (a) through (c) No change.
      (d) Content Standards
      (1) through (2) No change.
      (3) Disclosure of Fees, Expenses and Standardized Performance
      (A) Communications with the public, other than institutional sales material and public appearances, that present non-money market fund open-end management investment company performance data as permitted by Rule 482 under the Securities Act of 1933 and Rule 34b-1 under the Investment Company Act of 1940 must disclose:
      (i) the standardized performance information mandated by Rule 482 and Rule 34b-1; and
      (ii) to the extent applicable:
      (a) the maximum sales charge imposed on purchases or the maximum deferred sales charge, as stated in the investment company's prospectus current as of the date of submission of an advertisement for publication, or as of the date of distribution of other communications with the public; and
      (b) the total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements, as stated in the fee table of the investment company's prospectus described in paragraph (a).
      (B) All of the information required by paragraph (A) must be set forth prominently, and in any print advertisement, in a prominent text box that contains only the required information and, at the member's option, comparative performance and fee data and disclosures required by Rule 482 and Rule 34b-1.
      (e) No change.

      * * * * *

      2211. Institutional Sales Material and Correspondence

      (a) through (c) No change.
      (d) Content Standards Applicable to Institutional Sales Material and Correspondence
      (1) All institutional sales material and correspondence are subject to the content standards of Rule 2210(d)(1) and the applicable Interpretive Materials under Rule 2210, and all correspondence is subject to the content standards of Rule 2210(d)(3).
      (2) through (3) No change.

    • 06-47 SEC Approves New Rule 2441 Requiring Disclosure and Consent When Trading on a Net Basis with Customers

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      GUIDANCE

      Net Trading Requirements

      Effective Date: October 2, 2006

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      Net Trading
      Rule 2441

      Executive Summary

      On June 30, 2006, the Securities and Exchange Commission (SEC) approved new NASD Rule 2441, Net Transactions with Customers, which requires disclosure and consent when trading on a net basis with customers.1 Rule 2441, as adopted, is set forth in Attachment A of this Notice. The rule becomes effective on October 2, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, Regulatory Policy and Oversight (RPO) at (240) 386-5126; or the Office of General Counsel, RPO at (202) 728-8071.

      Background and Discussion

      On June 30, 2006, the SEC approved new NASD Rule 2441. Rule 2441 clarifies and codifies that a member is required to provide disclosure to, and obtain consent from, a customer prior to executing a transaction with a customer on a "net" basis. A "net" transaction means a principal transaction in which a market maker, after having received an order to buy (sell) an equity security, purchases (sells) the equity security at one price (from (to) another broker-dealer or another customer) and then sells to (buys from) the customer at a different price.2

      The disclosure and consent requirements under the new rule differ depending on whether the member is trading with an institutional or non-institutional customer.3

      •   For non-institutional customers, a member must obtain the customer's written consent on an order-by-order basis prior to executing a transaction for or with the customer on a net basis, and such consent must evidence the customer's understanding of the terms and conditions of the order.
      •   For institutional customers, a member must obtain the customer's consent prior to executing a transaction for or with the customer on a net basis. Consent may be obtained on an order-by-order basis or by use of a negative consent letter.
      •   If using a negative consent letter, such letter must clearly disclose in writing the terms and conditions for handling the customer orders and provide the institutional customer with a meaningful opportunity to object to the execution of transactions on a net basis. If the customer does not object, then the member may reasonably conclude that the institutional customer has consented to the member trading on a net basis with the customer and the member may rely on such letter for all or a portion of the customer's orders (as instructed by the customer).
      •   A member also may obtain consent from institutional customers orally or in writing on an order-by-order basis. A member that chooses to obtain consent orally on an order-by-order basis also must clearly explain to the institutional customer, prior to each transaction, the terms and conditions for handling the order and provide the institutional customer with a meaningful opportunity to object to the execution of the transaction on a net basis. The member also must document, on an order-byorder basis, the customer's understanding of the terms and conditions of the order and the customer's consent.

      If a customer has granted trading discretion to a fiduciary (e.g., an investment adviser), a member is permitted to obtain the consent required under Rule 2441 from the fiduciary. Further, if the fiduciary meets the definition of "institutional customer" in Rule 2441(e), the member may comply with the disclosure and consent requirements under Rule 2441 in the same manner permitted for institutional customers, notwithstanding the status of the ultimate customer.

      New Rule 2441 becomes effective October 2, 2006.

      Questions and Answers Relating to New Rule 2441

      To assist members in understanding the application of new Rule 2441, NASD is publishing the following questions and answers.

      Q1 What is a net transaction?
      A1 As defined in Rule 2441, a "net" transaction means a principal transaction in which a market maker, after having received an order to buy (sell) an equity security, purchases (sells) the equity security at one price (from (to) another broker-dealer or another customer) and then sells to (buys from) the customer at a different price.
      Q2 Do the Rule 2441 consent and disclosure requirements apply to orders received from members and other registered broker-dealers?
      A2 No. Rule 2441 does not apply to orders received from member firms and other registered broker-dealers.
      Q3 What are the ways in which consent can be obtained from institutional customers under the rule?
      A3 As described in detail in Rule 2441(c), there are three methods for obtaining an institutional customer's consent. The member may obtain the institutional customer's consent prior to executing the customer's transaction on a net basis: (1) through the use of a negative consent letter; (2) orally, on an order-by-order basis; or (3) in writing on an order-by-order basis.
      Q4 What is an institutional customer?
      A4 An institutional customer is a customer whose account qualifies as an "institutional account" under NASD Rule 3110(c)(4). Any customer whose account does not qualify as an institutional account under Rule 3110(c)(4) would be deemed a non-institutional customer.
      Q5 If I obtained a negative consent letter from my institutional customer, does that apply to all of the orders from that customer?
      A5 Depending on the institutional customer's instructions to the firm, the negative consent may apply to all or only a portion of the customer's orders.
      Q6 Is negative consent permissible for non-institutional customers?
      A6 No, use of a negative consent letter is not a permissible method to obtain consent to trade on a net basis with a non-institutional customer. For non-institutional customers, a member must obtain the customer's written consent on an order-by-order basis prior to executing a transaction for or with the customer on a "net" basis and such consent must evidence the customer's understanding of the terms and conditions of the order.
      Q7 How does the rule apply if the customer has granted trading discretion to a fiduciary?
      A7 Absent any instructions to the contrary, a member may look to the institutional or non-institutional status of the fiduciary, rather than the underlying account, when determining the Rule 2441 disclosure and consent requirements.
      Q8 When do the requirements in Rule 2441 go into effect?
      A8 The disclosure and consent requirements set forth in Rule 2441 become effective on October 2, 2006.

      1 See Securities Exchange Act Release No. 54088 (June 30, 2006), 71 FR 38950 (July 10, 2006) (File No. SR-NASD-2004-135).

      2 See Rule 2441(e).

      3 An "institutional customer" is a customer whose account qualifies as an "institutional account" under Rule 3110(c)(4). Any customer whose account does not qualify as an institutional account under Rule 3110(c)(4) would be deemed a non-institutional customer.


      ATTACHMENT A

      New language is underlined.

      2441. Net Transactions with Customers

      (a) Prior to executing a transaction for or with a customer on a "net" basis as defined in paragraph (e) below, a member must provide disclosure to and obtain consent from the customer as provided in this Rule.
      (b) With respect to non-institutional customers, the member must obtain the customer's written consent on an order-by-order basis prior to executing a transaction for or with the customer on a "net" basis and such consent must evidence the customer's understanding of the terms and conditions of the order.
      (c) With respect to institutional customers, a member must obtain the customer's consent prior to executing a transaction for or with the customer on a "net" basis in accordance with one of the following methods:
      (1) a negative consent letter that clearly discloses to the institutional customer in writing the terms and conditions for handling the customer order(s) and provides the institutional customer with a meaningful opportunity to object to the execution of transactions on a net basis. If the customer does not object, then the member may reasonably conclude that the institutional customer has consented to the member trading on a "net" basis with the customer and the member may rely on such letter for all or a portion of the customer's orders (as instructed by the customer) pursuant to this Rule;
      (2) oral disclosure to and consent from the customer on an order-by-order basis. Such oral disclosure and consent must clearly explain the terms and conditions for handling the customer order and provide the institutional customer with a meaningful opportunity to object to the execution of the transaction on a net basis. The member also must document, on an order-by-order basis, the customer's understanding of the terms and conditions of the order and the customer's consent; or
      (3) written consent on an order-by-order basis prior to executing a transaction for or with the customer on a "net" basis and such consent must evidence the customer's understanding of the terms and conditions of the order.
      (d) For those customers that have granted trading discretion to a fiduciary (e.g. an investment adviser), a member is permitted to obtain the consent required under this Rule from the fiduciary. If the fiduciary meets the definition of "institutional customer" in paragraph (e), the member may meet the disclosure and consent requirements under this Rule in the same manner permitted for institutional customers.
      (e) For purposes of this Rule, (1) "institutional customer" shall mean a customer whose account qualifies as an "institutional account" under Rule 3110(c)(4); and (2) "net" transaction shall mean a principal transaction in which a market maker, after having received an order to buy (sell) an equity security, purchases (sells) the equity security at one price (from (to) another broker-dealer or another customer) and then sells to (buys from) the customer at a different price.
      (f) Members must retain and preserve all documentation relating to consent obtained pursuant to this Rule in accordance with Rule 3110(a).

    • 06-46 Extension of Pilot Program Increasing Position and Exercise Limits for Stock Options

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      GUIDANCE

      Options Position and Exercise Limits

      SUGGESTED ROUTING

      KEY TOPICS

      Institutional
      Legal & Compliance
      Options
      Senior management
      Trading
      Training
      Exercise Limits
      Options
      Position Limits
      Rule 2860

      Executive Summary

      On August 10, 2006, NASD filed for immediate effectiveness with the Securities and Exchange Commission (SEC) amendments to Rule 2860 extending until March 1, 2007, a pilot program increasing certain stock options position and exercise limits. The pilot program was scheduled to expire on September 1, 2006.

      The rules, as amended, are set forth in Attachment A.

      The amendments become effective September 1, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-8104; or James L. Eastman, Assistant General Counsel, OGC, RPO at (202) 728-6961.

      Background and Discussion

      On August 10, 2006, NASD filed for immediate effectiveness with the SEC amendments to Rule 2860 extending until March 1, 2007, a pilot program increasing certain stock options position and exercise limits (Pilot Program).1 The Pilot Program was scheduled to expire on September 1, 2006.2 NASD extended the Pilot Program to allow it to continue without interruption.

      NASD Rule 2860(b)(3)(A) imposes a ceiling or position limit on the number of conventional and standardized equity options contracts in each class on the same side of the market (i.e., aggregating long calls and short puts or long puts and short calls) that can be held or written by a member, a person associated with a member, a customer or a group of customers acting in concert.3 The rule provides that the position limits for stock options are determined according to a five-tiered system in which more actively traded stocks with larger public floats are subject to higher position limits.

      Pursuant to the Pilot Program, which began March 30, 2005, and now ends March 1, 2007 (unless extended) (Pilot Period), the limits for each of the tiers remains increased as follows: a) 13,500 contracts has been increased to 25,000 contracts; b) 22,500 contracts has been increased to 50,000 contracts; c) 31,500 contracts has been increased to 75,000 contracts; d) 60,000 contracts has been increased to 200,000 contracts; and e) 75,000 contracts has been increased to 250,000 contracts. These tiers apply to both conventional and standardized options. Options exercise limits, which are set forth in Rule 2860(b)(4), and which incorporate by reference the position limits in Rule 2860(b)(3), also have been increased during the Pilot Period.


      1 Securities Exchange Act Release No. 34-54334 (August 18, 2006), 71 FR 50961 (August 28, 2006) (SR-NASD-2006-097).

      2 See Securities Exchange Act Release No. 53346 (February 22, 2006), 71 FR 10580 (March 1, 2006) (SR-NASD-2006-025) (extending Pilot Program); NASD Notice to Members 06-09 (March 2006); Securities Exchange Act Release No. 52271 (August 16, 2005), 70 FR 49344 (August 23, 2005) (SR-NASD-2005-097) (extending Pilot Program); NASD Notice to Members 05-56 (August 2005); Securities Exchange Act Release No. 51520 (April 11, 2005), 70 FR 19977 (April 15, 2005) (SR-NASD- 2005-040) (establishing Pilot Program); NASD Notice to Members 05-31 (April 2005).

      3 A "standardized equity option" is an equity options contract issued, or subject to issuance by, The Options Clearing Corporation that is not a FLEX Equity Option. NASD Rule 2860(b)(2)(UU). A "conventional option" is an option contract not issued, or subject to issuance by, The Options Clearing Corporation. NASD Rule 2860(b)(2)(N). NASD's limits on standardized equity options are applicable only to those members that are not also members of the exchange on which the option is traded; the limits on conventional options are applicable to all NASD members. NASD Rule 2860(b)(1)(A).


      ATTACHMENT A

      New text is underlined; deletions are in brackets.

      2800. SPECIAL PRODUCTS

      2860. Options

      (a) No Change.
      (b) Requirements.
      (1) and (2) No Change.
      (3) Position Limits
      (A) Stock Options—Except in highly unusual circumstances, and with the prior written approval of NASD pursuant to the Rule 9600 Series for good cause shown in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, non-member broker, or non-member dealer, an opening transaction through Nasdaq, the over-the-counter market or on any exchange in a stock option contract of any class of stock options if the member has reason to believe that as a result of such transaction the member or partner, officer, director or employee thereof, or customer, non-member broker, or non-member dealer, would, acting alone or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate equity options position in excess of:
      (i) 13,500 (or 25,000 during the pilot period from March 30, 2005 through [September 1, 2006 ]March 1, 2007 ("Pilot Period")) option contracts of the put class and the call class on the same side of the market covering the same underlying security, combining for purposes of this position limit long positions in put options with short positions in call options, and short positions in put options with long positions in call options; or
      (ii) through (viii) No Change.
      (B) through (D) No Change.
      (4) through (24) No Change.

    • 06-45 SEC Approves Amendments to NASD Rule 2211 to Require Principal Pre-Use Approval of Certain Member Correspondence Sent to 25 or More Existing Retail Customers within a 30 Calendar-Day Period; Effective Date: December 1, 2006

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      GUIDANCE

      Correspondence

      SUGGESTED ROUTING

      KEY TOPICS

      Advertising
      Executive Representatives
      Legal & Compliance
      Registered Representatives
      Senior Management
      Correspondence
      Rule 2211

      Executive Summary

      On July 26, 2006, the Securities and Exchange Commission (SEC) approved amendments to NASD Rule 2211, which governs NASD member institutional sales material and correspondence.1 The amendments require a registered principal to approve correspondence sent to 25 or more existing retail customers within any 30 calendar-day period if the correspondence makes any financial or investment recommendation or otherwise promotes a product or service of the member.

      The effective date of this rule change is December 1, 2006. Included with this Notice is Attachment A (text of rule amendments).

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Joseph P. Savage, Associate Vice President, Investment Companies Regulation, Regulatory Policy and Oversight (RPO), at (240) 386- 4534; or Philip A. Shaikun, Associate Vice President and Associate General Counsel, Office of the General Counsel, RPO, at (202) 728- 8451.

      Background and Discussion

      In 2003, the SEC approved as part of NASD's modernization of its advertising rules the creation of new Rule 2211, which included an amended definition of "correspondence." That definition of correspondence included any written letter or electronic mail message distributed by a firm to one or more of its existing retail customers and to fewer than 25 prospective retail customers within a 30 calendar-day period.2 Previously, "correspondence" included any written or electronic communication prepared for delivery to a single current or prospective customer, and not for dissemination to multiple customers or the general public.

      The definition of correspondence is significant in several respects. Firms generally are not required to have a registered principal approve correspondence prior to use, nor are they required to file correspondence with the NASD Advertising Regulation Department (Department). In addition, correspondence is subject to fewer content restrictions than advertisements and sales literature.

      NASD found that some member correspondence to multiple existing customers raised the same regulatory concerns as member advertisements and sales literature, yet it was not required to be filed with NASD or approved by a principal prior to use. In contrast, had those types of form letters been sent to at least 25 prospective retail customers, such correspondence would have required both registered principal pre-use approval and filing with the Department. As a result, NASD believes it no longer should apply the principal pre-use approval requirement differently to non-clerical correspondence sent to prospective and existing retail customers.

      The amendments to Rule 2211 approved by the SEC require registered principal pre-use approval of any correspondence sent to 25 or more existing retail customers within any 30 calendar-day period if the correspondence makes any financial or investment recommendation or otherwise promotes a product or service of the member. Registered principal pre-use approval will better ensure that this material complies with applicable standards of the advertising rules before reaching current or prospective customers. This correspondence need not be filed with the Department and is not subject to all of the content standards of the advertising rules. Of course, a firm may choose to file this correspondence with the Department to better ensure that it complies with applicable standards, particularly when the correspondence promotes the firm's products or services.

      The registration required of a principal that approves correspondence prior to use pursuant to amended Rule 2211(b) is the same as the registration required for a principal that supervises correspondence under Rule 3010(d)(2). Accordingly, a member may opt to utilize a General Securities Sales Principal (formerly Series 8 and now Series 9/10) to perform this function.

      This rule change becomes effective on December 1, 2006.


      1 See SEC Rel. No. 34-54217 (July 26, 2006), 71 Fed. Reg. 43831 (Aug. 2, 2006) (File No. SR-NASD-2006-11).

      2 NASD has clarified that, for purposes of its rules governing member communications with the public, NASD views instant messaging in the same manner in which it views traditional electronic mail messages. Accordingly, instant messaging may qualify as correspondence or sales literature, depending upon the facts and circumstances. See Notice to Members 03-33 (July 2003).

      3 NASD Rule 3010(d)(2) requires each member to develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing correspondence with the public relating to its investment banking or securities business. Where such procedures do not require review of all correspondence prior to use or distribution, they must include provision for the education and training of associated persons as to the firm's procedures governing correspondence, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to.


      ATTACHMENT A

      Text of Rule Change

      New text is underlined; deletions are in brackets.

      * * * *

      2211. Institutional Sales Material and Correspondence

      (a) No change.
      (b) Approval and Recordkeeping
      (1) Registered Principal Approval

      (A) Correspondence. Correspondence need not be approved by a registered principal prior to use, [but] unless such correspondence is distributed to 25 or more existing retail customers within any 30 calendar-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the member. All correspondence is subject to the supervision and review requirements of Rule 3010(d).
      (B) No change.
      (2) No change.
      (c) through (e) No change.

    • 06-44 Exemption for Registered NASDAQ Market Makers Acting in the Capacity of Exchange Market Maker (This Notice supersedes Notice to Members 06-37)

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      GUIDANCE

      Trading Activity Fee

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management
      Trading
      NASDAQ Exchange Registration
      Trading Activity Fee

      Executive Summary

      NASD is issuing this Notice to supersede NASD Notice to Members (NTM) 06-37 and replace the guidance provided in that Notice relating to the application of the Trading Activity Fee (TAF) to members acting in the capacity of an exchange specialist or market maker. Accordingly, this Notice repeats pertinent information from NTM 06-37. However, it also provides additional guidance and clarification not included in NTM 06-37.

      On July 5, 2006, NASDAQ announced that it would begin to operate as a national securities exchange on August 1, 2006 for NASDAQlisted securities.1 Section 1 of Schedule A to NASD's By-Laws exempts from the TAF proprietary transactions by a firm that is a member of both NASD and a national securities exchange, effected in its capacity as an exchange specialist or market maker, and that is subject to Securities Exchange Act of 1934, Section 11(a) and Rule 11a1-1(T)(a) thereunder. The exemption does not, however, apply to other transactions permitted by Section 11(a), such as bona fide arbitrage or hedge transactions.

      Accordingly, on August 1, 2006 when NASDAQ became operational as an exchange in NASDAQ securities, NASD member firms that are also members of the NASDAQ Exchange became exempt from the TAF for transactions in which they act in their capacity as a registered market maker in such NASDAQ securities.2 Further, when NASDAQ becomes operational as an exchange in Consolidated Quotation System (CQS) securities on approximately October 1, 2006, NASD member firms that are also members of the NASDAQ Exchange will be exempt from the TAF for transactions effected on the NASDAQ Exchange in which they act in their capacity as a registered market maker in CQS securities.

      Questions/Further Information

      Questions concerning this Notice should be directed to the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071, or NASD Finance at (240) 386-5397.

      Background and Discussion

      In 2003, the SEC approved NASD's new member regulatory pricing structure, which: (1) eliminated the NASDAQ-based regulatory fee; (2) instituted a new transactionbased TAF applied across a broader range of equity, options and securities futures transactions; (3) increased the rates assessed to member firms under the Personnel Assessment (PA); and (4) implemented a simplified three-tiered flat rate for the Gross Income Assessment (GIA), whereby deductions and exclusions were eliminated.3 NASD uses fees collected under the member regulatory pricing structure to fund member regulatory activities, including the regulation of members through examination, processing of membership applications, financial monitoring, policymaking, rulemaking, and interpretive and enforcement activities.

      As stated above, Section 1 of Schedule A to NASD's By-Laws exempts from the TAF proprietary transactions by a firm that is a member of both NASD and a national securities exchange, effected in its capacity as an exchange specialist or market maker, and that is subject to Securities Exchange Act of 1934, Section 11(a) and Rule 11a1-1(T)(a) thereunder. Accordingly, once NASDAQ is operational as an exchange, this exemption will be applicable to transactions that occur on the NASDAQ Exchange in the same manner as it is currently applicable to certain transactions that occur on other exchanges. To assist members in understanding the application of this exemption to market making activity on the NASDAQ Exchange, NASD staff is publishing the following questions and answers.

      Questions and Answers

      1. Will a member be exempt for all proprietary transactions in NASDAQ-listed securities for which it is registered as a market maker?

      No. No. Only those proprietary transactions effected through the registered market maker's attributable quote on the NASDAQ Exchange are exempt from the TAF. Proprietary transactions of a registered market maker executed through SIZE on the NASDAQ Exchange are not exempt from the TAF, as well as transactions not effected through the NASDAQ Exchange like, for example, those reported to either a Trade Reporting Facility (TRF)4 or the Alternative Display Facility (ADF).5
      2. Does the exemption relating to registered NASDAQ Exchange market makers apply only to NASDAQ-listed securities?

      Yes. Yes. Until NASDAQ is operational as an exchange in all National Market System (NMS) securities, the TAF exemption will apply only to NASDAQ-listed securities.6 NASDAQ has announced that it intends to be operational as an exchange in CQS securities on October 1, 2006. Accordingly, until NASDAQ is operating as a national securities exchange in CQS securities, transactions executed through NASDAQ systems in CQS securities are still subject to the TAF. At such time that NASDAQ is operational as an exchange in CQS securities, the TAF exemption discussed above for registered market makers acting in their capacity as a registered market maker on the NASDAQ exchange will also be applicable to CQS securities.
      3. If I am a registered market maker on the NASDAQ Exchange and receive an agency order from an NASD member broker-dealer that I then send to the NASDAQ Exchange for execution, is that transaction exempt from the TAF?

      Yes. Consistent with guidance issued in Notice to Members 02-75, Question 3, when a member acts as agent on behalf of another NASD member in the sale of a covered security, the fee will be assessed to the member who is the ultimate seller of the security, not the member acting as agent. Therefore, an agency transaction executed on behalf of another NASD member broker-dealer on the NASDAQ Exchange by a registered market maker acting in such capacity is exempt from the TAF.
      4. If I am a registered market maker on the NASDAQ Exchange and receive an order from a customer that I send to the NASDAQ Exchange for execution, is that transaction exempt from the TAF?

      No. Transactions executed on behalf of a registered market maker's own customer, including agency and riskless principal transactions, must be assessed the TAF.
      5. If I am a registered market maker on the NASDAQ Exchange and place an order in SIZE that is subsequently executed, is that transaction exempt from the TAF?

      No. An execution resulting from an order, either agency or principal, placed into SIZE is not exempt from the TAF.
      6. If I am a registered market maker and enter an attributable proprietary market making order or quote into the NASDAQ Market Center that is immediately executed (i.e., does not become displayed on NASDAQ's book since it was marketable upon receipt), is the resulting execution exempt from the TAF?

      Yes. Executions resulting from attributable proprietary orders or quotes entered by a registered market maker acting in the capacity of an exchange market maker are exempt from the TAF. Proprietary transactions that are not related to market making activities are not exempt from the TAF, even if executed by or through a registered market maker's MPID or account.

      1 The Securities and Exchange Commission (SEC) approved NASDAQ's application for registration as a national securities exchange on January 23, 2006. See Exchange Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10-131). On June 30, 2006, the SEC issued an order modifying a condition to NASDAQ's operation as a national securities exchange. See Exchange Act Release No. 54085 (June 30, 2006), 71 FR 38910 (July 10, 2006) (File No. 10- 131). NASDAQ plans to be operational as an exchange in NASDAQ-listed issues on August 1, 2006, and in other exchange-listed issues on or after September 1, 2006. See NASDAQ Head Trader Alert No. 2006-098 (July 5, 2006), www.nasdaqtrader.com/trader/news/2006/ headtraderalerts/hta2006-098.stm and NASDAQ Head Trader Alert No. 2006-111 (July 26, 2006), www.nasdaqtrader.com/Trader/News/2006/head traderalerts/hta2006-111.stm.

      2 See, e.g. Notice to Member 02-63 (Sept. 2002), Question 1.

      3 See Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003) (approving SR-NASD-2002-148) and Exchange Act Release No. 47106 (Dec. 30, 2002), 68 FR 819 (Jan. 7, 2003) (approving SR-NASD-2002-99).

      4 See Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR-NASD-2005-087) (SEC approval of the changes to NASD rules to reflect NASDAQ's registration as an exchange and the operation of the TRF by NASDAQ subject to NASD's regulatory license and oversight).

      5 See Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 (July 31, 2002) (SEC approval of SR-NASD-2002-97 authorizing NASD to operate the ADF on a pilot basis); Exchange Act Release No. 47633 (Apr. 10, 2003), 68 FR 19043 (Apr. 17, 2003) (File No. SR-NASD-2003-067) (extension of ADF pilot until January 26, 2004); Exchange Act Release No. 49131 (Jan. 27, 2004), 69 FR 5229 (Feb. 3, 2004) (File No. SR-NASD- 2004-012) (extension of ADF pilot until October 26, 2004); Exchange Act Release No. 50601 (Oct. 28, 2004), 69 FR 64611 (Nov. 5, 2004) (File No. SR-NASD-2004-160) (extension of ADF pilot until July 26, 2005); Exchange Act Release No. 52122 (July 25, 2005), 70 FR (Aug. 1, 2005) (File No. SRNASD-2005-092) (extension of ADF pilot until April 26, 2006); Exchange Act Release No. 53699 (April 21, 2006), 71 FR 25271 (Apr. 28, 2006) (File No. SR-NASD-2006-050) (extension of ADF pilot period until January 26, 2007).

      6 See Exchange Act Release No. 51808 (June 5, 2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04) (SEC order adopting rules under Regulation NMS and amendments to the joint industry plans for disseminating market information).

    • 06-43 NASD Announces Nominees for Regional Industry Member Seats on the National Adjudicatory Council

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      INFORMATIONAL

      NAC Nominees

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Senior Management
      National Adjudicatory Council

      Executive Summary

      The purpose of this Special Notice to Members is to announce the proposed nominees for the National Adjudicatory Council (NAC) from the New York and West Regions. The nominees, nominated for three-year terms beginning January 2007, are listed in Exhibit 1. The nominees will be proposed to NASD's National Nominating Committee unless an additional candidate comes forward within 14 calendar days from the date of this Special Notice.

      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 New York and West Regional Nominating Committees thoroughly reviewed the background of every candidate before selecting their nominees in an effort to secure appropriate and fair representation of both regions.

      Contested Election Procedures

      If an officer, director or employee of an NASD member in the New York and West Regions 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, NASD's Corporate Secretary, at the address below within 14 calendar days of the date of this Special Notice, or by September 6, 2006.

      Barbara Z. Sweeney
      NASD
      Office of the Corporate Secretary
      1735 K Street, NW
      Washington, DC 20006-1506

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

      Questions/Further Information

      Questions concerning this Special Notice may be directed to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, 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 NASD's National Nominating Committee and are appointed by the NASD Regulation Board of Directors as at-large members. Five Industry members each represent one of the following geographic regions:

      Midwest Region: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin (Districts 4 and 8)
      New York Region: New York (the counties of Nassau and Suffolk, and the five boroughs of New York City) (District 10)
      North Region: Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City), Pennsylvania, Rhode Island, Vermont, Virginia and West Virginia (Districts 9 and 11)
      South Region: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, the Canal Zone, Puerto Rico and the Virgin Islands (Districts 5, 6 and 7)
      West Region: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming and the former U.S. Trust Territories (Districts 1, 2 and 3)

      Two regions (New York and West) will have open seats that need to be filled during this election. NAC members for the other three regions (Midwest, North and South) are indicated in Exhibit II, along with the year in which their terms expire.

      Function

      According to the NASD Regulation 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 exercise of exemptive authority; and
      •  other proceedings or actions authorized by the Rules of NASD.

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


      EXHIBIT I

      Nominees for NAC Industry Member Seats

      New York Region (District 10)
      West Region (Districts 1, 2 and 3)
      Laurence H. Bertan
      Sanford C. Bernstein & Co., LLC
      New York, NY
      Francis X. Roche, II
      RBC Dain Rauscher Inc.
      San Francisco, CA

      EXHIBIT II

      NAC Members with Terms Expiring in January 2007

      New York Region
      West Region
      Judith R. MacDonald
      Rothschild, Inc.
      New York, NY
      Neal E. Nakagiri
      NPB Financial Group, LLC
      Burbank, CA

      NAC Members with Terms Expiring in January 2008

      Midwest Region
      South Region
      Timothy Henahan
      Baker & Co., Inc.
      Rocky River, OH
      W. Dennis Ferguson
      Sterne Agee Clearing
      Boca Raton, FL

      NAC Member with Term Expiring in January 2009

      North Region
      Stephanie L. Brown
      Linsco/Private Ledger Corp.
      Boston, MA

    • 06-42 Pilot Program to Permit Additional Market Participant Identifier Functionality on the Alternative Display Facility

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      GUIDANCE

      Alternative Display Facility

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Senior Management
      Operations
      Systems
      Trading
      Alternative Display Facility
      IM-4613A-1
      Multiple Market Participant
      Identifiers
      Registered Reporting ADF ECNs
      Rule 4613A

      Executive Summary

      On August 8, 2006, NASD filed with the Securities and Exchange Commission (SEC) for immediate effectiveness a rule change to amend Rule 4613A and adopt IM-4613A-1 to enable ECN members that post quotations through the Alternative Display Facility (ADF) (i.e., Registered Reporting ADF ECNs) to request and receive multiple market participant identifiers (MPIDs) with which to enter multiple quotes/orders in the ADF and report trades through the ADF Trade Reporting and Comparison Service (TRACS), pursuant to the Rule 4000A Series.1

      Rule 4613A, as amended, and new IM-4613A-1 are set forth in Attachment A of this Notice. The effective date and the implementation date of the amendments was August 8, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Elliot Levine, Associate Vice President, Transparency Services, at (202) 728-8405; Chris Stone, Associate Chief Counsel, Transparency Services, at (202) 728-8457; or Kathleen O'Mara, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8056.

      Background and Discussion

      An NASD member that registers as a market maker or ECN is currently permitted to enter one two-sided quotation per security in the ADF and is assigned a unique MPID with which to enter such quotations. The NASD 4600A Rule Series governs the character of such quotations and the rights and obligations of members that display quotations in the ADF via their MPIDs.

      NASD has amended Rule 4613A and adopted IM-4613A-1 to permit Registered Reporting ADF ECNs to request the use of additional MPIDs for a pilot period ending January 26, 2007.2 At this time, only ECNs have been certified for posting quotations through the ADF, and at no time has a registered market maker been certified for the ADF. Accordingly, the scope of this rule is limited to Registered Reporting ADF ECNs.3 An ECN will be entitled to request additional MPIDs for displaying quotes/orders and reporting trades through the ADF trade reporting facility, TRACS, pursuant to the Rule 4000A Series.4

      Registered Reporting ADF ECNs that are permitted to use an additional MPID for displaying quotes/orders are subject to the same rules applicable to the members' first quotation. In other words, ECNs that display one or more additional quotes/orders are required to comply with all NASD and SEC rules applicable to ECNs in their display of quotes/orders. Registered Reporting ADF ECNs are prohibited from using an additional MPID to accomplish indirectly what they are prohibited from doing directly through their Primary MPID. To the extent that the allocation of additional MPIDs were to create regulatory confusion or ambiguity or would diminish the quality or rigor of the regulation of the over-the-counter market, every inference would be drawn against the use of additional MPIDs. Moreover, pursuant to the rule and related interpretive material, NASD staff has full discretion to determine whether a bona fide regulatory and/or business need exists for being granted the additional MPID privilege and to limit or withdraw the additional MPID display privilege at any time.

      The amendments to Rule 4613A and IM-4613A-1 became effective August 8, 2006.


      1 Exchange Act Release No. 54307 (August 11, 2006) (Notice of Filing and Immediate Effectiveness of SR-NASD-2006-096). Under Section 19(b) of the Securities Exchange Act of 1934 (Act), the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 This date coincides with the expiration of the current ADF pilot period. See Exchange Act Release No. 53699 (April 21, 2006). Accordingly, the provisions set forth in Rule 4613A and IM-4613A-1 will be extended with any extension of an ADF pilot period.

      3 NASD will expand additional MPID privilege functionality to Registered Reporting ADF Market Makers at such time that at least one broker-dealer NASD member becomes certified for posting quotations through the ADF and demonstrates a bona fide business and/or regulatory need for additional MPID functionality.

      4 NASD will not assess fees for the issuance or use of an additional MPID, other than the SEC-approved fees set forth in NASD Rule 7010.


      ATTACHMENT A

      New language is underlined.

      * * * * *

      4613A. Character of Quotations

      (a) No Change.
      (b) Primary and Additional MPIDs
      (1) The first Market Participant Identifier ("MPID") issued to an NASD Market Participant shall be referred to as the NASD Market Participant's "Primary MPID." For a pilot period ending January 26, 2007, a Registered Reporting ADF ECN may request the use of Additional MPIDs for displaying quotes/orders and reporting trades through TRACS for any ADF-Eligible Security (as defined in NASD Rule 4100A). A Registered Reporting ADF ECN that ceases to meet the obligations appurtenant to its Primary MPID in any security shall not be permitted to use Additional MPIDs for any purpose in that security.
      (b) through (e) renumbered as (c) through (f).

      * * * * *

      IM-4613A-1 Procedures For Allocation of Multiple MPIDs

      NASD considers the issuance of, the display of, and the trade reporting with Additional MPIDs to be a privilege and not a right. NASD has developed the following method for allocating the privilege of receiving, displaying, and trade reporting with Additional MPIDs in an orderly, predictable, and fair manner. While NASD does not intend to place a numerical limit on the number of Additional MPIDs it may grant to Registered Reporting ADF ECNs, given the agent business model of ECNs, NASD does not anticipate the granting of many additional MPIDs to Registered Reporting ADF ECNs.

      As described in Rule 4613A, NASD will automatically designate a Registered Reporting ADF ECN's first MPID as a "Primary MPID." Additional MPIDs will be designated as such. Registered Reporting ADF ECNs are required to use their Primary MPID in accordance with the requirements of NASD Rule 4613A as well as all existing requirements for the use of MPIDs in NASD systems and under NASD rules. Each of an ECN's MPID will be subject to the requirements of NASD Rule 4623A.

      If it is determined that one or more Additional MPIDs are being used improperly, NASD staff retains full discretion to limit or withdraw its grant of the Additional MPID(s) for all purposes for all securities. In addition, if a Registered Reporting ADF ECN no longer fulfills the conditions appurtenant to its Primary MPID (e.g., by being placed into an unexcused withdrawal), it may not use an Additional MPID for any purpose in that security.

      The first priority of NASD's method for allocating the privilege of displaying and trade reporting with Additional MPIDs is that each Registered Reporting ADF ECN should be permitted to display quotations and report trades under a Primary MPID before any is permitted to display additional quotations under and report trades with Additional MPIDs. If all requests for Primary MPIDs have been satisfied, NASD will then register Additional MPIDs on a first-come-first-served basis, consistent with the procedures listed below.

      A Registered Reporting ADF ECN shall contact NASD in writing setting forth the bona fide business and/or regulatory reasons for requesting an Additional MPID. NASD will consider the business and/or regulatory reasons demonstrated by the Registered Reporting ADF ECN and promptly respond to the Registered Reporting ADF ECN. If an Additional MPID is granted, it will be subject to the same requirements applicable to a Primary MPID. NASD staff retains full discretion to limit or withdraw the Additional MPID privileges of a Registered Reporting ADF ECN.

      A Registered Reporting ADF ECN that posts a quotation through either a Primary MPID or Additional MPID and reports a trade to TRACS as a result of such a posted quotation must utilize the corresponding Primary MPID or Additional MPID for reporting purposes through which the quotation was originally posted (i.e., Registered Reporting ADF ECNs must use the same MPID for TRACS trade reporting as was used for ADF quotation posting).

      * * * * *

    • 06-41 Special Measures against Specified Banks Pursuant to Section 311 of the USA PATRIOT Act

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      INFORMATIONAL

      NASD and NYSE Joint Release on Section 311 of the USA PATRIOT Act

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Anti-Money Laundering

      Discussion

      This Notice reminds member organizations that the Financial Crimes Enforcement Network (FinCEN) has issued a final rule imposing a special measure,1 which becomes effective August 14, 2006, against the Latvian bank VEF Banka and its subsidiaries, including Veiksmes lizings.2 This measure is comparable to that imposed against the Commercial Bank of Syria and its subsidiaries, including Syrian Lebanese Commercial Bank, which became effective April 14, 2006.3

      The special measures have been imposed in response to findings that these entities and their subsidiaries (the "Specified Banks") are financial institutions of primary money laundering concern. Under the special measures, covered financial institutions, which includes broker-dealers, are subject to the following two primary requirements with respect to the Specified Banks:

      Prohibition of the Direct Use of Correspondent Accounts by the Specified Banks

      Covered financial institutions are prohibited from opening or maintaining a correspondent account4 in the United States for, or on behalf of, the Specified Banks. This prohibition requires all covered financial institutions to review their account records to ensure that they maintain no accounts directly for, or on behalf of, the Specified Banks.

      Due Diligence to Prevent Indirect Use

      As a corollary to the prohibition on the opening or maintaining of correspondent accounts directly for the Specified Banks, each covered financial institution is required to apply due diligence to its correspondent accounts that is reasonably designed to guard against their indirect use by the Specified Banks. At a minimum, such due diligence must include two elements:

      1) Notification to Correspondent Accountholders

      A covered financial institution must notify its correspondent accountholders that the account may not be used to provide the Specified Banks with access to the covered financial institution. The purpose of the notice requirement is to help ensure that the Specified Banks are denied access to the United States financial system, as well as to increase awareness within the international financial community of the risks and deficiencies of the Specified Banks. However, the final rules emphasize that FinCEN is not requiring or expecting financial institutions to obtain a certification from their correspondent accountholders that indirect use will not be provided.

      Although FinCEN makes clear that covered financial institutions have flexibility in choosing their method of notification, sample notification language which may be used for this purpose is provided, as follows:

      "Notice: Pursuant to U.S. regulations issued under section 311 of the USA PATRIOT Act, 31 CFR 103.192, we are prohibited from opening or maintaining a correspondent account for, or on behalf of, [the Specified Banks]. The regulations also require us to notify you that your correspondent account with our financial institution may not be used to provide [the Specified Banks] with access to our financial institution. If we become aware that [the Specified Banks] are indirectly using the correspondent account you hold at our financial institution, we will be required to take appropriate steps to prevent such access, including terminating your account."

      Methods of compliance with the notice requirement could include, for example, transmitting a one-time notice by mail, fax, or e-mail, or including such information in the next regularly occurring transmittal from the covered financial institution to its correspondent accountholders. Each covered financial institution must document its compliance with the requirement that it notify its correspondent accountholders that the accounts may not be used to provide the Specified Banks with access to the covered financial institution.
      2) Identification of Indirect Use

      A covered financial institution must take reasonable steps in order to identify any indirect use of its correspondent accounts by the Specified Banks, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. A covered financial institution must take a risk-based approach when deciding what, if any, additional due diligence measures it should adopt to guard against the indirect use of correspondent accounts by the Specified Banks, based on risk factors such as the type of services offered by, and geographic locations of, its correspondents. Unlike the duties imposed under the one-time notification requirement, covered financial institutions have an ongoing obligation to take reasonable steps to identify all correspondent account services they may directly or indirectly provide to the Specified Banks.

      Members are urged to consult the following links for further details:
      •   www.fincen.gov/vef_final_rule_070706.pdf (for additional information regarding the final rule issued against VEF Banka and its subsidiaries);
      •   www.fincen.gov/noticeoffinalrule03152006.pdf (for additional information regarding the final rule issued against the Commercial Bank of Syria and its subsidiary, Syrian Lebanese Commercial Bank); and
      •   www.fincen.gov/reg_section311.html (for information on all special measures issued by FinCEN).

      Questions/Further Information

      Questions or comments concerning this Notice may be directed as follows:

      NASD: Brant K. Brown, Assistant General Counsel, Regulatory Policy and Oversight, at (202) 728-6927.

      NYSE: Stephen Kasprzak, at (212) 656-5226.


      1 The rule was issued pursuant to the authority contained in 31 U.S.C. § 5318A. Section 311 of the USA PATRIOT Act added section 5318A to the Bank Secrecy Act and granted the Secretary of the Treasury the authority, after finding that reasonable grounds exist for concluding that a foreign jurisdiction, foreign financial institution, international class of transactions, or type of account is of "primary money laundering concern," to require domestic financial institutions and domestic financial agencies to take certain "special measures" against the primary money laundering concern.

      2 See 71 FR 39554 (July 13, 2006) available at www.fincen.gov/vef_final_rule_070706.pdf.

      3 See 71 FR 13265 (Mar. 15, 2006) available at www.fincen.gov/noticeoffinalrule03152006.pdf.

      4 For purposes of these final rules, a "correspondent account" is defined as an account established to receive deposits from, or make payments or other disbursements on behalf of, a foreign bank, or handle other financial transactions related to the foreign bank (see 31 U.S.C. § 5318A(e)(1)(B) as implemented in 31 C.F.R. § 103.175(d)(1)(ii)).

    • 06-40 Nominees for District Committee and District Nominating Committee

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      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      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.1 The individuals identified in this Special Notice (see Attachment A) have been nominated for three-year terms2 on the District Committees, and for one-year terms on the District Nominating Committees, starting in January 2007. These nominees will be considered duly elected on September 1, 2006, unless an election is contested in accordance with the procedures summarized below.

      Also identified in Attachment A is the total number of candidates for the District Committee and/or the District Nominating Committee in each district. We appreciate the substantial interest shown by all of the candidates participating in the District Elections, and thank everyone for their continuing support of the self-regulatory process.

      Contested Election Procedures

      If an officer or director of, or individual who is registered with, an NASD member who meets the qualifications of Sections 8.2 or 8.9, as applicable, of the NASD Regulation By-Laws, has not been nominated by the District Nominating Committee as a candidate or alternate and wants to be considered for election to the District Committee or the District Nominating Committee, he or she must deliver a written notice to the District Director or Regional Director within 14 calendar days of the date of this Special Notice, or by August 31, 2006.

      If an additional candidate or candidates come forward by August 31, 2006, the Corporate Secretary will provide each additional candidate with a list of members who are eligible to vote in the District. In order to be considered for nomination, within 30 calendar days of receipt of the list of members eligible to vote, an additional candidate must 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.

      Additional information pertaining to the District Election Procedures can be found in Article VIII of the NASD Regulation By-Laws.

      Questions/Further Information

      Questions concerning this Special Notice may be directed to the District Office contact noted in Attachment A, or to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD at (202) 728-8062 or via email at barbara.sweeney@nasd.com.


      1 In addition to nominating a slate of candidates for each of these committees, each District Nominating Committee may nominate one alternate candidate for each committee. The nomination of alternate candidates is permitted under Section 8.17 of the NASD Regulation By-Laws. Attachment A identifies each District Nominating Committee's slate of nominees, plus alternate candidates (if any).

      2 Some nominees are filling existing vacancies and therefore may serve less than a three-year term, as indicated on Attachment A.


      Attachment A

      District Committee and District Nominating Committee Nominees
      District 1
      Debra J. Pohlson, Acting District Director
      525 Market Street, Suite 300, San Francisco, CA 94105-2711 (415) 882-1203
      (415) 546-6991 Fax
      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
      2006 District Nominating Committee Chair
      Nicholas C. Cochran American Investors Company San Ramon, CA
      Number of Candidates: 23
      District 1 Nominees
      Leonard Berry Backstrom McCarley Berry & Co., LLC San Francisco, CA
      Scott Cook Charles Schwab & Co., Inc. San Francisco, CA
      James Williams Financial Telesis, Inc. San Rafael, CA
      Alternate Candidate
      Christopher Aguilar Merriman Curhan Ford & Co. San Francisco, CA
      District 1 Nominating Committee Nominees
      William A. Evans Stone & Youngberg, LLC San Francisco, CA
      Gerard P. Gloisten GBS Financial Corporation Santa Rosa, CA
      William P. Hayes Wells Fargo Investments, LLC San Francisco, CA
      Francis X. Roche, II Morgan Stanley San Francisco, CA
      William Svoboda Sutter Securities, Inc. Palo Alto, CA
      Alternate Candidate
      Warren Gordon Charles Schwab & Co., Inc. San Francisco, CA

      District 2
      Lani M. Sen Woltmann, District Director
      300 South Grand Avenue, Suite 1600, Los Angeles, CA 90071-3126 (213) 613-2601
      (213) 617-3156 Fax
      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
      2006 District Nominating Committee Chair
      Don Dalis UBS Financial Services, Inc. Newport Beach, CA
      Number of Candidates: 28
      District 2 Nominees
      Benjamin J. Prince Banc of America Investment Services Newport Beach, CA
      Jeffrey P. Shackett RH Investment Corp. Encino, CA
      Craig R. Watanabe Western International Securities Pasadena, CA
      Alternate Candidate
      Maureen M. Maloney Associated Securities Corp. Los Angeles, CA
      District 2 Nominating Committee Nominees
      M. LaRae Bakerink WBB Securities, LLC San Diego, CA
      Stephen B. Benton Financial Network Investment Corp. El Segundo, CA
      Don S. Dalis UBS Financial Services, Inc. Newport Beach, CA
      James M. Dillahunty Fixed Income Securities, LLC San Diego, CA
      Neal E. Nakagiri NPB Financial Group, LLC Burbank, CA
      Alternate Candidate
      Diane P. Blakeslee Blakeslee & Blakeslee, Inc. San Luis Obispo, CA

      District 3
      Joseph M. McCarthy, District Director
      370 17th Street, Suite 2900 Denver, CO 80202-5629 (303) 446-3100
      (303) 620-9450 Fax
      Arizona, Colorado, New Mexico, Utah and Wyoming
      Michael E. Lewis, District Director
      601 Union Street, Suite 1616
      Seattle, WA 98101-2327
      (206) 624-0790
      (206) 623-2518 Fax
      Alaska, Idaho, Montana, Oregon and Washington
      2006 District Nominating Committee Chair
      Bridget M. Gaughan AIG Financial Advisors, Inc. Phoenix, AZ
      Number of Candidates: 28
      District 3 Nominees
      James Cannon AIG Financial Advisors, Inc. Phoenix, AZ
      Patrick Elliott RBC Dain Rauscher Bainbridge Island, WA
      Chester Hebert CIM Securities, LLC Greenwood Village, CO
      Alternate Candidate
      Elyssa Baltazar Citigroup Global Markets, Inc. Denver, CO
      District 3 Nominating Committee Nominees
      Bridget Gaughan AIG Financial Advisors, Inc. Phoenix, AZ
      John Goodwin Goodwin Browning & Luna Securities, Inc. Albuquerque, NM
      Curtis Hammond Morgan Stanley DW Inc. Bellevue, WA
      J. Keith Kessel AFS Brokerage, Inc. Greenwood Village, CO
      Arlene Wilson D.A. Davidson Great Falls, MT

      District 4
      Thomas D. Clough, District Director
      120 W. 12th Street, Suite 800, Kansas City, MO 64105 (816) 421-5700
      (816) 421-5029 Fax
      Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota
      2006 District Nominating Committee Chair
      Jeffrey A. Schuh Residential Funding Securities Corporation Minneapolis, MN
      Number of Candidates: 33
      District 4 Nominees
      Kenneth M. Cherrier1 Fintegra, LLC Minneapolis, MN
      Richard D. Link Edward Jones St. Louis, MO
      Daniel J. May Financial Network Investment Corporation Minneapolis, MN
      Arthur S. Montgomery2 Walnut Street Securities, Inc. St. Louis, MO
      Alternate Candidate
      Jo Ann Zellmer Northland Securities, Inc. Minneapolis, MN
      District 4 Nominating Committee Nominees
      Robert M. Chambers A.G. Edwards & Sons, Inc. West Des Moines, IA
      Joseph D. Fleming RBC Dain Rauscher Inc. Minneapolis, MN
      Mark T. Lasswell Wells Fargo Brokerage Services, LLC Minneapolis, MN
      Kevin P. Maas PrimeVest Financial Services, Inc. St. Cloud, MN
      Stephen S. Soden Country Club Financial Services, Inc. Mission Woods, KS


      1 Mr. Cherrier has been nominated to serve the remaining year of the term of Stephen R. Oliver, who has resigned from the District Committee.

      2 Mr. Montgomery is currently serving the remaining year of the term of Richard M. Hurwitz, who resigned from the District Committee. Mr. Montgomery has been nominated to serve a three-year term on the District Committee, commencing January 2007.


      District 5
      Keith E. Hinrichs, District Director
      1100 Poydras Street, Energy Centre, Suite 850, New Orleans, LA 70163-0802 (504) 522-6527
      (504) 522-4077 Fax
      Alabama, Arkansas, Louisiana, Mississippi, Oklahoma and Tennessee
      2006 District Nominating Committee Chair
      John J. Dardis Jack Dardis & Associates, Ltd. Metairie, LA
      Number of Candidates: 27
      District 5 Nominees
      Hal J. Brown BOSC, Inc. Oklahoma City, OK
      Michael J. Mungenast ProEquities, Inc. Birmingham, AL
      Gary K. Wunderlich, Jr. Wunderlich Securities, Inc. Memphis, TN
      Alternate Candidate
      Rush F. Harding, III Crews & Associates, Inc. Little Rock, AR
      District 5 Nominating Committee Nominees
      John J. Dardis Next Financial Group, Inc. Metairie, LA
      Henry M. Fyfe, III Duncan-Williams, Inc. Memphis, TN
      Charles C. Hollinger, Jr. Johnson Rice & Company, LLC New Orleans, LA
      Carolyn R. May Simmons First Investment Group, Inc. Little Rock, AR
      R. Patrick Shepherd Avondale Partners, LLC Nashville, TN
      Alternate Candidate
      Donald (Don) Winton Crews & Associates, Inc. Little Rock, AR

      District 6
      Virginia F. M. Jans, Regional Director, South Region
      12801 N. Central Expressway, Suite 1050, Dallas, TX 75243 (972) 701-8554
      (972) 716-7646 Fax
      Texas
      2006 District Nominating Committee Chair
      V. Keith Roberts Stanford Group Company Houston, TX
      Number of Candidates: 33
      District 6 Nominees
      Kennard (Ken) R. George VSR Financial Services, Inc. Dripping Springs, TX
      William C. Rea Banc of America Investment Services, Inc. Dallas, TX
      Fenner R. Weller, Jr. Weller Anderson & Co., Ltd. Houston, TX
      Alternate Candidate
      Joan H. (Dorothy) Peurifoy Financial Network Investment Corporation Dallas, TX
      District 6 Nominating Committee Nominees
      Karen Banks Frost Brokerage Services, Inc. San Antonio, TX
      Cynthia E. Besek Maplewood Investment Advisors, Inc. Dallas, TX
      William D. Felder Southwest Securities, Inc. Dallas, TX
      Brent T. Johnson Multi-Financial Securities Corporation Houston, TX
      John R. Muschalek First Southwest Company Dallas, TX
      Alternate Candidate
      Sennett Kirk, III Kirk Securities Corporation Denton, TX

      District 7
      Daniel J. Stefek, District Director
      One Securities Centre
      3490 Piedmont Road, NE, Suite 500
      Atlanta, GA 30305
      (404) 239-6128
      (404) 237-9290 Fax
      Georgia, North Carolina and South Carolina
      Mitchell C. Atkins, District Director
      Crystal Corporate Center
      2500 N. Military Trail, Suite 302
      Boca Raton, FL 33431
      (561) 443-8010
      (561) 443-7995 Fax
      Florida, Puerto Rico, the Canal Zone and the Virgin Islands
      2006 District Nominating Committee Chair
      Roark A. Young Young, Stovall & Company Miami, FL
      Number of Candidates: 37
      District 7 Nominees
      Jed E. Bandes Mutual Trust Company of America Securities Clearwater, FL
      Valerie G. Brown Multi-Financial Services Corporation Atlanta, GA
      Raymond H. Smith, Jr.3 Smith, Brown & Groover, Inc. Macon, GA
      Dennis W. Zank Raymond James & Associates, Inc. St. Petersburg, FL
      Alternate Candidate
      Thomas A. Kicak SunTrust Capital Markets, Inc. Atlanta, GA
      District 7 Nominating Committee Nominees
      Susan J. Hechtlinger Banc of America Investment Services, Inc. Charlotte, NC
      Landrum H. Henderson, Jr. Stephens, Inc. Charlotte, NC
      Dennis S. Kaminski Mutual Service Corporation West Palm Beach, FL
      James A. Klotz FMSBonds, Inc. North Miami Beach, FL
      Alan L. Maxwell Wachovia Capital Markets, LLC Charlotte, NC
      Alternate Candidate
      Kenneth W. McGrath Popular Securities, Inc. San Juan, PR


      3 Mr. Smith has been nominated to serve the remaining year of the term of Erick R. Holt, who has resigned from the District Committee.


      District 8
      Carla A. Romano, Regional Director, Midwest Region
      55 West Monroe Street, Suite 2700, Chicago, IL 60603-5052 (312) 899-4324
      (312) 899-4399 Fax
      Illinois, Indiana, Kentucky, Michigan, Ohio and Wisconsin
      2006 District Nominating Committee Chair
      Carol P. Foley Podesta & Company Chicago, IL
      Number of Candidates: 47
      District 8 Nominees
      Joel R. Blumenschein Freedom Investors Corp Hartland, WI
      Thomas A. Bono David A. Noyes & Company Oak Park, IL
      Steven J. Greenwald Telemus Investment Brokers, LLC Southfield, MI
      Alternate Candidate
      Lloyd A. Wennlund Northern Trust Securities, Inc. Chicago, IL
      District 8 Nominating Committee Nominees
      George E. Bates Bates Securities, Inc. Rockford, IL
      Michael E. Bosway City Securities Corporation Indianapolis, IN
      Mari Buechner Coordinated Capital Securities, Inc. Madison, WI
      Ruth C. Hannenberg Mesirow Financial, Inc. Chicago, IL
      Robert J. Michelotti Ferris, Baker Watts Incorporated Auburn Hills, MI
      Alternate Candidate
      G. Donald Steel Planned Investment Co., Inc. Indianapolis, IN

      District 9
      Gary K. Liebowitz, Regional Director, North Region
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095
      (732) 596-2025
      (732) 596-2001 Fax
      New Jersey and New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City)
      James J. Flicker, Associate District Director
      1835 Market Street, Suite 1900
      Philadelphia, PA 19103
      (215) 665-1180
      (215) 963-7442 Fax
      Delaware, the District of Columbia, Maryland, Pennsylvania, Virginia and West Virginia
      2006 District Nominating Committee Chair
      Michael B. Row Pershing LLC Jersey City, NJ
      Number of Candidates: 28
      District 9 Nominees
      Wayne F. Holly4 Sage, Rutty & Co., Inc. Rochester, NY
      James J. Rabenstine PNC Investments LLC Pittsburgh, PA
      Timothy L. Smith. Comprehensive Asset Management & Servicing, Inc. Parsippany, NJ
      Alternate Candidate
      James Clements... Park Avenue Securities LLC Bethlehem, PA
      District 9 Nominating Committee Nominees
      A. Louis Dentoy Peterson Investments, Inc. Blue Bell, PA
      Peter P. Jenkins Credit Suisse Securities (USA) LLC Baltimore, MD
      W. Dean Karrash Burke, Lawton, Brewer & Burke Spring House, PA
      Gregg A. Kidd Pinnacle Investments Inc. East Syracuse, NY
      Harold N. Peremel Mercantile Brokerage Services, Inc. Baltimore, MD
      Alternate Candidate
      Kimberly Tillotson Fleming Hefren-Tillotson, Inc. Pittsburgh, PA


      4 Mr. Holly is currently serving the remaining year of the term of Barry M. Cash, who resigned from the District Committee. Mr. Holly has been nominated to serve a three-year term on the District Committee, commencing January 2007.


      District 10
      Hans L. Reich, Regional Director, New York Region
      One Liberty Plaza
      49th Floor, 165 Broadway
      New York, NY 10006
      (212) 858-4180
      (212) 858-4078 Fax
      Patricia Cappeto, Deputy District Director Long Island Office
      Two Jericho Plaza
      2nd Floor, Wing A
      Jericho, NY 11753
      (516) 949-4200
      (516) 949-4201 Fax
      New York (the counties of Nassau and Suffolk, and the five boroughs of New York City)
      2006 District Nominating Committee Chair
      Jennifer A. Connors Lehman Brothers Inc. New York, NY+00?u .
      Number of Candidates: 23
      District 10 Nominees
      Alfred R. Berkeley, III Pipeline Trading Systems LLC. New York, NY
      Kathryn G. Casparian. CIBC World Markets Corp. New York, NY
      Jonathan S. Hurd Terwin Capital, LLC New York, NY
      Craig B. Jampol5 Caris & Company New York, NY
      James D. Lamke Bear, Stearns & Co. Inc. New York, NY
      Alternate Candidate
      George Mandl ITG Inc. New York, NY
      District 10 Nominating Committee Nominees
      Margaret M. Caffrey Schonfeld & Company, LLC Jericho, NY
      Lon T. Dolber American Portfolios Financial Services, Inc. Holbrook, NY
      George T. Mimura Nomura Securities International, Inc. New York, NY
      Richard J. Paley Carey Financial Corporation New York, NY
      Howard R. Plotkin Lehman Brothers Inc. New York, NY
      Alternate Candidate
      Judith R. MacDonald Rothschild Inc. New York, NY


      5 Mr. Jampol has been nominated to serve the remaining year of the term of Jeffrey T. Letzler, who has resigned from the District Committee.


      District 11
      Frederick F. McDonald, Jr., District Director
      99 High Street, Suite 900, Boston, MA 02110 (617) 532-3401
      (617) 451-3524 Fax
      Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont
      2006 District Nominating Committee Chair
      Mark R. Hansen. Alta Capital Group, LLC. Boston, MA.
      Number of Candidates: 21
      District 11 Nominees
      Michael E. Callaghanê:i. Harvest Capital Advisors, LLC Wethersfield, CT
      Stephen L. Schardin Charles River Brokerage, LLC Burlington, MA
      Therese M. Squillacote ING Financial Advisers, LLC Hartford, CT
      Alternate Candidate
      Steven D. Martino Detwiler, Mitchell, Fenton, and Graves, Inc. Boston, MA
      District 11 Nominating Committee Nominees
      David K. Booth Jefferson Pilot Securities Corp. Concord, NH
      Mark R. Hansen Alta Capital Group, LLC Boston, MA
      Thomas F. Hollenbeck National Financial Services, LLC Boston, MA
      Thomas J. Horack Sun Life Financial Distributors Wellesley Hills, MA
      Wilson G. Saville Barrett & Company Providence, RI
      Alternate Candidate
      Curtis L. Snyder, Jr. American Technology Research, Inc. Greenwich, CT

    • 06-39 SEC Approves Amendments Relating to Automated Reporting of Transactions Subject to Regulatory Transaction Fee; Effective Date: December 1, 2006

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      GUIDANCE

      Automated Transaction Reporting

      SUGGESTED ROUTING

      KEY TOPICS

      Finance
      Legal & Compliance
      Operations
      Senior Management
      Away from the Market Sales
      Odd-Lot Transactions
      OTC Options
      Regulatory Transaction Fee
      Section 3 of Schedule A to
      NASD By-Laws
      Transaction Reporting

      Executive Summary

      On June 12, 2006, the Securities and Exchange Commission (SEC) approved SR-NASD-2006-055 relating to automated reporting of transactions subject to the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws (NASD Section 3).1 Specifically, effective December 1, 2006, members will be required to report to NASD in an automated manner all transactions that must be reported to NASD and that are subject to a regulatory transaction fee pursuant to NASD Section 3. Members can use NASD systems, including the Trade Reporting Facility (TRF), OTC Reporting Facility (OTCRF) and/or the Alternative Display Facility Trade Reporting and Comparison Service (TRACS) to report such transactions to NASD in an automated manner.

      NASD also has amended certain rules governing trade reporting that currently prohibit member firms from reporting odd-lot transactions, sales where the buyer and seller have agreed to a price substantially unrelated to the current market for the security (also referred to as "away from the market sales"), and purchases or sales of securities effected upon the exercise of an over-the-counter (OTC) option, as well as other transactions, to clarify that the prohibition found in the transaction reporting rules is limited to the submission of a transaction for publication purposes. Lastly, NASD has amended Rules 6130 and 6130A to require members to report odd-lot transactions, away from the markets sales, and OTC option exercises with a special indicator denoting that such transactions are reported in accordance with NASD Section 3. The amended rule text is set forth in Attachment A. As noted above, the effective date is December 1, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to NASD Finance at (240) 386-5397, or the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.

      Background and Discussion

      Section 31 of the Securities Exchange Act of 1934 (Exchange Act) requires NASD and national securities exchanges to pay transaction fees and assessments to the SEC that are designed to recover the costs related to the government's supervision and regulation of the securities markets and securities professionals. NASD obtains its Section 31 fees and assessments from its membership in accordance with NASD Section 3. NASD Section 3 assessments apply only to transactions effected otherwise than on a national securities exchange.2 Many of the transactions that are assessable under NASD Section 3 are reported to NASD through automated facilities. NASD is able to use the transaction data reported to these automated facilities for NASD Section 3 billing purposes.

      Currently, member firms are required to self-report manually covered sales of odd-lots, away from the market sales and the exercise of OTC options because these transactions are not otherwise required to be reported to NASD through an automated facility. To improve NASD's programs related to compliance with Section 31 of the Exchange Act and Rule 31 thereunder, NASD is requiring members to report in an automated manner all covered securities transactions that must be reported to NASD and that are assessed under NASD Section 3. While the previous manual self-reporting process has allowed NASD to meet its obligations under Section 31 of the Exchange Act, automated reporting of such covered transactions will facilitate more efficient, accurate and timely reporting to the SEC. Automated reporting also will reduce the burden on members that results from manually reporting certain transactions to NASD.

      Under the new provisions, odd-lot transactions, away from the market sales and OTC option exercises must be submitted to the TRF, OTCRF or TRACS, as applicable, by 6:30 p.m. Eastern Time on the day of execution (or the end of the reporting session that is in effect at that time) with a special indicator denoting that such transactions are reported in accordance with NASD Section 3. Specifically, all odd-lot transactions effected by a member otherwise than on a national securities exchange that are subject to a regulatory transaction fee pursuant to NASD Section 3, must be submitted with a modifier of .RO; away from the market sales effected by a member otherwise than on a national securities exchange that are subject to a regulatory transaction fee pursuant to NASD Section 3 must be submitted with a modifier of .RA; and OTC option exercises that are subject to a regulatory transaction fee pursuant to NASD Section 3 must be reported with a modifier of .RX. The transactions may be entered as clearing or nonclearing, as appropriate. These entries will not be assessed any system usage fees by TRF, OTCRF or TRACS, unless the entry is submitted for clearing, in which case the normal clearing related fee schedule will apply.

      As of December 1, 2006, NASD will require the automated reporting of all transactions effected otherwise than on a national securities exchange that must be reported to NASD and that are subject to a regulatory transaction fee pursuant to NASD Section 3. As a result, members will no longer be required to file a Self-Reporting Form with NASD's Finance Department. This rule change only applies to NASD Section 3 assessable transactions executed on or after December 1, 2006. Any NASD Section 3 assessable transaction that is subject to the self-reporting requirement executed prior to that date should not be reported to TRF, OTCRF or TRACS for this purpose, but should be submitted on the Self-Reporting Form for the applicable month.


      1 See Exchange Act Release No. 53977 (June 12, 2006), 71 FR 34976 (June 16, 2006) (Approval Order of File No. SR-NASD-2006-055).

      2 On August 1, 2006, The Nasdaq Stock Market LLC began operation as a national securities exchange for purposes of NASDAQ-listed securities. Additionally, NASDAQ has announced it will become operational as an exchange for Consolidated Quotation System (CQS) securities on approximately October 1, 2006. Accordingly, NASD is reminding members that transactions executed on the NASDAQ exchange are not subject to NASD Section 3 and should not be reported to NASD pursuant to this rule change.


      * * * * *

      SCHEDULE A TO NASD BY-LAWS

      * * * * *

      Section 3—Regulatory Transaction Fee

      Each member shall be assessed a regulatory transaction fee. The amount shall be determined periodically in accordance with Section 31 of the Act. Transactions assessable under this Section 3 that must be reported to NASD shall be reported in an automated manner.

      * * * * *

      4000. THE TRADE REPORTING FACILITY

      * * * * *

      4630. Reporting Transactions in Designated Securities

      * * * * *

      4632. Transaction Reporting

      (a) through (d) No Change.
      (e) Transactions Not [Required] To Be Reported For Publication Purposes

      The following types of transactions shall not be reported to the Trade Reporting Facility for publication purposes:
      (1) through (6) No Change.
      (f) through (g) No Change.

      * * * * *

      4000A. NASD ALTERNATIVE DISPLAY FACILITY

      * * * * *

      4600A. TRADING IN NASDAQ SECURITIES

      * * * * *

      4632A. Transactions Reported by Members

      (a) through (j) No Change.
      (k) Transactions Not To Be Reported To NASD For Publication Purposes

      The following types of transactions effected by NASD members shall not be reported to TRACS for publication purposes:
      (1) through (6) No Change.
      (l) No Change.

      * * * * *

      6000. NASD SYSTEMS AND PROGRAMS

      * * * * *

      6100. CLEARING AND COMPARISON RULES

      * * * * *

      6130. Trade Report Input

      (a) through (f) No Change.
      (g) Reporting Certain Transactions for Purposes of Regulatory Transaction Fee Assessment

      The following types of transactions that are assessed a regulatory transaction fee in accordance with Section 3 of Schedule A to the NASD By-Laws must be reported to the System as prescribed below. Transactions must be submitted to the System by 6:30 p.m. Eastern Time (or the end of the System reporting session that is in effect at that time).
      (1) Odd-Lot Transactions

      Transactions for less than a normal unit of trading shall be reported to the System with a modifier of .RO to designate the transaction as submitted for purposes of the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws. Transactions may be entered as clearing or non-clearing.
      (2) Away From the Market Sales

      Transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security, and consideration is given, shall be reported to the System with a modifier of .RA to designate the transaction as submitted for purposes of the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws. Transactions may be entered as clearing or nonclearing.
      (3) Exercises of OTC Options

      Transactions effected pursuant to the exercise of an OTC option shall be reported to the System with a modifier of .RX to designate the transaction as submitted for purposes of the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws. Transactions may be entered as clearing or nonclearing.

      * * * * *

      6400. REPORTING TRANSACTIONS IN LISTED SECURITIES

      * * * * *

      6420. Transaction Reporting

      (a) through (d) No Change.
      (e) Transactions Not [Required] To Be Reported For Publication Purposes

      The following types of transactions shall not be reported for inclusion on the Consolidated Tape:
      (1) through (8) No Change.
      (f) No Change.

      * * * * *

      6600. Over-The-Counter Equity Securities

      * * * * *

      6620. Transaction Reporting

      (a) through (d) No Change.
      (e) Transactions Not [Required] To Be Reported For Publication Purposes

      The following types of transactions shall not be reported for publication purposes:
      (1) through (4) No Change.
      (f) No Change.

      * * * * *

      6000A. NASD ADF SYSTEMS AND PROGRAMS

      6100A. TRACS TRADE COMPARISON SERVICE

      * * * * *

      6130A. Trade Report Input

      (a) through (b) No Change.
      (c) Reporting Certain Transactions for Purposes of Regulatory Transaction Fee Assessment

      The following types of transactions that are assessed a regulatory transaction fee in accordance with Section 3 of Schedule A to the NASD By-Laws must be reported to TRACS as prescribed below. Transactions must be submitted to TRACS by 6:30 p.m. Eastern Time (or the end of the TRACS reporting session that is in effect at that time).
      (1) Odd-Lot Transactions

      Transactions for less than a normal unit of trading shall be reported to TRACS with a modifier of .RO to designate the transaction as submitted for purposes of the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws. Transactions may be entered as clearing or non-clearing.
      (2) Away From the Market Sales

      Transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security, and consideration is given, shall be reported to TRACS with a modifier of .RA to designate the transaction as submitted for purposes of the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws. Transactions may be entered as clearing or non-clearing.
      (3) Exercises of OTC Options

      Transactions effected pursuant to the exercise of an OTC option shall be reported to TRACS with a modifier of .RX to designate the transaction as submitted for purposes of the regulatory transaction fee under Section 3 of Schedule A to the NASD By-Laws. Transactions may be entered as clearing or nonclearing.

      * * * * *


      1 The rule text set forth in this attachment incorporates the amendments approved in SR-NASD-2006-055, as well as technical amendments that became effective pursuant to SR-NASD-2006-098.

    • 06-38 Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties

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      GUIDANCE

      Life Settlements

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal and Compliance
      Retail
      Senior Management
      Variable Life Settlements
      Variable Insurance Policies
      Suitability
      Best Execution
      Rule 3010

      Executive Summary

      Sales of existing life insurance policies to third parties—often referred to as "life settlements"—have grown exponentially in recent years, and that trend appears likely to continue. The purpose of this Notice is to remind firms and associated persons that life settlements involving variable insurance policies are securities transactions, and firms and associated persons involved in such transactions are subject to applicable NASD rules.

      Questions

      Questions regarding this Notice may be directed to Eric Moss, Vice President and Director of Emerging Regulatory Issues, at (202) 728-8982; or Laura Gansler, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8275.

      Background and Discussion

      Until recently, the owner of a life insurance policy who no longer wanted or could not afford it had two options: to let it lapse or surrender it to the issuer for its cash surrender value. The emergence of a secondary market for existing life insurance policies provides a third alternative: to sell the policy to a third party for less than the net death benefit, but more than the cash surrender value. Such transactions are typically referred to as life settlements. The value of a particular life settlement depends on a variety of factors, including the insured's life expectancy and the nature and terms of the policy.

      The life settlement market emerged as an offshoot of the viatical settlement industry that developed in the 1980s as a source of liquidity for AIDS patients and other terminally ill policyholders with life expectancies of less than two years. Unlike viaticals, however, life settlements involve policyholders who are not terminally ill, but generally have a life expectancy of between two and ten years. Life settlements also tend to involve policies with higher net death benefits than viaticals.

      The life settlement market has expanded rapidly in recent years. One recent study estimates that existing policies with a collective face value of $5.5 billion were sold by policyholders to investors in 2005, while others suggest that the potential market exceeds $100 billion. Although business models vary, in a typical scenario, an insured sells an existing policy to a life settlement provider, which either holds it to maturity and collects the net death benefit, or sells the policy or interests in multiple, bundled policies to hedge funds or other investors. The insured may contact the life settlement provider directly, or through a financial adviser, or may use a life settlement broker, which solicits bids from multiple life settlement providers on behalf of the insured. In most states, both life settlement providers and life settlement brokers are subject to licensing and other requirements.

      Most life settlement providers claim to target only those policyholders who have already made the decision to surrender a policy or allow it to lapse, either because the policy is no longer wanted or needed, or because the policyholder can no longer afford to pay the premiums. However, as more providers enter the life settlement industry, there is increasing competition to find policyholders who fall into that relatively narrow category. This has led the some life settlement providers to aggressively encourage financial service providers, including broker-dealers, to canvass their books of business for seniors or other eligible customers who may be interested in selling their life insurance policies in the secondary market, even if they do not need to or had not previously considered surrendering or allowing their policies to lapse. Significantly, the commissions paid in connection with life settlements are typically quite high—in some cases, up to 30 percent or more of the purchase price. Accordingly, NASD is concerned that aggressive marketing tactics, fueled by high commissions, may lead to inappropriate sales practices in connection with these transactions.

      Obligations under NASD Rules for Firms and Associated Persons When Recommending or Facilitating the Sale of an Existing Variable Life Insurance Policy to Third Parties

      A variable life insurance policy is a security, and the sale of such a product in the secondary market is a securities transaction subject to NASD rules. The purpose of this Notice is to remind firms and associated persons of their obligations in connection with recommending or facilitating a variable life settlement, including suitability, due diligence, best execution, supervision and training, and compensation in connection with variable insurance contracts.

      Suitability

      NASD Rule 2310 requires that, before recommending the purchase, sale or exchange of a security, members must have a reasonable basis for believing that the transaction is suitable for the customer. This analysis requires an associated person to fully understand and explain to their customers the products and transactions they recommend. This analysis also requires an associated person to make reasonable efforts to obtain information concerning the customer's financial status, tax status, investment objectives and other relevant information.

      NASD is concerned that some of the marketing materials prepared by life settlement companies to encourage financial service providers, including broker-dealers, to recommend life settlements to their customers do not present a fair and balanced view of life settlements, and may encourage broker-dealers to recommend unsuitable transactions.

      A variable life settlement may be a valuable option for insureds who otherwise would surrender their policies or allow them to lapse. However, variable life settlements are not for everyone. There can be significant costs associated with such transactions, and NASD cautions firms that a variable life settlement is not necessarily suitable for a customer simply because the settlement price offered exceeds the policy's surrender value. Other relevant factors may include the customer's continued need for coverage, and, if the customer plans to replace the existing policy with another policy, the availability, adequacy and cost of comparable coverage. Depending on the circumstances, including the customer's stated financial needs and investment objectives, firms also may need to consider the basic tax and other relevant implications of selling a variable policy.1

      Due Diligence

      In addition to the general due diligence regarding terms and conditions that is required in connection with any securities transaction, the unique nature of variable life settlements poses certain special concerns.2 Purchasers of life settlements, whether they are life settlement providers, or the entities or investors who purchase interests in life settlements from them, commit to paying the premiums on the policy for the insured's lifetime in exchange for the net death benefit when the insured dies. Therefore, the sooner the insured dies, the more profitable the life settlement is to the purchaser. In sum, the purchaser acquires a financial interest in the insured's death.

      While some states require that life settlement providers and brokers have confidentiality policies in place to protect the identity and the medical records of the insured, others do not. Likewise, some life settlement brokers only solicit bids from providers with such policies; others do not. Before recommending a life settlement to a customer, firms and associated persons should understand the confidentiality policies of the providers or brokers with whom they are doing business. They should also understand and be able to explain to their customers any ongoing obligations the customer will incur. For example, some life settlement providers require that the insured provide notification of significant medical developments.

      Given the wide range of practices among industry participants, as well as the regulatory disparity among the states, firms that allow their associated persons to recommend variable life settlements may want to consider developing a list of approved life settlement providers and/or brokers whose policies and practices are consistent with the firms' obligations to its customers. At a minimum, NASD believes that firms should prohibit their associated persons from recommending variable life settlements that involve life settlement providers and brokers that are not properly licensed where such licenses are required.

      Best Execution

      Firms recommending or facilitating a variable life settlement must also make certain that they meet their best execution obligations under NASD Rule 2320. How that obligation is met in any given transaction depends on the particular facts and circumstances of the transaction, but the core duty is to use reasonable diligence first to ascertain the best market for the security, and then to obtain the most favorable price possible in that market under prevailing market conditions. Price is only one component of best execution. Other factors include the speed and quality of execution, and the reliability of the other market participants. Firms must develop their own policies and procedures for ensuring best execution in the context of variable life settlements. At a minimum, however, NASD believes that firms recommending that a customer sell a variable life insurance policy should make reasonable efforts to obtain bids from multiple licensed providers, either directly or through a life settlement broker.3 Therefore, an exclusivity arrangement between a firm or an associated person and one life settlement provider would generally be inconsistent with the firm's best execution obligations. Moreover, in a market that is evolving as rapidly as the life settlement market, firms should regularly review their best execution policies and procedures to ensure that they continue to satisfy Rule 2320.4

      Training and Supervision

      In accordance with NASD Rule 3010, members should establish an appropriate supervisory system to ensure that their associated persons comply with all applicable NASD and SEC rules when recommending or participating in the sale of variable life insurance policies in the secondary market. Among other things, firms must ensure that their written supervisory procedures require that the appropriate reasonable-basis suitability analysis is completed before transactions are recommended; associated persons perform appropriate customer-specific suitability analysis; all promotional materials are accurate and balanced; and all NASD and SEC rules are followed. In addition to establishing written procedures, firms also must document the steps they have taken to ensure adherence to these procedures.

      Firms and associated persons should also remember that, pursuant to NASD Rule 3040, to the extent that an associated person participates in a settlement involving a variable life insurance policy outside the regular course or scope of the associated person's employment with a member, the associated person must provide prior written notice to the member describing the proposed transaction in detail. If the associated person is to receive compensation in connection with the transaction, the member firm must approve in writing the associated person's participation in the transaction, must record it on the firm's books and records and must supervise the person's participation as if the transaction were executed on behalf of the member.

      Compensation in Connection with Variable Insurance Contracts

      NASD also reminds members that Rule 2820(g), governing the sale and distribution of variable contracts, prohibits an associated person from accepting any compensation from anyone other than the member with which the person is associated except in the manner specified by the rule. Members therefore should ensure that any compensation received by associated persons in connection with recommendations to sell a variable life insurance policy comports with this rule.

      Participation in the Subsequent Marketing and Sale of Interests in Life Settlements

      While this Notice focuses primarily on the obligations of NASD members and associated persons when recommending that a customer sell an existing variable life insurance policy to a third party, NASD is also concerned about the involvement of NASD members and associated persons in the subsequent marketing and sale of interests in life insurance policies for investment purposes. NASD notes that, depending on the circumstances, entities participating in the sale and marketing of interests in life insurance policies, variable or not, for investment purposes may trigger broker-dealer registration requirements under the Securities Exchange Act of 1934. NASD will continue to monitor this emerging market closely, and will take appropriate action or issue further guidance as necessary.


      1 NASD notes that the sale of a variable policy, under certain circumstances, could have the unintended consequence of affecting the customer's eligibility for Medicaid or other federal programs

      2 NASD has routinely reminded members about their due diligence obligations when recommending any securities transaction. See, e.g., NASD Notice to Members 03-71: NASD Reminds Members of Obligations When Selling Non-Conventional Investments (Nov. 2003).

      3 If multiple bids from licensed providers are not available, firms may perform or obtain an actuarial valuation as a means to comport with their best execution responsibilities in terms of the price being offered.

      4 For the sake of clarity, NASD reiterates that this Notice is aimed at the sale of existing variable life insurance policies by the insured to a third party, and nothing in the discussion of best execution obligations is meant to suggest that members are required to recommend the lowest-cost product when recommending the initial purchase of a variable insurance policy from an issuer.

    • 06-37 Exemption for Registered NASDAQ Market Makers Acting in the Capacity of Exchange Market Maker (This Notice is superseded by Notice to Members 06-44)

      View PDF File

      GUIDANCE

      Trading Activity Fee

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Trading
      Registered Representatives
      Senior Management
      Trading Activity Fee
      NASDAQ Exchange Registration

      Executive Summary

      On July 5, 2006, The NASDAQ Stock Market, Inc. ("NASDAQ") announced that it would begin to operate as a national securities exchange on August 1, 2006 for NASDAQ-listed securities.1 Section 1 of Schedule A to NASD's By-Laws exempts from the Trading Activity Fee ("TAF") proprietary transactions by a firm that is a member of both NASD and a national securities exchange, effected in its capacity as an exchange specialist or market maker, and that is subject to Securities Exchange Act of 1934, Section 11(a) and Rule 11a1-1(T)(a) thereunder. The exemption does not, however, apply to other transactions permitted by Section 11(a), such as bona fide arbitrage or hedge transactions.

      Accordingly, on August 1, 2006 when NASDAQ became operational as an exchange in NASDAQ securities, NASD member firms that are also members of the NASDAQ Exchange became exempt from the TAF for transactions in which they act in their capacity as a registered market maker in such NASDAQ securities.2 Further, when NASDAQ becomes operational as an exchange in Consolidated Quotation System ("CQS") securities on approximately October 1, 2006, NASD member firms that are also members of the NASDAQ Exchange will be exempt from the TAF for transactions effected on the NASDAQ Exchange in which they act in their capacity as a registered market maker in CQS securities.

      Questions/Further Information

      Questions concerning this Notice should be directed to the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071, or NASD Finance at (240) 386-5397.

      Background and Discussion

      In 2003, the SEC approved NASD's new member regulatory pricing structure, which: (1) eliminated the NASDAQ-based regulatory fee; (2) instituted a new transactionbased TAF applied across a broader range of equity, options and securities futures transactions; (3) increased the rates assessed to member firms under the Personnel Assessment ("PA"); and (4) implemented a simplified three-tiered flat rate for the Gross Income Assessment ("GIA"), whereby deductions and exclusions were eliminated.3 NASD uses fees collected under the member regulatory pricing structure to fund member regulatory activities, including the regulation of members through examination, processing of membership applications, financial monitoring, policymaking, rulemaking, and interpretive and enforcement activities.

      As stated above, Section 1 of Schedule A to NASD's By-Laws exempts from the TAF proprietary transactions by a firm that is a member of both NASD and a national securities exchange, effected in its capacity as an exchange specialist or market maker, and that is subject to Securities Exchange Act of 1934, Section 11(a) and Rule 11a1- 1(T)(a) thereunder. Accordingly, once NASDAQ is operational as an exchange, this exemption will be applicable to transactions that occur on the NASDAQ Exchange in the same manner as it is currently applicable to certain transactions that occur on other exchanges. To assist members in understanding the application of this exemption to market making activity on the NASDAQ Exchange, NASD staff is publishing the following questions and answers.

      Questions and Answers

      1. Will a member be exempt for all proprietary transactions in NASDAQ-listed securities for which it is registered as a market maker?

      No. Only those proprietary transactions effected through a registered market maker's quote on the NASDAQ Exchange are exempt from the TAF. Proprietary transactions of a registered market executed through SIZE on the NASDAQ Exchange are not exempt from the TAF, as well as transactions not effected through the NASDAQ Exchange like, for example, those reported to either a Trade Reporting Facility ("TRF")4 or the Alternative Display Facility ("ADF").5
      2. Does the exemption relating to registered NASDAQ Exchange market makers apply only to NASDAQ-listed securities?

      Yes. Until NASDAQ is operational as an exchange in all National Market System ("NMS") securities, the TAF exemption will apply only to NASDAQ-listed securities.6 NASDAQ has announced that it intends to be operational as an exchange in CQS securities on October 1, 2006. Accordingly, until NASDAQ is operating as a national securities exchange in CQS securities, transactions executed through NASDAQ systems in CQS securities are still subject to the TAF. At such time that NASDAQ is operational as an exchange in CQS securities, the TAF exemption discussed above for registered market makers acting in their capacity as a registered market maker on the NASDAQ exchange will also be applicable to CQS securities.
      3. If I am a registered market maker on the NASDAQ Exchange and receive an agency order from an NASD member broker-dealer that I then send to the NASDAQ Exchange for execution, is that transaction exempt from the TAF?

      Yes. Consistent with guidance issued in Notice to Members 02-75, Question 3, when a member acts as agent on behalf of another NASD member in the sale of a covered security, the fee will be assessed to the member who is the ultimate seller of the security, not the member acting as agent. Therefore, an agency transaction executed on behalf of another NASD member broker-dealer on the NASDAQ Exchange by a registered market maker acting in such capacity is exempt from the TAF.
      4. If I am a registered market maker on the NASDAQ Exchange and receive an order from a customer that I send to the NASDAQ Exchange for execution, is that transaction exempt from the TAF?

      No. Transactions executed on behalf of a registered market maker's own customer, including agency and riskless principal transactions, must be assessed the TAF.
      5. If I am a registered market maker on the NASDAQ Exchange and place an order in SIZE that is subsequently executed, is that transaction exempt from the TAF?

      No. An execution resulting from an order, either agency or principal, placed into SIZE is not exempt from the TAF.

      1 The Securities and Exchange Commission ("SEC") approved NASDAQ's application for registration as a national securities exchange on January 23, 2006. See Exchange Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10-131). On June 30, 2006, the SEC issued an order modifying a condition to NASDAQ's operation as a national securities exchange. See Exchange Act Release No. 54085 (June 30, 2006), 71 FR 38910 (July 10, 2006) (File No. 10-131). NASDAQ plans to be operational as an exchange in NASDAQ-listed issues on August 1, 2006, and in other exchange-listed issues on or after September 1, 2006. See NASDAQ Head Trader Alert No. 2006-098 (July 5, 2006), http://www.nasdaqtrader.com/trader/news/2006/ headtraderalerts/hta2006-098.stm and NASDAQ Head Trader Alert No. 2006-111 (July 26, 2006), http://www.nasdaqtrader.com/Trader/News/2006/ headtraderalerts/hta2006-111.stm.

      2 See, e.g. Notice to Member 02-63 (Sept. 2002), Question 1.

      3 See Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003) (approving SR-NASD-2002-148) and Exchange Act Release No. 47106 (Dec. 30, 2002), 68 FR 819 (Jan. 7, 2003) (approving SR-NASD-2002-99).

      4 See Exchange Act Release No. 54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (File No. SR-NASD-2005-087) (SEC approval of the changes to NASD rules to reflect NASDAQ's registration as an exchange and the operation of the TRF by NASDAQ subject to NASD's regulatory license and oversight).

      5 See Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 (July 31, 2002) (SEC approval of SR-NASD-2002-97 authorizing NASD to operate the ADF on a pilot basis); Exchange Act Release No. 47633 (Apr. 10, 2003), 68 FR 19043 (Apr. 17, 2003) (File No. SR-NASD-2003-067) (extension of ADF pilot until January 26, 2004); Exchange Act Release No. 49131 (Jan. 27, 2004), 69 FR 5229 (Feb. 3, 2004) (File No. SR-NASD- 2004-012) (extension of ADF pilot until October 26, 2004); Exchange Act Release No. 50601 (Oct. 28, 2004), 69 FR 64611 (Nov. 5, 2004) (File No. SR-NASD-2004-160) (extension of ADF pilot until July 26, 2005); Exchange Act Release No. 52122 (July 25, 2005), 70 FR (Aug. 1, 2005) (File No. SRNASD- 2005-092) (extension of ADF pilot until April 26, 2006); Exchange Act Release No. 53699 (April 21, 2006), 71 FR 25271 (Apr. 28, 2006) (File No. SR-NASD-2006-050) (extension of ADF pilot period until January 26, 2007).

      6 See Exchange Act Release No. 51808 (June 5, 2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04) (SEC order adopting rules under Regulation NMS and amendments to the joint industry plans for disseminating market information).

    • 06-36 NASD and NYSE Joint Interpretive Guidance on Fixed Income Research

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      GUIDANCE

      Research Analysts and Research Reports

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Fixed Income
      Investment Banking
      Legal & Compliance
      Operations
      Research
      Senior Management
      Research Conflicts of Interest
      SEC Regulation Analyst Certification
      Supervision
      Rule 2711
      Rule 3010

      Background

      In December 2005, the New York Stock Exchange (NYSE) and NASD (the SROs) issued a joint report that assessed the effectiveness of the SRO research analyst conflict of interest rules.1 Those rules apply only to equity research reports.2 However, the joint report noted that the SROs would monitor the extent to which firms have adopted the Bond Market Association's (BMA) "Guiding Principles to Promote the Integrity of Fixed-Income Research" (Guiding Principles)3, which are voluntary, principle-based guidelines designed to help firms manage potential conflicts of interest that may arise in the context of fixed income research activities. According to the BMA, the Guiding Principles were designed "to address the issue of research integrity in the fixed income markets in a manner that takes into account their unique characteristics."

      The SROs note that voluntary trade association conduct standards are not the equivalent of sanctionable rules. As such, the SROs maintain the right to promulgate rules in the fixed income research area that may be different from, or analogous or additive to, the Guiding Principles. Nonetheless, the SROs regard as a worthy objective trade association efforts to promote aspirational standards and agree with the BMA that the Guiding Principles "serve as a helpful reference point as firms review and modify their own fixed income research practices." The SROs therefore believe a review of compliance with the Guiding Principles helps to inform consideration of whether more definitive rules are needed to regulate fixed income research.4

      To that end, the SROs conducted examinations of certain member organizations to assess how those firms have addressed conflicts of interest with respect to fixed income research. The examinations found many instances in which firms had failed to adhere to the Guiding Principles. Even more significantly, the examinations discovered several instances where firms failed to establish, maintain and enforce written supervisory procedures in the fixed income research area—a fundamental obligation under SRO rules5—or comply with existing SEC Regulation Analyst Certification (Regulation AC).6 A general synopsis of the examination results follows.

      Questions/Further Information

      Questions or comments concerning this Notice may be directed as follows:

      NASD: Philip Shaikun, Associate Vice President and Associate General Counsel,
      Regulatory Policy and Oversight, at (202) 728-8451.
      NYSE: William Jannace (212) 656-2744, Stephen Kasprzak (212) 656-5226 and Erika
      Lazar (212) 656-4591.

      Supervision

      Instances were noted in which member organizations did not have effective written supervisory procedures for fixed income research in place pursuant to the SRO supervision rules and BMA Guiding Principle 4.10.1, which provide that firms should establish appropriate written policies and procedures to supervise fixed income research analysts. This Principle follows from the broader guideline found in Principle 4.10, which states that firms should allocate sufficient supervisory resources to promote the integrity of the fixed income research process.

      In other cases, member organizations had supervisory procedures in place but failed to enforce them. For example, instances were noted in which fixed income research analysts made public appearances without documented approval by a supervisor, as required by the firm's written supervisory procedures. Further, several instances were noted in which analysts maintained outside personal investment accounts that were not approved by their legal and compliance departments, though such approval was required by the firm's written supervisory procedures. Apart from violating the member organizations' internal policies, these infractions are inconsistent with BMA Principle 4.5, which suggests that firms impose personal trading restrictions on fixed income research analysts to manage conflicts of interest.7

      Disclosures

      The examination results revealed that the most prevalent failure among member organizations with respect to the Guiding Principles involved the inadequacy of disclosures contained in fixed income research reports. BMA Guiding Principle 4.68 lists certain disclosures that should be included in a fixed income research report to inform investors of potential conflicts of interest that may affect fixed income research. These disclosures include: whether the analyst's compensation is based on such factors as the firm's overall performance, or the profitability or revenues of the fixed income department or the asset class covered by the analyst; whether the analyst or certain relatives have a financial interest in the security that is the subject of the research report (other than investment grade sovereigns); whether the analyst is affiliated with the issuer; whether the firm or its affiliates has managed or co-managed a public or Rule 144A offering for the issuer within the past 12 months; whether the firm trades or may trade as principal in the securities that are the subject of the research report; and, if the report contains ratings established by the firm, the meaning of those ratings. Instances were noted in which firms failed to include tailored disclosures in research reports specific to a subject company and/or did not include all of the necessary relevant disclosures. Blanket or boilerplate disclosures should not be used in a fixed income research report when more specific disclosures are necessary to alert investors to specific conflicts.

      Analyst Certifications

      The examinations also found instances in which member organizations failed to comply with the requirements set forth in Regulation AC, which applies equally to fixed-income and equity research. Specifically, member organizations issued reports9 that did not include the requisite analyst certifications in connection with research reports or that included references to analyst certifications that were insufficient because they did not direct the reader to the correct place to find the certification. Failures were similarly noted with respect to certifications required in connection with public appearances.10

      Conclusion

      The SROs appreciate industry initiatives like the BMA Guiding Principles that foster better compliance policies within firms. In considering whether to engage in more definitive rulemaking, the SROs will continue to monitor the extent to which firms have adopted and adhered to the Guiding Principles or other supervisory systems regarding fixed-income research conflicts of interest that are reasonably designed to achieve compliance with applicable SRO rules and securities laws and regulations.


      1 See "Joint Report by NASD and the NYSE on the Operation and Effectiveness of the Research Analyst Conflict of Interest Rules" at www.nasd.com/web/groups/rules_regs/ documents/rules_regs/nasdw_015803.pdf and www.nyse.com/pdfs/rajointreport.pdf.

      2 NASD Rule 2711 (Research Analysts and Reports) and NYSE Rule 472 (Communications with the Public).

      3 See "Guiding Principles To Promote Integrity of Fixed Income Research," May 2004, www.bondmarkets.com/assets/files/Guiding_ Principles_Principles_for_Research.pdf.

      4 As the joint report noted, anti-fraud statutes, as well as existing SRO rules such as NYSE Rules 401 (Business Conduct), 476(a)(6) (allowing for disciplinary proceedings against a member organization for "conduct or proceeding inconsistent with just and equitable principles of trade"), and NASD Rule 2110 (which requires that members "observe high standards of commercial honor and just and equitable principles of trade") can reach and address any egregious conduct involving fixed income research.

      5 See NYSE Rule 342 (Offices Approval, Supervision and Control) and NASD Rule 3010 (Supervision).

      6 17 CFR 242.500 et seq.

      7 Note also that NYSE Rule 407 (Transactions—Employees of Members, Member Organizations and the Exchange) prohibits any employee of a member organization to "establish or maintain any securities or commodities account...at another member or member organization, or a domestic or foreign non-member broker-dealer, investment adviser, bank, other financial institution, or otherwise without the prior written consent of another person designated by the member or member organization under NYSE Rule 342(b)(1) to sign such consents and review such accounts." NASD Rule 3050 (Transactions for or by Associated Persons) requires an associated person to notify his or her employer member in writing when opening a securities account at a broker-dealer.

      8 "Firms and research analysts should promote investor awareness of potential research analyst conflicts of interest by disclosing in fixed income research reports and/or elsewhere certain material factors that may be viewed as potentially affecting the integrity of specific security recommendations or investment conclusions."

      9 17 CFR 242.501.

      10 17 CFR 242.502.

    • 06-35 Revisions to the Series 22, 27, 28, 39 and 55 Examination Programs; Implementation Date: August 15, 2006

      View PDF File

      GUIDANCE

      Qualification Examinations

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Training
      Limited Principal—Direct Participation
      Programs (Series 39)
      Limited Principal—Financial and
      Operations (Series 27)
      Limited Principal—Introducing
      Broker-Dealer Financial and
      Operations (Series 28)
      Limited Representative—Direct
      Participation Programs (Series 22)
      Limited Representative—Equity
      Trader (Series 55)
      Rule 1022(b)
      Rule 1022(c)
      Rule 1022(e)
      Rule 1032(c)
      Rule 1032(f)

      Executive Summary

      NASD has revised the following examination programs:

      •  Limited Representative—Direct Participation Programs (Series 22);
      •  Limited Principal—Financial and Operations (Series 27);
      •  Limited Principal—Introducing Broker-Dealer Financial and Operations (Series 28);
      •  Limited Principal—Direct Participation Programs (Series 39); and
      •  Limited Representative—Equity Trader (Series 55).1

      The changes are reflected in study outlines that are available on the NASD Web site (www.nasd.com/brokerqualifications). The changes will appear in examinations administered starting on August 15, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to Carole Hartzog, Senior Qualifications Specialist, NASD Testing and Continuing Education Department (TCE), at (240) 386-4678; Elaine Warren, Lead Analyst, TCE, at (240) 386-4679; Eva Cichy, Senior Qualifications Analyst, TCE, at (240) 386-4680; or Karen Bescher, Senior Qualifications Analyst, TCE, at (240) 386-4677.

      Background and Discussion

      Section 15A(g)(3) of the Securities Exchange Act of 1934 requires NASD to prescribe standards of training, experience and competence for persons associated with NASD members. In accordance with that provision, NASD has developed examinations, and administers examinations developed by other self-regulatory organizations, that are designed to establish that persons associated with NASD members have attained specified levels of competence and knowledge. NASD periodically reviews the content of the examinations to determine whether revisions are necessary or appropriate in view of changes pertaining to the subject matter covered by the examinations.

      NASD staff and committees of industry representatives recently reviewed the Series 22, 27, 28, 39 and 55 examination programs. As a result of these reviews, and as discussed in greater detail below, NASD has revised the examination programs to reflect changes to the laws, rules and regulations covered by the examinations and to better reflect the duties and responsibilities of the individuals who are taking these examinations.

      Series 22

      NASD Rule 1032(c) provides that an associated person of a member firm who meets the definition of "representative" in Rule 1031 may register with NASD as a Limited Representative—Direct Participation Programs if 1) the individual's activities in the investment banking and securities business are limited solely to the solicitation, purchase and/or sale of equity interests in or debt of direct participation programs as defined in Rule 1022(e)(2) and 2) the individual passes the Series 22 qualification examination.

      NASD has revised the Series 22 study outline to add a section on the Securities and Exchange Commission (SEC) Form S-1 registration. NASD also has added a section on NASD Rule 2370 (Borrowing from or Lending to Customers) and a section on like-kind exchanges.

      In addition, NASD has removed the sections on Section 4(3) under the Securities Act of 1933 and SEC Rule 174; NASD Rules 1040 (Registration of Assistant Representatives and Proctors) and 1110 (formerly Registration of Government Securities Principals and Representatives); and NASD Certificate of Incorporation.

      NASD has made these changes to the entire content of the Series 22 examination, including the selection specifications and question bank. The number of questions on each section of the Series 22 examination remains the same. In addition, the number of questions on the examination remains at 100, and candidates continue to have 21/4 hours (135 minutes) to complete the exam. Also, each question continues to count one point, and each candidate must correctly answer 70 percent of the questions to receive a passing grade.

      Series 27

      Pursuant to NASD Rule 1022(b), member firms that have a minimum net capital requirement of $250,000 under SEC Rules 15c3-1(a)(1)(ii) and 15c3-1(a)(2)(i), as well as members that have a minimum net capital requirement of $150,000 under SEC Rule 15c3-1(a)(8), are required to designate as a Limited Principal—Financial and Operations those individuals associated with them who are responsible for the members' financial and operational management, including, but not limited to, final approval and responsibility for the accuracy of financial reports submitted to regulators. In addition, Rule 1022(b) provides that the chief financial officer of such firms must be a Limited Principal—Financial and Operations. The Series 27 examination is an NASD exam that qualifies an individual to function as a Limited Principal—Financial and Operations.

      NASD has revised the Series 27 study outline to add sections on Municipal Securities Rulemaking Board (MSRB) Rules G-8(g) (Transactions in Municipal Fund Securities), G-14 (Reports of Sales and Purchases), G-15(f) (Minimum Denominations), G-15(g) (Forwarding Official Communications), G-17 (Conduct of Municipal Securities Activities), G-37 (Political Contributions and Prohibitions on Municipal Securities Business) and G-32(b) (Inter-Dealer Disclosure Requirements).

      NASD has added a section on SEC Regulation SHO, including Rules 200 (Definition of "Short Sale" and Marking Requirements) and 203 (Borrowing and Delivery Requirements).

      NASD also has added sections on NASD Rules 1150 (Executive Representatives), 2350 (Broker-Dealer Conduct on the Premises of Financial Institutions), 2370, 3012 (Supervisory Control System), 3013 (Annual Certification of Compliance and Supervisory Processes), 3510 (Business Continuity Plan) and 9800 (Temporary Cease and Desist Orders).

      In addition, NASD has revised the study outline to remove the sections on NASD Rules 1110, 2320 (Best Execution and Interpositioning), 3370 (Purchases), 11100(d) (CUSIP Number), 11110 (Uniform Practice Committees), 11120 (Definitions), 11180 (formerly Use of Trade Acceptance and Reconciliation Service) and 11830 (formerly Mandatory Close-Out for Short Sales). Further, NASD has removed the following two subsections of the Insider Trading and Securities Fraud Enforcement Act of 1988 section: Investigatory Assistance to Foreign Securities Authorities and Cooperation with Foreign Authorities and International Organizations in Enforcement.

      NASD also has removed the sections on Form X17F-1A (Report for Missing, Lost, Stolen, or Counterfeit Securities), NASD Certificate of Incorporation and Articles VII, XII, XIII and XV of the NASD By-Laws.

      NASD has modified the number of questions on several sections of the Series 27 study outline as follows:

      •  Keeping and Preservation of Records and Broker-Dealer Financial Reporting Requirements: decreased from 16 to 15 questions;
      •  Customer Protection: decreased from 37 to 36 questions;
      •  Municipal Securities Rulemaking Board Regulations: decreased from 10 to 9 questions;
      •  Uniform Practice Rules: decreased from 15 to 12 questions; and
      •  Other Relevant Regulations and Interpretations: increased from 15 to 21 questions.

      NASD also has changed the title of Section 5 from "Federal Reserve Board Regulations" to "Extension of Credit in the Securities Industry."

      NASD has made these changes to the entire content of the Series 27 examination, including the selection specifications and question bank. The number of questions on the Series 27 examination remains at 145, and candidates continue to have 31/2 hours (210 minutes) to complete the exam. Also, each question continues to count one point, and each candidate must correctly answer 70 percent of the questions to receive a passing grade.

      Series 28

      In accordance with NASD Rule 1022(c), member firms that are subject to the net capital requirements of SEC Rule 15c3-1, other than those members that are subject to the net capital requirements of SEC Rules 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8), are required to designate as a Limited Principal—Introducing Broker-Dealer Financial and Operations those individuals associated with them who are responsible for the firms' financial and operational management, including, but not limited to, final approval and responsibility for the accuracy of financial reports submitted to regulators. In addition, Rule 1022(c) provides that the chief financial officer of such firms must be a Limited Principal—Introducing Broker-Dealer Financial and Operations. The Series 28 examination is an NASD examination that qualifies an individual to function as a Limited Principal—Introducing Broker-Dealer Financial and Operations.

      NASD has revised the Series 28 study outline to add a section on MSRB Rule G-37. NASD also has added a section on SEC Regulation SHO, including Rules 200 and 203. NASD has added sections on NASD Rules 1150, 2350, 2370, 3012, 3013, 3510 and 9800.

      In addition, NASD has revised the study outline to remove the sections on NASD Rules 1100 (Foreign Associates), 1110 and 2320. NASD also has removed the sections on Form X17F-1A, NASD Certificate of Incorporation and Articles VII, XII, XIII and XV of the NASD By-Laws.

      Further, NASD has added a new section covering certain rules of the NASD Uniform Practice Code (Uniform Practice Rules). NASD has added the Uniform Practice Rules under Section 4 and has moved the section on Other Relevant Regulations and Interpretations (formerly under Section 4) to Section 5, a new section.

      NASD has modified the number of questions on several sections of the Series 28 study outline as follows:

      •  Keeping and Preservation of Records and Broker-Dealer Financial Reporting Requirements: increased from 15 to 16 questions;
      •  Uniform Practice Rules (new section): 5 questions; and
      •  Other Relevant Regulations and Interpretations: increased from 24 to 28 questions.

      NASD has made these changes to the entire content of the Series 28 examination, including the selection specifications and question bank. The number of questions on the Series 28 examination has increased from 85 to 95 questions. Candidates continue to have 2 hours (120 minutes) to complete the exam. Also, each question continues to count one point, and each candidate must correctly answer 70 percent of the questions to receive a passing grade.

      Series 39

      NASD Rule 1022(e) provides that an associated person of a member firm who meets the definition of "principal" in Rule 1021 may register with NASD as a Limited Principal—Direct Participation Programs if 1) the individual's activities in the investment banking and securities business are limited solely to the equity interests in or the debt of direct participation programs as defined in Rule 1022(e)(2); 2) the individual also is registered as either a General Securities Representative (Series 7) or a Limited Representative—Direct Participation Programs (Series 22); and 3) the individual passes the Series 39 qualification examination.

      NASD has revised the Series 39 study outline to add a section on SEC Form S-1 registration. NASD also has added sections on NASD Rules 2370, 3012, 3013, 3510 and 3520 (Emergency Contact Information).

      NASD has revised the study outline to remove the sections on Section 4(3) under the Securities Act of 1933 and SEC Rule 174; NASD Rules 1040, 1110 and 2750 (Transactions with Related Persons); and NASD Certificate of Incorporation.

      NASD has modified the number of questions on each section of the Series 39 study outline as follows:

      •  Structure and Regulation of Direct Participation Program Offerings: decreased from 47 to 46 questions;
      •  Sales Supervision, General Supervision of Employees, Regulatory Framework of NASD: increased from 31 to 32 questions; and
      •  Compliance with Financial Responsibility Rules: increased from 17 to 22 questions.

      NASD has made these changes to the entire content of the Series 39 examination, including the selection specifications and question bank. The number of questions on the Series 39 examination has increased from 95 to 100 questions, and candidates now have 21/4 hours (135 minutes) to complete the exam. Also, each question continues to count one point, and each candidate must correctly answer 70 percent of the questions to receive a passing grade.

      Series 55

      Pursuant to NASD Rule 1032(f), the Series 55 examination is required, with certain limited exceptions, for associated persons who are engaged in or directly supervise proprietary trading or the execution of transactions on an agency basis with respect to transactions in equity, preferred or convertible debt securities effected otherwise than on a securities exchange. There is an exception from the Series 55 examination requirement for any person associated with a member whose trading activities are conducted principally on behalf of an investment company that is registered with the SEC pursuant to the Investment Company Act of 1940 and that controls, is controlled by, or is under common control with the member.

      NASD has revised the Series 55 study outline to add a section on Rules 600 (NMS Security Designation and Definitions), 602 (Dissemination of Quotations in NMS Securities), 604 (Display of Customer Limit Orders), 605 (Disclosure of Order Execution Information), 606 (Disclosure of Order Routing Information) and 612 (Minimum Price Increments) of SEC Regulation NMS.

      NASD also has added sections on NASD Rules 2111 (Trading Ahead of Customer Market Orders) and 3380 (Order Entry and Execution Practices). NASD has modified the section on the NASDAQ Market Center—Execution Services to add specific references to NASD Rules 4701 (Definitions), 4704 (Opening Process for NASDAQ-Listed Securities), 4706 (Order Entry Parameters), 4707 (Entry and Display of Quotes/Orders), 4709 (NASDAQ Closing Cross), 4710 (Participant Obligations in the NASDAQ Market Center), 4714 (Routing NASDAQ-Listed Securities), 4715 (Adjustment of Open Quotes and/or Orders) and 4719 (Anonymity).

      NASD has added a section on the NASDAQ Initial Public Offering Process (NASDAQ Head Trader Alert 2005-096) and has modified the section on SEC Regulation SHO to add specific references to Rules 200 and 203. Further, NASD has added references to the specific types of NASDAQ securities covered by the Series 55 examination, added two additional modifiers (.ST (Pre-Open and Aftermarket Trades Not Reported Within 90 Seconds) and .W (Stop Orders)) to the list of Trade Reporting Service modifiers and added a section on reporting cancelled trades.

      In addition, NASD has revised the study outline to remove the following sections: SEC Rules 11Ac1-1 (formerly Dissemination of Quotations), 11Ac1-4 (formerly Display of Customer Limit Orders), 11Ac1-5 (formerly Disclosure of Order Execution Information) and 11Ac1-6 (formerly Disclosure of Order Routing Information); NASDAQ Levels 1, 2 and 3 Service; SEC Rule 10b-10 (Confirmation of Transactions); and NASD Rules 3360 (Short Interest Reporting), 3370 and 4643 (Customer Confirmations).

      NASD has modified the number of questions on each section of the Series 55 study outline as follows:

      •  NASDAQ and Over-the-Counter Markets: decreased from 42 to 41 questions;
      •  NASDAQ Display, Execution and Trading Systems: increased from 15 to 17 questions;
      •  Trade Reporting Requirements: increased from 16 to 19 questions; and
      •   General Industry Standards: decreased from 27 to 23 questions.

      NASD has made these changes to the entire content of the Series 55 examination, including the selection specifications and question bank. The number of questions on the Series 55 examination remains at 100, and candidates continue to have 3 hours (180 minutes) to complete the exam. Also, each question continues to count one point, and each candidate must correctly answer 70 percent of the questions to receive a passing grade.

      Availability of Study Outlines

      The study outlines for the revised examination programs are available on the NASD Qualifications Web page at www.nasd.com/brokerqualifications.


      1 See File Nos. SR-NASD-2006-082 (Proposed Rule Change Relating to Revisions to the Series 22 Examination Program); SR-NASD-2006-083 (Proposed Rule Change Relating to Revisions to the Series 27 Examination Program); SR-NASD-2006-084 (Proposed Rule Change Relating to Revisions to the Series 28 Examination Program); SR-NASD-2006-085 (Proposed Rule Change Relating to Revisions to the Series 39 Examination Program); and SR-NASD-2006-086 (Proposed Rule Change Relating to Revisions to the Series 55 Examination Program). These rule filings were filed with the SEC for immediate effectiveness on July 14, 2006.

    • 06-34 Technical Changes in the Reporting of Statistical and Summary Information Regarding Customer Complaints and Disclosure Events pursuant to Rule 3070

      View PDF File

      ACTION REQUIRED

      NASD Rule 3070 System Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Chief Compliance Officer
      Legal and Compliance
      Operations
      Senior Management
      NASD Rule 3070 System Requirements

      Executive Summary

      NASD Rule 3070(c) requires members to report to NASD statistical and summary information regarding customer complaints by the 15th calendar day of the month following the calendar quarter's end (e.g., by April 15 for the first quarter) in which customer complaints are received by the member. The information reported by members provides NASD with important regulatory information that assists with the timely identification of potential sales practice and operational problems.

      The Rule significantly parallels comparable provisions of New York Stock Exchange (NYSE) Rule 351(d), and it exempts members that are currently subject to the requirements of Rule 351(d) to ensure that there is no regulatory duplication for dual NASD/NYSE members. In an effort to make the filing requirements of NASD 3070(c) and NYSE 351(d) more uniform and enhance the regulatory value of the information, the following data fields are being modified in the 3070 system file layout:

      DATA FIELDS XML FILE TAG NAMES
      Complaint Number <id>
      Complaint Date <date>
      Branch <branch-id>
      Contact Phone Number <phone-number>
      Contact Name <first-name> <last-name>
      Customer Account Number <account-number>
      Customer Name <first-name> <last-name>
      Allegation Activity Period <activity-date> <activity-date2>
      Total Amount <amount>
      Dispute Amount <dsptd-amt> <dsptd-amt-flag>
      Security Symbol/Description <symbol> <iss-descrpt>
      Response Date <response-date>

      Testing and Implementation of the Changes to the 3070 System

      The changes to the 3070 System fields listed above will be effective on Friday, December 15, 2006.

      NASD recognizes that the changes to the 3070 System may require members to make modifications to their systems and processes. Members will have an opportunity to test their program changes as of October 23, 2006 using the Regulation Filing Applications test site, which can be found on NASD's Web site at https://regfilingtest.nasd.com.

      Questions/Further Information

      Questions regarding technical requirements may be directed to NASD's Gateway Call Center at (800) 321-NASD. Other questions regarding these changes and Rule 3070 may be directed to David Troutner at (202) 728-8069.

      Background and Discussion

      Attached to this Notice is a chart of the revised 3070 import XML file format that will be effective for fourth quarter 2006 reporting of 3070(c) complaint information. Note that some of the Rule 3070(a) disclosure event fields will be modified in order to maintain data structure consistency in the 3070 system.

      The following is a description of the data fields being modified:

      Complaint Number

      Change:

      This field is currently not mandatory and accepts a maximum of eight numeric characters. It will become a mandatory field, and will be expanded to accept 30 alphanumeric characters.

      Guidance:

      This is the member's unique identification for the complaint.


      Complaint Date

      Change:

      The field format will change from "mm/dd/yyyy" to "yyyy/mm/dd."

      Guidance:

      This is the date the complaint letter is first received by the member, not when a particular department of the member receives it. If the complaint is received after business hours and is time-stamped the next day, that date may be used as the receipt date. Members may utilize a date-stamp/time-stamp machine to reflect the date/time of receipt, or manually write it in if no other means is available. If no evidence of the date and time of receipt are reflected on the document, then the date of the letter will be viewed as the date of receipt.


      Branch

      Change:

      The branch identification field will change from numerical to alphanumeric characters.

      Guidance:

      This field is mandatory. Use the assigned CRD Branch Number. You may type in "HOME" if the complaint is related to a home office that does not meet the Branch Office definition and therefore does not have a CRD Branch Number.


      Contact Phone Number

      Change:

      This field will change to alphanumeric characters.

      Contact First Name

      Change:

      This field will change from alpha to alphanumeric characters.

      Contact First Last

      Change:

      This field will change from alpha to alphanumeric characters.

      Customer Account Number

      Change:

      This field will be expanded from 15 alpha characters to accept a maximum of 50 alphanumeric characters.

      Guidance:

      This is the account number relating to the customer's account referenced in the complaint. This will remain an optional field.


      Customer Name

      Change:

      There are two fields for customer name. The customer's last name field will be expanded from 30 alpha characters to accommodate a maximum of 255 alphanumeric characters, and is mandatory. The customer's first name field will be reformatted from alpha characters to accommodate a maximum of 30 alphanumeric characters.

      Guidance:

      Members must provide the name of the complaining investor.
      •  When the customer is not a proper name: For institutional or "for the benefit of" type accounts, the account title must be entered in the last name field the way the account is reflected on the organization's books and records. Do not abbreviate the account title.
      •  Third-party complaints: Enter the term "third party" or use the customer's name in the last name field.
      •  Attorney writing on behalf of client: Enter the customer's name.
      •  Investment advisory accounts: Enter the entire title. For example, "ABC Advisory for the Benefit of Joe Doe."
      •  Anonymous complaints: Write "anonymous" in the last name field.
      Allegation Activity Period

      Change:

      The two fields for the dates that the alleged activity of the problem began and ended will be reformatted from "mm/dd/yyyy" to "yyyy/mm/dd."

      Guidance:

      The allegation activity period is required for all complaints if stated within the body of the letter or gleaned from enclosed information such as an account statement or confirmation. The system will allow zeros in the month or day fields for those instances where all such precise dates are not known (for example, when the specific day of the month is not know, but the month and year is known, you may enter "yyyy/mm/00").

      The activity "from" date must be less than or equal to the filing submission date. The activity "to" date must be less than or equal to the filing submission date and equal or subsequent to the activity "from" date. For example, when the alleged activity is for a specific day, the activity "from" and "to" dates will be the same.

      Total Amount

      Change:

      This field will no longer be mandatory.

      Guidance:

      This will now be an optional field for the total amount of the investment involved in the complaint.

      Dispute Amount

      Change:

      The alleged compensatory damages should be classified as follows:
      •  Enter the specified amount (if included in complaint) $___________________ .
      Otherwise:
      •  Select the radio button when the compensatory damages amount is not specified but is believed to be $5,000 or more, or if you cannot determine the amount per a good faith effort.
      •  Select the radio button when the compensatory damages amount is not specified but is believed to be under $5,000, or when it is determined there is no alleged or potential monetary damages related to the dispute.
      Guidance:

      Members must provide the amount of alleged compensatory damage in the complaint for sales practice complaints. If a specific amount is included in the complaint, it must be used. When a specific amount is not included, members are required to make a good faith estimate in order to select either "$5,000 or more" or "under $5,000."


      Security Description

      Change:

      The system will now allow for the entry of up to three valid securities symbols. If a symbol is not available, there are fields for up to three entries for securities descriptions of up to 255 alphanumeric characters each.

      Guidance:

      This field is for the description of the security related to the predominant alleged problem in the complaint. If the security has a symbol, it must be used. If a complaint is not related to a security, then "not applicable" must be used and placed in the security description field (< iss-descrpt >). If the security name is included in the complaint but the symbol is not included, the symbol should be obtained by the member. For instances where there are no security symbols, such as variable annuities, free-form text must be utilized to identify the security. A maximum of three securities relating to the predominant problem and product allegation can be included.


      Response Date

      Change:

      The date format will change from "mm/dd/yyyy" to "yyyy/mm/dd.

      Guidance:

      This is the date the member responded to the complaint. This field remains voluntary (not a required field).


      ATTACHMENT A

      3070 Import File Format

      Shaded rows indicate fields that are changing effective December 15, 2006.

      Like HTML, in the XML format, every open tag must have a close tag. While indention is not necessary, it does allow potential debugging of a faulty script to be easier.

      Complaints

      In order to import a filing containing one or more Complaints the file must adhere to the following XML file format:

      Tag Name Max Lng Format Rqrd/
      Optnl
      Notes
      <filings-3070>     R Container for 3070 filings
      <complaint>     R Container for complaint
      <id> 30 A/N R Member firm's unique ID for this complaint
      <date> 10 yyyy/mm/dd R Date complaint was received
      <firm-id> 8 number R Firm's CRD #
      <branch-id> 12 A/N R Use the assigned CRD branch code, or chose "HOME" if complaint is related to home office.
      <branch-zip> 5 number R  
      <contact>     R Container for contact info
      <phone-number> 20 A/N R Contact's phone number
      <first-name> 30 A/N R First name
      <last-name> 30 A/N R Last name
      <related-to>     R Container for related-to information. You must select at least one option.
      <other> 1 number O If complaint is related to other, use the value '1.'
      <rep> 1 number O If complaint is related to rep, use the value '1.'
      <firm> 1 number O If complaint is related to firm, use the value '1.'
      <affiliate> 1 number O If complaint is related to affiliate, use the value '1.'
      <product> 2 number R Product code
      <problem> 2 number R Problem code
      <customer>     R Container for customer info
      <account-number> 50 A/N O Customer's account number
      <first-name> 30 A/N O First name
      <last-name> 255 A/N R Last name
      <activity-date> 10 yyyy/mm/dd R First date of allegation activity. The activity from date must be equal or prior to the filing submission date. The system will allow zeros in the month or day fields for those instances where all such precise dates are not known (for example, when the specific day of the month is not know, but the month and year is known, you may enter "yyyy/mm/00").
      <activity-date2> 10 yyyy/mm/dd R Last date of allegation activity. The activity to <activity-date2> must be equal or prior to the filing submission date and equal or subsequent to the activity from <activity-date> field entry. The system will allow zeros in the month or day fields for those instances where all such precise dates are not known (for example, when the specific day of the month is not know, but the month and year is known, you may enter "yyyy/mm/00"). If the activity is alleged or known to be ongoing, you should provide an explanation in the <comment> field.
      <transaction>     R Container for transaction info
      <amount> 12 number O Amount of the transaction
      <disputed-amount>      R Container for the disputed amount information.
      NOTE: Required for sales practice complaints.
      <dsptd-amt-flag> 1 number R Use 0—exact amount is entered in <dsptd-amt>
      Use 1—<disputed-amount> is estimated to be $5,000 or more / cannot determine
      Use 2—<disputed-amount> is estimated to be under $5,000
      <dsptd-amt> 12 number O Amount in dispute (required if <Dsptd-amt-flag> contains a zero, otherwise not allowed).
      <securities>     R Container for securities Information
      <security>     R Container for each security. Must supply at least one security entry. Can supply up to three securities. Use only one of the following two fields for each security being reported.
      <symbol> 14 alpha O Enter a known symbol. Alphabetic characters and periods (.) are allowed. Do not use in conjunction with the <iss-descrpt> field.
      <iss-descrpt> 255 A/N O Use this to provide the security description (or NOT APPLICABLE if not security related) if the issue symbol is not known.
      <investigator>     O Container for investigator name
      <first-name> 30 alpha O First name
      <last-name> 30 alpha O Last name
      <response-date> 10 yyyy/mm/dd O Date that your firm responded to this complaint.
      <representative>     O Container for rep information. NOTE: If <rep> value is "1," then these values are required.
      <id> 12 number O Rep CRD ID. If <rep> value is "1," then this value is required.
      <location>     O Container for rep location. If <rep> value is "1", then this value is required.
      <city> 15 alpha O If <rep> value is "1," then this value is required.
      <state> 2 alpha O If <rep> value is "1," then this value is required.
      <zip> 5 number O If <rep> value is "1," then this value is required.
      <supervisor>     O Container for rep's supervisor. If <rep> value is "1," then this value is required.
      <first-name> 30 alpha O First name. If <rep> value is "1," then this value is required.
      <last-name> 30 alpha O Last Name. If <rep> value is "1," then this value is required.
      <employed> 1 number O Code = 1 for Y, 0 for N. If <rep> value is "1," then this value is required.
      <comment> 255 text O Free-form comment.

      DISCLOSURES

      Tag Name Max Lng Format Rqrd/
      Optnl
      Notes
      <filings-3070>       Container for 3070 filings
      <disclosure>       Container for disclosure
      <id> 30 A/N R Member firm's unique ID for this disclosure
      <date> 10 yyyy/mm/dd R Date disclosure was discovered
      <firm-id> 8 number R Firm's CRD #
      <branch-id> 12 A/N R Use the assigned CRD branch code, or chose "HOME" if complaint is related to home office.
      <contact>     R Container for contact info
      <phone-number> 20 A/N R Contact's phone number
      <first-name> 30 A/N R First name
      <last-name> 30 A/N R Last name
      <related-to>     R Container for related-to information. You must select at least one option.
      <other> 1 number O If complaint is related to other, use the value '1.'
      <rep> 1 number O If complaint is related to rep, use the value '1.'
      <firm> 1 number O If complaint is related to firm, use the value '1.'
      <affiliate> 1 number O If complaint is related to affiliate, use the value '1.'
      <event> 2 number R  
      <customer>     R Container for customer info
      <account-number> 50 A/N O Customer's account number
      <first-name> 30 A/N O First name
      <last-name> 255 A/N R Last name
      <activity-date> 10 yyyy/mm/dd R First date of allegation activity. Must be equal or prior to the <date> field entry. The system will allow zeros in the month or day fields for those instances where all such precise dates are not known (for example, when the specific day of the month is not know, but the month and year is known, you may enter "yyyy/mm/00").
      <activity-date2> 10 yyyy/mm/dd R Last date of allegation activity. Must be equal or prior to the filing submission date and equal or subsequent to the activity from <activity-date> field entry. The system will allow zeros in the month or day fields for those instances where all such precise dates are not known (for example, when the specific day of the month is not know, but the month and year is known, you may enter "yyyy/mm/00"). If the activity is alleged or known to be ongoing, you should provide an explanation in the <comment> field.
      <transaction>     O Container for transaction information. Required if event code = 2.
      <product> 2 number O Required if event code = 2.
      <amount> 12 number O Required if event code = 2. Amount of the transaction in whole dollars. Use zero if not applicable.
      <disputed-amount>     O Container for the disputed amount information.
      NOTE: Required if event code = 2.
      <Dsptd-amt-flag> 1 number O Required if event code = 2.
      Use 0—exact amount is entered in <dsptd-amt>
      Use 1—<disputed-amount> is estimated to be $5,000 or more / cannot determine
      Use 2—<disputed-amount> is estimated to be under $5,000
      <dsptd-amt> 12 number O Amount in dispute (required if <Dsptd-amt-flag> contains a zero, otherwise not allowed).
      <securities>     O Container for securities Information. Required if Event Code = 2.
      <Security>     O Container for each security. Must supply at least one security entry. Can supply up to three securities. Use only one of the following two fields for each security being reported.
      <symbol> 14 alpha O Enter a known symbol. Alphabetic characters and periods (.) are allowed. Do not use in conjunction with the <iss-descrpt> field.
      <iss-descrpt> 255 A/N O Use this to provide the security description (or NOT APPLICABLE if not security related) if the issue symbol is not known.
      <investigator>     O Container for investigator name
      <first-name> 30 alpha O First name
      <last-name> 30 alpha O Last name
      <response-date> 10 yyyy/mm/dd O Date that your firm responded to this complaint.
      <representative>     O Container for rep information. NOTE: If <rep> value is "1", then these values are required.
      <id> 12 number O Rep CRD ID. If <rep> value is "1," then this value is required.
      <location>     O Container for rep location. If <rep> value is "1." then this value is required.
      <city> 15 alpha O If <rep> value is "1," then this value is required.
      <state> 2 alpha O If <rep> value is "1," then this value is required.
      <zip> 5 number O If <rep> value is "1," then this value is required.
      <supervisor>     O Container for Rep's supervisor. If <rep> value is "1," then this value is required.
      <first-name> 30 alpha O First name. If <rep> value is "1," then this value is required.
      <last-name> 30 alpha O Last name. If <rep> value is "1," then this value is required.
      <employed> 1 number O Code = 1 for Y, 0 for N. If <rep> value is "1," then this value is required.
      <disciplinary-action> 1 alpha O Required if Event Code = 10. Use W = Withholding of Commissions, T = Termination, F = Imposition of Fines, S = Suspension
      <comment> 255 Text O Freeform comment
      <statutory-disqualification>     O Container for SD information. Required if Event Code = 9.
      <party-first-name> 30 alpha O First Name. Required if Event Code = 9.
      <party-last-name> 30 alpha O Last Name. Required if Event Code = 9.
      <party-company> 10 alpha O Required if Event Code = 9.
      <relationship> 1 alpha O Required if Event Code = 9. Use A = Affiliate, F = Firm, O = Other, R = Representative
      <explanation> 50 alpha O Required if Event Code = 9.
      <case-disposition> 1 alpha O Required if Event Code = 7. Use A = Award, J = Judgment, S = Settlement

    • 06-33 Frequently Asked Questions regarding Electronic Blue Sheet Submissions; Remediation Dates Extended

      View PDF File

      ACTION REQUESTED

      Intermarket Surveillance Group1

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Blue Sheets

      Executive Summary

      This Notice to Members presents responses to questions from firms concerning Electronic Blue Sheet (EBS) submissions. This information should assist members who are conducting a validation of all required EBS data to ensure that EBS submissions are consistent with current standards and accurately reflect members' books and records.

      In addition, the ISG grants two extensions of time for remediation, one deadline that applies to the Account Type Identifier and the Exchange Code fields, and another that applies to all other EBS fields.

      In addition, the ISG grants two extensions of time for remediation, one deadline that applies to the Account Type Identifier and the Exchange Code fields, and another that applies to all other EBS fields.

      The following self-regulatory organizations (SROs), acting jointly as members of the Intermarket Surveillance Group (ISG), prepared this Notice:

      •  American Stock Exchange LLC (AMEX)
      •  Boston Stock Exchange, Inc. (BSE)
      •  Chicago Board Options Exchange, Inc. (CBOE)
      •  Chicago Stock Exchange, Inc. (CHX)
      •  International Securities Exchange (ISE)
      •  NASD Inc. (NASD)
      •  NASDAQ Stock Market LLC (NASDAQ)
      •  National Stock Exchange (NSX)
      •  New York Stock Exchange, LLC (NYSE)
      •  NYSE Arca (NYSEArca)
      •  Philadelphia Stock Exchange, Inc. (PHLX)

      Questions/Further Information

      Questions concerning this Notice may be directed to any of the following SRO staff:

      SRO Individual Telephone No. Email
      AMEX Robert Ulmer (212) 306-1283 robert.ulmer@nasd.com
      BSE Bruce Goodhue (617) 235-2022 bruce.goodhue@bostonstock.com
      CBOE Pat Sizemore (312) 786-7752 sizemore@cboe.com
      CHX Marguerite Donovan (312) 663-2548 mdonovan@chx.com
      ISE Willie Wong (212) 897-8126 wwong@iseoptions.com
      NASD Rose Braisted (240) 386-4987 rose.braisted@nasd.com
      NASDAQ John Zecca (301) 978-8498 john.zecca@nasdaq.com
      NSX Nicole Guiffra (312) 786-8809 guiffran@nsx.com
      NYSE John Kroog (212) 656-6532 jkroog@nyse.com
      NYSEArca John Chapin (312) 442-7790 jchapin@nyse.com
      PHLX Christopher Swisher (215) 496-5680 chris.swisher@phlx.com

      If you have questions concerning the interpretation of SEC Rule 17a-25 under Section 17 of the Securities Exchange Act of 1934, or if you need to report problems concerning EBS submissions to the SEC, please contact:

      Individual Telephone No. Email
      Joseph Cella (202) 551-4951 cellaj@sec.gov
      Alton Harvey (202) 551-5691 harveya@sec.gov

      ISG Regulatory Memorandum, ISG 2006-02

      On September 7, 2005, SROs, acting jointly as members of the Intermarket Surveillance Group, issued ISG Regulatory Memorandum 2005-01 (the "2005-01 ISG Notice") concerning the automated submission of trading information via the Electronic Blue Sheet System. The 2005-01 ISG Notice reiterated requirements for accurate and timely EBS reporting. The 2005-01 ISG Notice also required that by no later than March 31, 2006, members and member organizations conduct and complete a validation of certain required EBS data to ensure that EBS transmissions are consistent with current standards and accurately reflect members' books and records. Attachment A of the 2005-01 ISG Notice, Record Layout for Submission of Trading Information, indicated those layout records that required validation.

      Recently, the SROs and the Securities Industry Association (SIA) engaged in a series of discussions with respect to the EBS requirements. This Regulatory Memorandum addresses specific questions raised in those discussions. The responses reflect a consensus of the ISG members.

      With regard to the Account Type Identifier and the Exchange Code fields, members and member organizations will be given a remediation extension until December 31, 2006. Members and member organizations are not required to remediate historical data for these two fields for trade dates on or before December 31, 2006. All members and member organizations that are correcting inconsistencies in these two fields shall provide written confirmation by electronic mail to their designated SRO that remediation has been completed on or before December 31, 2006.

      With regard to all other EBS fields, members and member organizations will be given a remediation extension until September 30, 2006. Members and member organizations are not required to remediate historical data for trade dates on or before September 30, 2006. All members and member organizations that are correcting inconsistencies in any other EBS fields shall provide written confirmation by electronic mail to their designated SRO that remediation has been completed on or before September 30, 2006.

      Frequently Asked Questions2

      Electronic Blue Sheet System

      Field Name:    Opposing Broker Number

      Question 1:

      If the executing broker does not give the clearing firm the opposing broker information, can the clearing firm leave the opposing broker field blank, or is the clearing firm obligated to obtain and report that information?

      Answer 1:

      If the clearing firm has the information related to the opposing broker, then it should report the information. If the clearing firm does not have the information, then the field may be left blank.

      Question 2:

      If a foreign affiliate does not reveal the opposing broker in a trade involving foreign securities executed in a foreign market, is it acceptable to leave this field blank?

      Answer 2:

      Yes, it is acceptable to leave this field blank if the foreign affiliate docs not provide information regarding the opposing broker on the trade.

      Question 3:

      For "anonymous" trading exchanges, the exchange trading system does not identify the contra-broker. Should firms report the omnibus clearing number associated with the exchange in the opposing broker field?

      Answer 3:

      Yes. However, if the market or exchange does not provide the opposing broker, it is acceptable to leave the field blank.

      Question 4:

      How do firms report the opposing broker for an average price trade?

      Answer 4:

      For individual market executions, the specific opposing broker should be reported for each trade. For the allocation trades into an average price recipient account, firms may leave the opposing broker field blank.

      Question 5:

      Suppose a firm executes a trade with a contra-party that does not have a National Securities Clearing Corp. (NSCC) number, but the firm clears its trades with another firm that does have an NSCC number. In the opposing broker field, should firms report the NSCC number for the clearing firm of the opposing broker or the market participant identifier (MPID) of the executing broker?

      Answer 5:

      The NSCC number for the clearing firm for the opposing broker is preferable, but the MPID of the clearing firm would be an acceptable alternative.

      Question 6:

      For odd-lot transactions executed on the NYSE, the exchange trading system does not provide the exchange mnemonic of the contra-broker. Odd lots are cleared through the specialist.

      For EBS reporting purposes should firms:

      1. Leave the opposing broker field blank, to be consistent with the information that the NYSE provides from its front office systems?
      2. Report the NYSE/AMEX omnibus clearing number associated with normal trades done through the specialists (0787 for NYSE or 0620 for AMEX)? or
      3. Derive the NSCC number of the individual specialist firm based on the security?

      Answer 6:

      In this scenario, the firm should know the opposing broker, so the firm must report it.

      Field Name:    File Creation Date

      Question 7:

      Is "file creation date" a required field?

      Answer 7:

      Yes. This information should be inputted for the file creation date held.

      Field Name:    CUSIP Number

      Question 8:

      Since foreign securities do not have U.S. CUSIP numbers, what should firms report for foreign trades in the CUSIP field?

      Answer 8:

      In the case of foreign securities, firms should use foreign identification numbers, such as the International Securities Identification Number (ISIN), the CUSIP International Numbering System (CINS) number, or the identification code issued by the Stock Exchange Daily Official List (SEDOL).

      Field Name:    Ticker Symbol

      Question 9:

      How should securities without U.S. symbols be handled? Are they out of scope for EBS requests?

      Answer 9:

      Non-U.S. securities are not out of the scope of EBS requests. When the U.S. security is traded in a non-U.S. market, the ISG wants to see the U.S. symbol. When the U.S. security is an American Depository Receipt (ADR) or American Depository Share (ADS) and the ISG participant is also interested in the home country or "Ordinary" shares, the ISG participant will send two distinct EBS requests, one for the ADR or ADS and one for the Ordinary shares. In this event, the firm should report the Ordinary symbol and the corresponding non-U.S. identification number.

      Question 10:

      Since there is no OPRA ticker symbol for foreign options, does that mean they are out of scope?

      Answer 10:

      No. Foreign ISG members could request information through the ISG. Therefore, foreign securities could be requested and therefore EBS must be reported.

      Question 11:

      Firms are still not clear when and if foreign transactions should be reported.

      Answer 11:

      See Questions 9 and 10 above.

      Question 12:

      By specifying a ticker symbol as a required field, does this mean that only securities with U.S. ticker symbols will be requested on an EBS report?

      Answer 12:

      See Questions 9 and 10 above.

      Question 13:

      Do firms need to maintain EBS data for securities not listed on U.S. markets?

      Answer 13:

      Yes.

      Field Name:    Settlement Date

      Question 14:

      For "when issued" trades, should firms leave the settlement date blank, or should firms report the corrected settlement date of the transaction once it is established?

      Answer 14:

      If firms do not know the settlement date, the field should be blank.

      Field Name:    Quantity

      Question 15:

      The EBS file format accepts only whole numbers. How do firms report fractional shares, for example, for international securities?

      Answer 15:

      It is acceptable for submitting firms to truncate to the whole share any quantities that are in fractional shares. For example, 100.5 shares may be reported as 100 shares.

      Field Name:    Price

      Question 16:

      For trades executed in a foreign currency, what exchange rate should be used to translate the trade price into U.S. dollars? Is it acceptable to use the noon buying rate used by the Federal Reserve?

      Answer 16:

      The use of the Federal Reserve noon buying rate is acceptable. The firm may use an alternative foreign exchange rate, as long as any such exchange rate used is applied consistently in all EBS reporting by the firm.

      Field Name:    Exchange Code

      Question 17:

      The NASD ADF requires a "Q" code. What is the NASD ADF?

      Answer 17:

      The NASD ADF is the "Alternative Display Facility." For more information, go to http://www.nasdaqtrader.com or http://www.nasd.com.

      Question 18:

      If the NASD ADF is not an execution venue, but only a display tool, when would it ever produce a trade execution that would be reported through the EBS?

      Answer 18:

      Currently, there will be no occasion to report "Q" for NASD ADF trades through the EBS. However, this code is reserved for future use in the event that the NASD ADF ever executes trades.

      Question 19:

      What code should be assigned to electronic communications network (ECN) trades: "Z" or "O"?

      Answer 19:

      ECN trades should all be coded as "Z."

      Question 20:

      How should trades executed on the INET ATS, Inc. (INET) ECN and Brass ECN (BRUT) be reported on the EBS after they have become part of the NASDAQ and after NASDAQ has become an exchange?

      Answer 20:

      After the conversion of INET and BRUT from independent ECNs to components of the NASDAQ trading system, they should be reported as "R." Prior to this conversion, these ECNs should be reported as "Z." After NASDAQ has become an exchange, trades on the exchange should be reported as "R". Trades reported on the Trade Reporting Facility (TRF) should be reported as "S".

      Question 21:

      What code should be assigned to Third Market trades of listed securities executed on an exchange: "Z" or "S"?

      Answer 21:

      Third Market trades should all be coded as "S" for OTC.

      Question 22:

      Are the following applications of the exchange code correct?

      •  Broker-to-broker transactions cleared through NASDAQ Market Center or TRACS: "S"
      •  Listed securities executed OTC but not on SuperMontage (Third Market): "S"
      •  Non-listed securities executed on an ECN: "Z"
      •  Listed securities executed on an ECN: "Z"
      •  Non-listed securities executed on SuperMontage: "R"
      •  OTC Bulletin Board transactions: "S"
      •   Pink Sheets transactions: "S"

      Answer 22:

      The applications described above are correct.

      Question 23:

      What exchange code should be assigned to trades posted to the recipient of average price trades?

      Answer 23:

      The exchange code should be left blank for the recipient of the average price trades.

      Field Name:    Broker-Dealer Code

      Question 24:

      Firms understand that if a transaction was done for another broker-dealer, the broker-dealer code should be "1," to indicate "yes." What does "done for" mean? Does it mean executed, or cleared, or both?

      Answer 24:

      Both clearing and executing brokers are responsible for submitting this code on their EBS submissions. "Done for" can mean either execution or clearing, depending on the role that the submitting broker-dealer played in the transaction.

      Question 25:

      How should firms report the broker-dealer code if an executing broker-dealer executes and clears a customer trade? Firms believe that the executing broker should report a "1" if the customer is a broker-dealer (or it is a customer of another broker-dealer) and a "0" if the customer is not a broker-dealer. Is this correct?

      Answer 25:

      Yes.

      Question 26:

      What do clearing brokers report for trades that are cleared for their correspondents (that is, their introducing brokers and executing brokers)? Firms believe that clearing brokers should report "1" for these trades since they are "done for" another broker-dealer. Is this correct?

      Answer 26:

      Yes.

      Question 27:

      What are the acceptable broker-dealer codes? Are they "1" and "2," or are they "0" and "1"?

      Answer 27:

      The correct answers are "0" for "no" and "1" for "yes."

      Question 28:

      If an account is a disclosed account for the benefit of an underlying client (e.g., XYZ broker-dealer FBO John Doe), should this be coded as "broker-dealer," or is the broker-dealer code limited to proprietary accounts of broker-dealer clients?

      Answer 28:

      This trade would be coded "1" for "yes," as this is a trade for another broker-dealer. The designation of a trade as a "broker-dealer" trade is not limited to proprietary trades of broker-dealers. The "broker-dealer" designation also includes non-proprietary trades done for another broker-dealer.

      Question 29:

      Should firms code a "flip," or a trade in an omnibus account, as "broker-dealer"?

      Answer 29:

      Yes. Both the executing broker and the clearing broker would report these transaction types as "1" for "yes."

      Question 30:

      When a member firm is the executing broker and its trades settle at a prime broker, should these trades have a value of "0" for "no" or "1" for "yes"?

      Answer 30:

      Trades executed by an executing broker that will be delivered to a prime broker should be designated according to the broker-dealer status of the executing broker's customer.

      The executing broker should input a "1" for "yes" in the broker-dealer code field on its EBS submission, signifying that the account belongs to another broker-dealer, and input the NSCC clearing number of the prime broker in the prime broker field.

      The prime broker would input a "0" for "no" in the broker-dealer code field on its EBS submission, signifying that the account is not one of another broker/dealer, and its own NSCC clearing number in the prime broker field.

      Question 31:

      What code should be used when a broker-dealer trades for its own account?

      Answer 31:

      Proprietary trades by broker-dealers are always coded as "0." Trades are only coded as "1" if they are done for another broker-dealer. Note that clearing brokers that execute for their own accounts would also code these trades as "0."

      Question 32:

      Should trades done for foreign affiliates be marked as broker-dealer trades?

      Answer 32:

      Trades done for foreign affiliates would be categorized as correspondent or omnibus trades. Therefore, as noted above in Question 29, they would be coded "1."

      Question 33:

      Should prime broker trades being reported by the prime broker be marked as broker-dealer trades?

      Answer 33:

      Trades that are reported by a prime broker should be coded "0," as these trades can only be for non-broker-dealer customers.

      Field Name:    Solicited Code

      Question 34:

      How should firms report trades from a "non-retail" environment? Is it permissible to default to "unsolicited" in absence of information to the contrary?

      Answer 34:

      It is acceptable to leave the field blank if a submitting firm does not know the solicited/unsolicited status of the trade.

      Field Name:    Branch Office/Registered Representative Number

      Question 35:

      Should the Branch Office value on the EBS match the NYSE EFP branch codes?

      Answer 35:

      No.

      Question 36:

      When reporting the registered representative number for institutional business, can firms use a generic number for trades handled by a specific trading desk, such as the program trading desk, or must firms report the registered representative number of the individual sales trader who handled the order?

      Answer 36:

      While it is preferable that firms report the registered representative number assigned to the individual trader, it is acceptable for the registered representative number to be the number assigned to a trading desk.

      Question 37:

      Should the registered representative number be associated with individual trades or to all trades for a particular account?

      Answer 37:

      It is preferable that firms report the registered representative number of the individual trader associated with the individual trade in order to provide the most granularity as to who handled the order or trade. However, it is acceptable to report the registered representative number associated with an account if the registered representative number of the trader is not available for the trade.

      Field Name:    Date Account Opened

      Question 38:

      Is "date account opened" a required field for proprietary accounts?

      Answer 38:

      The information should be reported if it is known. Otherwise, the field may be left blank.

      Field Name:    Short Name Field

      Question 39:

      How should the short name field be handled for non-individual accounts, such as corporate accounts, hedge funds, and firm accounts?

      Answer 39:

      If a firm has the information readily available, then it is preferable that the firm includes as much of the account name as possible.

      Question 40:

      Since this field is not listed as one requiring validation, is it required on all transactions submitted through the EBS?

      Answer 40:

      If a firm has the information readily available, then it is preferable that the firm includes the information. Otherwise, the field may be left blank.

      Field Name:    Employer Name

      Question 41:

      Is "employer name" currently a required field?

      Answer 41:

      If the firm has the information readily available, then it is preferable that the firm includes the information.

      Field Names:    TIN 1 Indicator and TIN 2 Indicator

      Question 42:

      What do firms report if the customer is a foreign broker-dealer and has no tax identification number (TIN)?

      Answer 42:

      The field should be left blank.

      Question 43:

      Do firms report the TIN for firm accounts? Do average price accounts require a TIN?

      Answer 43:

      For average price accounts, the field should be left blank. For other firm accounts, report the company's TIN.

      Field Name:    Name & Address Lines 1–6

      Question 44:

      What account information should the firm submit for processing accounts? For example, what information should the firm report for an allocation/average price account?

      Answer 44:

      The ISG has previously indicated that the account name of proprietary accounts should not be a cryptic code or reference number. Instead, the account name should make clear the nature of the account with all relevant information, including, without limitation, if it is a processing account or an allocation/average price account or otherwise.

      Question 45:

      According to SEC Rule 17a-25, submitting firms do not need to give account name and address information for proprietary accounts. However, firms understand that this information would now be required for proprietary accounts. Which view is the correct one?

      Answer 45:

      The account name and address information should be provided for proprietary accounts.

      Question 46:

      For trades that are sent to a prime broker, is it acceptable to use the address of the prime broker receiving the trade or must the address of the account's beneficial owner be used?

      Answer 46:

      It is acceptable to use the address of the prime broker.

      Field Name:    Account Type Identifiers

      Question 47:

      Are firms required to submit all possible account type identifiers according to all of the different exchanges and their unique sets of codes, or may firms limit their submission to only those account type identifiers listed in Attachment B of the 2005-01 ISG Notice?

      Answer 47:

      Firms only need to report those account type identifiers that are listed in Attachment B of the 2005-01 ISG Notice or any future changes that may be made by members of the ISG.

      Question 48:

      How should firm report the account type identifiers when trades from multiple customers are averaged together and each has a different account type code? For example, suppose an introducing broker has several clients for whom he acts as a money manager. Some of the clients are individuals and others are institutions. The introducing broker has a trading account with his executing broker to handle the order flow. The introducing broker sends a single order to his executing broker for the accounts of several different customers. The executing broker routes the order to the NYSE for execution. What is the correct account type identifier?

      Answer 48:

      In the example presented above, with individual and institutional orders aggregated together, the correct account type identifier is "A."

      Question 49:

      Can firms leave the account type identifier field blank for executions processed through the average price account?

      Answer 49:

      Firms should provide the account type on the individual executions in an average price/processing account. Clearing brokers should pass through to an average price account any account type identifier codes that they have been given by their executing and introducing brokers. However, if a clearing broker is not given the information, then this field may be left blank.

      Question 50:

      Do firms need to submit account type identifiers for short sale trades executed into an average price account, or is this information only required for trades executed directly into customer accounts?

      Answer 50:

      Firms are required to submit account type identifiers for short sale trades executed in an average price account.

      Question 51:

      Previous guidance specified unique account identifier codes for NASD EBS requests. The most current guidance from the 2005-01 ISG Notice makes no mention of the NASD codes previously in use.

      Should firms continue to use the previously announced NASD codes even though they were not mentioned in the latest guidance, or should firms assume these are obsolete and use only the codes specifically mentioned in the 2005-01 ISG Notice? If so, then is there any additional guidance on how firms should fit the NYSE originated codes in the 2005-01 ISG Notice to NASDAQ transactions?

      Answer 51:

      For trades that are executed on NASDAQ, it is acceptable to use the basic "A" and "P" codes for "agency" and "proprietary." NASD will accept the additional codes from the 2005-01 ISG Notice, but these codes are not required. AMEX trades should make use of the full set of NYSE originated codes listed in the 2005-01 ISG Notice.

      Question 52:

      Firms are unsure when to use the options code "P" and when to use options code "F." Options code "P" is for "Registered Trader Market Maker Transaction Regardless of the Clearing Number" and options code "F" is for non-program proprietary trades. What is the definition of a registered trader market maker? Are there any limits on whether these trades should be principal or agency trades?

      Answer 52:

      The "F" code applies to a clearing broker's proprietary option trades. The "P" code is for a trade done by a Primary Market Maker (PMM). A PMM may also be called a Designated Primary Market Maker (DPM) or Lead Market Maker (LMM) depending on the Exchange. The PMM is a market maker that has additional responsibilities similar to a specialist on an equity exchange. The "M" code is for a market maker that does not have these additional responsibilities. The "S" code is for an equity specialist executing option trades for their own account. With respect to the AMEX, the "S" code will also be used for the options' specialist executing trades in its specialty options.

      Question 53:

      The new guidance from the 2005-01 ISG Notice specifies separate codes for specialists and for competing market makers. Firms understand that specialist codes should apply to designated specialists that trade listed stock on the exchange floor. Furthermore, firms understand that competing market maker codes apply to both Third Market OTC Market Makers who trade listed stock OTC/NASDAQ, and NASDAQ Market Makers who trade NASDAQ stock on the NASDAQ market. Is this interpretation correct?

      Answer 53:

      Yes.

      Question 54:

      Many of the account type identifiers require firms to designate an account as a "member" or a "non-member." Firms understand that trades should use a "member" account identifier code if the account executing the trade is a member of the same exchange where the stock is listed. Is this interpretation correct?

      Answer 54:

      In connection with this question, the ISG was asked to consider the following two scenarios.

      Under the first scenario, an introducing broker has a customer who is a member of the NYSE, but not a member of the AMEX. The introducing broker sends two orders on behalf of its customer in NYSE-listed securities to its executing broker. When the introducing broker sends these orders, it does not know where they will be executed. The executing broker routes one of the orders to the NYSE and the other to the AMEX.

      In addition, when the introducing broker delivers the orders to the executing broker, the executing broker knows the membership status of the account. When the executing broker routes the order, it knows the execution venue of the trade and the listing origin of the security.

      In this scenario, if member and non-member trades are aggregated together, then the aggregated trade should default to a non-member "A" code.

      Under the second scenario, an introducing broker has a customer who is a member of the NYSE. The introducing broker sends an order on behalf of its customer In NYSE-listed securities to its executing broker. When the introducing broker sends this order, it docs not know where the order will be executed. In this case, the executing broker routes this order to an ECN.

      In this scenario, the membership status for a given trade is based on the membership of the account and the venue of execution.

      Question 55:

      How should a firm assign the account type identifier to a trade if the trade can be categorized in more than one way?

      Answer 55:

      In connection with this question, the ISG was asked to consider the following two scenarios.

      The first scenario involves a program trade that is also a proprietary market maker trade. The correct account type identifier depends on the composition of the program. If the program contains any exchange-traded stocks, then the NYSE program trading account type identifier codes should be used. If the program does not contain any exchange-traded stocks, then the P/A NASDAQ codes should be used.

      The second scenario involves a program trade with some component trades that are short sale exempt. In this case, the program trades' account type identifiers are the correct ones to use, and not the short exempt identifiers.

      Question 56:

      How should the status of a "registered trader" be ascertained? Firms understand that the definition of a "registered trader" (the "G" code) includes "upstairs broker-dealers doing proprietary trades through an affiliated floor broker." Is this correct?

      Answer 56:

      No. The "G" code is for trades done by a registered equity trader on the floor of the exchange.

      Field Name:    Prime Broker

      Question 57:

      What clearing number should be included in the prime broker field? What should be reported if the submitting firm acted as prime broker?

      Answer 57:

      An executing broker should report the NSCC clearing number of the prime broker. For the same trade, a prime broker should report its own NSCC clearing number. If an executing broker also acts as the prime broker, then it should report its own NSCC clearing number.

      Field Name:    Average Price Account

      Question 58:

      If a client order is facilitated through an "Average Price Facilitation Account," but the resulting execution of the order is filled through single execution, should the transaction be reported as "average price"?

      Answer 58:

      Yes.

      Question 59:

      How should firms handle allocated trades that are derived from underlying trades with mixed characteristics? For example, how should an aggregated trade be coded if it is derived from underlying trades with different account type codes or exchange codes?

      Answer 59:

      For the individual market executions (i.e., the underlying trades), the specific opposing broker, exchange code and account type identifier should be reported for each trade. However, these fields may be left blank for the allocation trades into an average price recipient account.

      Question 60:

      Multiple executions of an order for a customer can be rolled up such that a customer receives one confirmation indicating an average price. For example, suppose a customer enters an order for 200 IBM that is filled in two lots of 100. Instead of receiving two separate confirmations, the customer receives one confirmation at an average price. The individual execution lots are reported on the EBS submission. Do these trades need to be reflected on the EBS as an average price trade as well?

      Answer 60:

      No.

      Question 61:

      How should fair price trades/allocations be reported on the EBS? Is it acceptable to treat fair price trades like average price trades in terms of reporting the execution and the allocation, and for applying the average price codes of "1" (average/fair price trade itself) and "2" (executions that make-up average/fair price trade)?

      Or for fair price trades/allocations, should only the execution be reported (without the specific account holder information)?

      Or for fair price trades/allocations, should only the allocations be reported (with the specific account holder information)?

      Answer 61:

      Fair price trades can be coded with the same methodology as average price trades, in order to identify cases where both an execution and an allocation are provided on the EBS for double counting purposes. However, if a firm processes fair price trades such that only the execution or allocation is provided on the EBS, then it would be acceptable to report it without an average price indicator.

      Question 62:

      A customer sells long and short throughout the day. The trades are appropriately identified for the street side fills as long sales and short sales. The customer's transactions are averaged out at the end of the day. What should be reflected in the Buy/Sell field for the account that received the average price in this mixed capacity scenario?

      Answer 62:

      In this mixed capacity scenario, the Buy/Sell field should reflect a long sale for the account that received the average price.

      Field Name:    Depository Institution Identifier

      Question 63:

      What is a Depository Institution Identifier?

      Answer 63:

      The Depositary Institution Identifier is the identifier number assigned by the depository institution. (See NASD Notice to Members 01-60.)

      Other Topics

      Field Validation

      Question 64:

      Is there a general guideline as to when a firm may leave a particular EBS field blank?

      Answer 64:

      The general guideline is that a firm should report data if it has the data in its possession. If that data is unattainable, then that EBS field may be left blank.

      Question 65:

      What is the difference between required validation fields and fields where validation is not required?

      Answer 65:

      A non-validated field does not necessarily indicate that the information is optional to report. To the extent that information in these fields have been provided in the past, then it is expected that the firm continue to supply the information.

      For example, the Net Amount field is not a required field for validation and the firm may or may not provide the information. However, the Requesting Organization Number is also not a required field for validation, but the information is necessary for the submission of the EBS.

      Question 66:

      What is required to be reported to the ISG if a firm finds in its validation process a discrepancy between the requirements and how or what the firm has been submitting?

      Answer 66:

      •  If a firm discovers an error in its EBS process, then it should immediately self-report gaps as follows:
      •  If the firm is a member of only one SRO, report to that SRO;
      •  If the firm is a member of multiple SROs including the NYSE, report to the NYSE; or* If the firm is a member of multiple SROs and is not a NYSE member, report to the NASD.

      Question 67:

      When a firm is acting as a clearing broker for transactions that are executed away from it, the data attributes arc outside the clearing broker's sphere of control and are passed to it by the introducing broker or the executing broker. Is it sufficient to validate that the information is correctly passed to the firm's EBS and consistent with information on the clearing firm's books and records?

      Answer 67:

      A firm should report information that it has available. It should also make a reasonable effort to ensure that the information it reports is accurate. If a firm discovers that the information that it received from a client that the firm is depending upon to make an EBS report is inaccurate, the firm should refer the client to that client's Designated Examining Authority. See Question 66 above.

      Scope of products/ transactions that are reportable through EBS

      Question 68:

      Aside from common shares and exchange-traded options, there are many other security types that are priced based on the underlying value of corporate equity or debt. Are any of these other securities and derivatives reportable through EBS, or are EBS submissions limited to common shares and exchange-traded options?

      Answer 68:

      All ISG SROs may make EBS requests for any securities traded. This may include bonds (reporting face value amounts), foreign stocks (reporting foreign ticker/ foreign identification number), domestic stock (reporting domestic ticker and CUSIP), fixed income securities traded over the counter (such as corporate and municipal bonds, and U.S. treasury securities), exchange-traded options (listed) and structured products.

      Question 69:

      How should listed bonds be reported through the EBS?

      Answer 69:

      The reportable "quantity" should be the face value of the bonds, the "net amount" should be the net proceeds, and the "symbol" should be the symbol for the bond on the marketplace where the bond was traded. However, if the bond trades on more than one marketplace, then provide the symbol of the marketplace requesting the EBS.

      Question 70:

      Is the scope of foreign securities reportable through EBS isolated to only common stock/shares traded in foreign markets that have U.S. equivalents? Does the scope of foreign securities reportable through EBS include foreign bonds, foreign stock options, foreign index options, etc.?

      Answer 70:

      EBS requests will be for specific securities as indicated by a ticker symbol or security identification number, including ISINs, CINS, or SEDOLs. Therefore, firms will not be responsible for reporting related ADRs, preferreds, or any other related classes of securities requested for an EBS report, unless that other class is specifically requested. This is true for requests of both domestic and foreign securities.

      Question 71:

      Are fractional share purchases associated with equity dividend reinvestment plans required to be shown on an EBS?

      Answer 71:

      No. Only whole number of shares are reportable. See Question 15, above.

      Question 72:

      Should clearing member trade agreement (CMTA) trades be included in the executing firm's EBS submission? Should CMTA trades be included in the clearing firm's EBS submission? Or both?

      Answer 72:

      CMTA trades should be included in the firm's EBS submission. Executing firms that do option trades and then CMTA the trade for clearance will be expected to know the trade details for an EBS submission. Each firm has to provide the information the firm knows.

      Question 73:

      Are firms required to report pre-settlement trade cancels/corrects through the EBS? Is it acceptable to report, for a cancel/correct, only the adjusted trade without reference to any cancels, or nothing in the case of a straight cancel?

      Answer 73:

      The firm's EBS submission should reflect the corrected settlement date transaction information, since this is the information that is recorded on the firm's books and records and accurately reflects the transactions. Therefore, pre-settlement date adjustments do not need to be separately included on the firm's EBS submission. However, a firm may include pre-settlement trade adjustments if it prefers.

      Information Confidentiality

      Question 74:

      Does a clearing firm have to share the results of its EBS audit with its introducing firms? What is a clearing firm's responsibility with respect to the sharing of results?

      Answer 74:

      The ISG leaves this to the firms' discretion.

      Question 75:

      Is an executing firm required to pass on to its clearing firm all of the information that a clearing firm will require to submit its own EBS report?

      Answer 75:

      Yes. The ISG requires that executing firms pass to their clearing brokers all of the information that the clearing brokers will need to make their EBS submissions correct with respect to the fields that require validation. Additionally, the ISG would prefer that executing firms forward any other information that the clearing firm may require to make their submission complete.

      Information Retention Time

      Question 76:

      The 2005-01 ISG Notice indicated that member organizations are required to maintain EBS information for the time set forth in SEC Rule 17a-4(b). That rule states that records should be preserved for three years. However, from time to time, EBS requests are made for data that is older than three years. Is the firm obligated to answer EBS requests for periods exceeding the requirements of 17a-4(b)?

      Answer 76:

      Firms should maintain certain transaction information for six years and other information for three years. However, they only need to keep information in an "easily accessible" place for two years. If an EBS request is received for a period more than two years in the past, and that submission will take longer than 10 days to deliver, the submitting firm should contact its SRO on a case-by-case basis to discuss a reasonable timeframe for responding to the request.

      Executing Versus Clearing Broker Responsibilities

      Question 77:

      Is it acceptable for the executing broker on CMTAs and give- ups not to report these transactions since they are not processed on that firm's books and records and the executing broker does not have any account information to report in their EBS submission? For these trade types, the clearing broker has all of the required information for the EBS report, including the account name and account address.

      Answer 77:

      Executing brokers should report give-ups and CMTA-out trades. See Question 72 above.

      Question 78:

      For step-outs and flip-outs, does the executing broker report only the execution with the street, or should the executing broker also report the clearing transaction with the clearing broker?

      Consider this example: an executing broker executes a buy trade for a customer. After execution, the executing broker gives this customer trade to its clearing broker through a "correspondent flip-out." This flip-out to the clearing broker appears as a sell trade and is a separate transaction in the books and records of the executing broker, distinct from the buy trade done in the open market.

      The clearing broker receives this trade as a "flip-in" and processes it through the settlement cycle. The clearing broker reflects this flip-in as a buy trade.

      Answer 78:

      Step-outs and flip-outs should be reported. An executing firm should report both its market executions and its clearing transactions to its clearing broker.

      A clearing broker should report those clearing transactions it receives from its executing clients.

      Question 79:

      For transactions in which the firm is acting only as the clearing broker, as with prime brokerage, step-ins or flip-ins, clearing typically occurs on an aggregated basis and not at the individual execution level. Is it acceptable to report these transactions in the aggregated form in which they were cleared? If so, what is the appropriate account type indicator and exchange code to be used for aggregated trades?

      Answer 79:

      Prime brokers and clearing brokers should report in their EBS submission transactions showing the trade data that they were given. For aggregated trades, if the underlying transactions are of different types, then the clearing broker or prime broker should leave those fields blank. See Question 75 above.


      1 This ISG Notice 2006-02 was prepared by the following self-regulatory organizations as members of the ISG: American Stock Exchange LLC (AMEX), Boston Stock Exchange, Inc. (BSE), Chicago Board Options Exchange, Inc. (CBOE), Chicago Stock Exchange, Inc. (CHX), International Securities Exchange (ISE), NASD Inc. (NASD), NASDAQ Stock Market LLC (NASDAQ), National Stock Exchange (NSX), New York Stock Exchange LLC (NYSE), NYSE Arca (NYSEArca) and Philadelphia Stock Exchange, Inc. (PHLX).

      2 It should be noted that the SIA did not raise any questions for the following fields: Submitting Broker Number, Requesting Organization Number, Submitting Broker Number, Trade Date, Net Amount, Buy/Sell Code, State Code, Zip Code/Country Code and Account Number.

    • 06-32 NASD Requests Comment on Providing Public Access to Historic TRACE Data Not Previously Disseminated or Otherwise Publicly Available; Comment Period Expires August 15, 2006

      View PDF File

      REQUEST FOR COMMENT

      Corporate Debt Securities

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal and Compliance
      Research
      Senior Management
      Technology
      Trading and Market Making
      Training
      Debt Securities
      Operations
      Rule 6200 Series
      TRACE Rules
      Transaction Reporting

      Executive Summary

      NASD has received multiple requests to broaden the provision of previously non-public historic Trade Reporting and Compliance Engine (TRACE) transaction-level data to a variety of persons for business, academic, personal or other purposes. TRACE data is information reported to NASD by broker-dealers when they are parties to transactions in corporate bonds that are TRACE-eligible securities. NASD requests comment on providing public access to previously non-public historic TRACE transaction-level data described in greater detail below.

      Action Requested

      NASD encourages all interested parties to comment on this proposal. Comments must be received by July 31, 2006. Members and interested persons can submit their comments using the following methods:

      •  Mail comments in hard copy to the address on the address below; or
      •  Email written comments to pubcom@nasd.com.

      To help NASD process and review comments more efficiently, persons commenting on this proposal should use only one method. Comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1506
      Important Notes:

      The only comments that will be considered are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the NASD Web site. Generally, comments will be posted on the NASD Web site one week after the end of the comment period.1

      Before becoming effective, a proposed rule change (or certain policies) must be authorized for filing with the Securities and Exchange Commission (SEC) by the NASD Board, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Questions/Further Information

      As noted above, hard copy comments should be mailed to Barbara Z. Sweeney. Questions regarding this Notice may be directed to Elliot Levine, Chief Counsel, Transparency Services, Markets, Services and Information, at (202) 728-8405; David Lefferts, Vice President, Transparency Services, at (212) 858-4389; or Sharon K. Zackula, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8985.

      Background and Discussion

      The TRACE rules have two primary aspects: the reporting of individual corporate bond transactions (transaction-level data) to NASD through TRACE and the public dissemination of certain transaction information.3 When the TRACE rules became effective on July 1, 2002, all transactions in TRACE-eligible securities were required to be reported by any broker-dealer that was a party to a transaction. However, dissemination of transaction-level data was more limited in order to carefully gauge the relationship between transparent transaction information and its impact on the market and liquidity. As a result, transactions in the majority of instruments reported to TRACE were not subject to transaction-level public dissemination at launch.

      Concurrently, NASD committed to the ongoing study and periodic review of the impact on those segments of the bond market subject to transaction-level information dissemination. NASD expanded transaction-level information dissemination gradually over time from July 1, 2002 through January 9, 2006, in several phases.4 Currently, each transaction in TRACE-eligible securities reported to NASD is subject to immediate public dissemination, except those transactions in TRACE-eligible securities that are purchased or sold pursuant to Rule 144A under the Securities Act of 1933 (Rule 144A transactions). Those TRACE transactions subject to public dissemination are redistributed on a transaction-by-transaction basis (transaction-level) to and through multiple market data vendors who display the transaction-level data in real time, often provide value-added analytics and, finally, store aggregate and transaction-level data for historic retrieval and analysis by their clients.

      The TRACE transaction data that is reported to NASD comprise the first complete database of transaction and last-sale pricing ever compiled on the U.S. corporate bond market and, as such, is of widespread interest to corporate bond market participants, other financial intermediaries, market observers, academicians and financial regulators, among others. Since the introduction of TRACE, NASD has compiled and made available aggregated statistics from both disseminated and non-disseminated TRACE transaction information that have proven valuable in providing insights on activity in the overall corporate bond market. In doing so, NASD has been careful to aggregate the statistics in order to protect transaction-level non-disseminated data from being ascertained.

      More recently, NASD has received requests to make more historic, non-disseminated transaction-level data publicly available for research. Specifically, two types of requests have been made: 1) for standard TRACE-disseminated transaction-level data5 in publicly traded bonds (i.e., not Rule 144A transactions) that had previously not been disseminated (i.e., non-disseminated transactions prior to full dissemination, which began February 7, 2005) and 2) for additional data fields on individual transactions that are reported to NASD for regulatory purposes, but are not publicly disseminated at the transaction level (report-only data).

      NASD requests comment on whether NASD should make publicly available standard TRACE transaction-level data for public transactions that were not disseminated previously. If yes, NASD requests comment on whether access should be limited in any way, or if the data should be redacted as to certain types of information. Additionally, NASD requests comment on whether it should provide access to any portion of the transaction-level historic report-only data.

      Standard TRACE Transaction-Level Data for Previously Non-Disseminated Transactions

      1. Should NASD provide public access to historic transaction-level data (i.e., using the standard disseminated data format) for the period during which these transactions in publicly traded bonds were previously not disseminated? Should these non-disseminated transactions be made available for the entire period of July 1, 2002 through February 6, 2005, in which they may not have been disseminated, or some more limited period?

      Historic Report-Only Data

      2. Should NASD provide public access to fields of TRACE historic, transaction-level information that is report-only data? If so, which additional fields (see table of candidates for report-only data fields) of historic report-only transaction-level data should be made available publicly?
      a. Examples include historic report-only data transaction-level data fields, such as:
      •  Providing uncapped volumes (par value) for each large transaction in Investment-Grade and Non-Investment Grade bonds. This is similar to historical volume data provided by MSRB.6
      •  Providing indicators whether the trade was a customer buy, customer sell or inter-dealer trade.7
      •  Providing indicators whether the broker-dealer reporting each transaction was acting as "agent" or "principal."
      •  Identifying the reporting broker-dealer's MPID (i.e., identifier or corporate name) and/or their contra party (either another broker-dealer's MPID or "C" to denote that the countra party was an undisclosed customer) for each transaction.
      3. Should NASD make historic, report-only transaction-level data (or only particular data element(s)) available after certain extended periods of time delay? For example, report-only transaction-level data should only be available at least three months or six months after it was reported to TRACE.
           Candidates for Disclosure of Report-Only Data Transaction-Level Data Fields
      TRACE Reporting Field Currently Report-Only Field Currently Partially Disseminated
      Buy/Sell Indicator  
      Buyer $ Commission of Executing Broker Amount reflected in total price
      Buyer Principal/Agent Capacity  
      Contra Party ID (MPID or C for "Customer")  
      Reported Volume of Transaction
      (number of bonds multiplied x $1,000)
      Capped at $1MM or $5MM
      Reporting Party Give-Up (MPID)  
      Reporting Party ID (MPID)  
      Seller $ Commission of Executing Broker Amount reflected in total price
      Seller Principal/Agent Capacit  

      1 See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments). Personal identifying information, such as names or email addresses, will not be edited from submissions. Submit only information that you wish to make publicly available.

      2 Section 19 of the Securities Exchange Act of 1934 (Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and the rules thereunder.

      3 The TRACE Rules are the Rule 6200 Series.

      4 The phases culminating in implementation of real-time dissemination of TRACE information occurred on July 1, 2002, with the implementation of SR-NASD-1999-065 (Phase I); March 3, 2003 and April 14, 2003, with the two-part implementation of SR-NASD-2002-174 (and a supplemental rule filing) (Phase II); October 1, 2004 and February 7, 2005, with the two-part implementation of SR-NASD-2004-094 (Phase III); and January 9, 2006, with the implementation of SR-NASD-2005-120 (Phase IV-final phase).

      5 Dissemination data would be limited to the specific TRACE data fields that NASD currently disseminates to the market, not all the information per transaction that a broker-dealer reports to TRACE, and would be for transactions that were executed between July 1, 2002 to February 6, 2005, reported to TRACE, and not disseminated. It consists of the following information: the TRACE-eligible security identifier (e.g., the TRACE symbol or the CUSIP), the price inclusive of any mark-up, mark-down, or commission; the yield; the time of execution; and if the transaction was executed on a day other than when the information is being disseminated, the actual day of execution of the transaction. Quantity is reported as the par value of the trade, subject to certain limits. If a transaction is in an Investment-Grade TRACE-eligible security and exceeds $5 million, the quantity disseminated is $5 followed by an "MM+," indicating that the volume figure is capped. If a transaction is in a Non-Investment- Grade TRACE-eligible security and exceeds $1 million, the quantity disseminated is $1, followed by "MM+." (Information on Rule 144A transactions would not be included in dissemination data because such transactions have never been subject to dissemination.)

      6 See MSRB Notice 2004-39 (November 23, 2004).

      7 NASD recently published Notice to Members 06-22 (May 2006), requesting comment on whether NASD should include in the transaction information that is disseminated real-time symbols indicating if the member reporting the transaction in a TRACE-eligible security was a buyer (B) or a seller (S) and if the counterparty was a customer (C) or a dealer (D). In this Notice, NASD is requesting comment on whether historic TRACE transaction-level data, if made available to the public, should include such designations.

    • 06-31 NASD Requests Comment on Regulatory Relief that Should Be Granted in Response to a Possible Pandemic or Other Major Business Disruption; Comment Period Expires September 15, 2006

      View PDF File

      REQUEST FOR COMMENT

      Pandemic Regulatory Relief

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal and Compliance
      Operations
      Registration
      Senior Management
      Systems
      Trading
      Business Continuity
      Capital and Financial Reporting Requirements
      Extensions or Credit and Securities Delivery
      Filing and Reporting Requirements
      Licensing
      Operations
      Supervision
      Trade Reporting
      Temporary Account Transfers

      Executive Summary

      NASD recognizes that, in the event of a global pandemic or similar disaster, some level of regulatory flexibility may be necessary to allow firms to best serve investors and maintain market stability. NASD also understands that investor protection is perhaps most critical during times of financial and social stress. To help NASD strike the appropriate balance, we are soliciting comment from members and other interested persons regarding what specific, short-term regulatory relief may be appropriate and consistent with NASD's mission, and what specific conditions may warrant such relief.

      Action Requested

      NASD encourages all interested parties to comment on this proposal. Comments must be received by July 31, 2006. Members and interested persons can submit their comments using the following methods:

      •  Mail comments in hard copy to the address below; or
      •   Email written comments to pubcom@nasd.com.

      To help NASD process and review comments more efficiently, persons commenting on this proposal should use only one method. Comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, D.C. 20006-1506
      Important Notes:

      The only comments that will be considered are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the NASD Web site. Generally, comments will be posted on the NASD Web site one week after the end of the comment period.1

      Before becoming effective, a proposed rule change (or certain policies) must be authorized for filing with the Securities and Exchange Commission (SEC) by the NASD Board, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Questions/Further Information

      As noted above, hard copy comments should be mailed to Barbara Z. Sweeney. Questions concerning this Notice may be directed to Eric Moss, Vice President and Director of Emerging Regulatory Issues, at (202) 728-8982.

      Background and Discussion

      The precise impact of a flu pandemic or similar business disruption on the global markets is impossible to predict, but some experts believe that the impact could be severe. For example, some analysts project that areas affected by an outbreak of pandemic flu could experience absentee rates as high as 30 percent to 50 percent of the workforce for an extended period of time, possibly as long as several months. Affected regions may also experience quarantines and travel restrictions.

      Over the past few months, NASD has consulted with a number of firms in an effort to gauge how they are preparing for such a possibility. Firms are considering a range of approaches to maintain their ability to serve their customers, including moving certain functions to one of several overseas locations where the business disruption may have had a less severe impact and permitting employees to perform certain functions from their homes. Some firms, particularly smaller firms with no overseas affiliates, are considering the benefits of developing emergency "hand-off" plans that would allow them to pass client orders and other functions to clearing or other firms in a remote location, or even overseas.

      While some firms already are making preparations, they currently are constrained because they do not know what kind of regulatory relief they can expect, particularly in terms of licensing, supervision, and reporting and filing requirements. Firms may find it useful to consider the regulatory relief that was available in the aftermath of Hurricane Katrina and the September 11th attacks on the World Trade Center. The relief offered in those circumstances related to emergency office relocations and requirements regarding continuing education, registered personnel engaged in active military duty, books and records, handling of customers' funds and securities, customer communications, information barriers, the three-quote rule, and regulatory filings.3

      NASD is publishing this request for comment to solicit industry input as to what regulatory relief would be appropriate, and under what circumstances, in the event of a global pandemic or other major business disruption. NASD will work with the U. S. Securities and Exchange Commission and other self-regulatory organizations (SROs) to determine what regulatory relief is appropriate.4

      Comments that identify specific rule relief that may be appropriate and under what specific circumstances will be particularly useful. To facilitate the comment process, we have identified some topics that have been discussed during our initial consultation with industry representatives; however, commenters are encouraged to submit comments or recommendations relating to other areas.

      •   Licensing requirements: Who can do what, from where, and whose rules will apply.
      •   Capital and financial reporting requirements if operating abroad: Which jurisdiction's rules will apply.
      •   Supervision: Both in remote U.S. and non-U.S. locations.
      •   Trade reporting: Particularly where a market(s) may not be functioning.
      •   Temporary account transfers.
      •   Extensions or credit and securities delivery.
      •   Filing and reporting requirements.

      Conclusion

      NASD is committed to working with the industry and other regulators to minimize the impact of a global pandemic or other major business disruption on our financial markets. We are confident that the financial services industry will respond to such an event with the same commitment to market integrity and investor protection that was displayed in the aftermath of Hurricane Katrina and the attacks of September 11.


      1 See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments). Personal identifying information, such as names or email addresses, will not be edited from submissions. Submit only information that you wish to make publicly available.

      2 Section 19 of the Securities Exchange Act of 1934 (Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and the rules thereunder.

      3 See Notice to Members 05-57 (Guidance to Members Affected by Hurricane Katrina) and Testimony of Robert R. Glauber, President and Chief Executive Officer, National Association of Securities Dealers, Inc., Before the Senate Banking, Housing and Urban Affairs Hearing on the Condition of the U.S. Financial Markets (September 20, 2001).

      4 Our efforts to date in this area have not been limited to the United States. Given the international implications, NASD has reached out to SROs in other jurisdictions with the goal of identifying a set of principles that SROs could follow in addressing the legal, jurisdictional and logistical challenges such a pandemic would present.

    • 06-30 Amendments to the Fee for Extension of Time Requests under Regulation T and SEC Rule 15c3-3; Effective Date: July 1, 2006

      View PDF File

      GUIDANCE

      Fee Increase for Extension of Time Requests

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Senior Management
      Extension of Time Requests
      Fees
      Regulation T
      Schedule A to NASD By-Laws
      SEC Rule 15c3-3

      Executive Summary

      On May 15, 2006, NASD filed with the Securities and Exchange Commission (SEC) for immediate effectiveness a rule change to amend Section 8 of Schedule A to NASD's By-Laws to increase the service charge for processing extension requests to $4 per request.1

      Schedule A to NASD's By-Laws, as amended, is set forth in Attachment A of this Notice. The revised fee will be implemented on July 1, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, at (202) 728-8411; or Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 974-2974.

      Background and Discussion

      Regulation T, issued by the Board of Governors of the Federal Reserve System (FRB) pursuant to the Securities Exchange Act of 1934 (Exchange Act), among other things, governs the extension of credit to customers by broker-dealers for purchasing securities.2 Rule 15c3-3 under the Exchange Act governs, among other things, the time period in which customer sell orders must be completed.3 Under SEC Rule 15c3-3(n), a self-regulatory organization (SRO) may grant a broker-dealer an extension of time for delivery on sales of securities if: (1) it is satisfied that the broker-dealer is acting in good faith in making the request; and (2) exceptional circumstances warrant such action. Regulation T has a similar standard to allow an extension of time for payment for purchases of securities.4

      NASD has amended Section 8 of Schedule A to NASD's By-Laws to increase the service charge for processing each extension of time request pursuant to the provisions of Regulation T and SEC Rule 15c3-3 from $2 (or $1 in the case of electronically filed extension of time requests) to $4 for all manually or electronically filed extension of time requests.5 NASD believes that the proposed fees align with the actual costs associated with reviewing, processing, recording and responding to such requests.6

      The revised fee will be implemented on July 1, 2006.


      1 See SR-NASD-2006-063 and Amendment No. 1 filed on May 25, 2006. Under Section 19(b) of the Securities Exchange Act of 1934, the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 12 CFR 220.4(c) and 220.8(d). Regulation T generally requires that customers with a cash account pay for securities within five business days of purchase; for customers with a margin account, there must be sufficient minimum margin (typically 50%) to support the purchase.

      3 17 CFR 240.15c3-3. In particular, SEC Rule 15c3-3(m) requires a broker-dealer that executes a customer sell order to obtain possession of the securities within ten business days of the settlement date or to close the transaction by purchasing the securities.

      4 Under Regulation T, a firm's examining authority may grant an extension unless the examining authority believes that the broker-dealer is not acting in good faith or that the broker-dealer has not sufficiently determined that exceptional circumstances warrant such action.

      5 NASD also has filed a proposed rule change with the SEC to adopt new NASD Rule 3160 to require (1) all clearing firm members for which NASD is the designated examining authority (DEA) pursuant to Rule 17d-1 under the Exchange Act to submit to NASD requests for extensions of time pursuant to the provisions of Regulation T and SEC Rule 15c3-3; and (2) each clearing firm member for which NASD is the DEA to file a monthly report with NASD indicating all broker-dealers for which it clears that have overall ratios of requested extensions of time to total transactions for the month that exceed a percentage specified by NASD. See SR-NASD-2006-064.

      6 The New York Stock Exchange (NYSE) similarly increased the fee it charges its members for extensions of time requests to $4 per extension. See Exchange Act Release No. 53235 (Feb. 6, 2006), 71 FR 7820 (Feb. 14, 2006) (SR-NYSE- 2005-92) (SEC Notice of Filing and Immediate Effectiveness of a Proposed Rule Change and Amendment No.1 Thereto Relating to Increasing Certain Fees Charged by the NYSE to Its Members and Member Organizations).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      * * * * *

      SCHEDULE A TO NASD BY-LAWS

      * * * * *

      Section 8—Service Charge for Processing Extension of Time Requests

      (a) No Change.
      (b) The service charge for processing each initial extension of time request and for all subsequent extension of time requests (1) involving the same transaction under Regulation T and/or (2) involving an extension of time previously granted pursuant to SEC Rule 15c3-3(n) shall be [$2.00; provided, however, that the service charge shall be $1.00 for extension of time requests filed electronically by members using NASD's Automated Regulatory Reporting System]$4.00 per request.

    • 06-29 NASD Announces Nomination Procedures for Regional Industry Member Vacancies on the National Adjudicatory Council; Nomination Deadline: July 17, 2006

      View PDF File

      GUIDANCE

      NAC Nominations

      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 three-year terms of the NAC regional Industry members from the New York and West Regions will expire in January 2007. Exhibit I contains information regarding the NAC regional Industry members whose terms expire in January 2007. Exhibit II contains a list of all 2006 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 Regional Nominating Committee Chair, the NASD Regional or District Director, or the NASD Corporate Secretary (listed in Exhibit I) by July 17, 2006.

      The completed Candidate Profile Sheets will be provided to the appropriate Regional Nominating Committee for review. On or about August 23, 2006, the Regional Nominating Committees will provide NASD members with written notice of the NAC candidates that the Committees propose 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 may be directed to the Regional or 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, three of whom are Public. 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:

      Midwest Region: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.
      New York: The counties of Nassau and Suffolk, and the five boroughs of New York City.
      North Region: Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City), Pennsylvania, Rhode Island, Vermont, Virginia and West Virginia.
      South Region: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Puerto Rico, the Canal Zone and the Virgin Islands.
      West Region: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming and the former U.S. Trust Territories.

      We are seeking nominations for the New York and West 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 exercise of exemptive authority; and
      •  other proceedings or actions authorized by NASD rules.

      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 Member with a Term Expiring in January 2007

      New York Region (District 10)

      NAC Incumbent: Judith R. MacDonald

      If you are interested in nominating yourself or a colleague to represent the New York Region for a three-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 July 17, 2006.

      Lon T. Dolber
      Regional Nominating Committee Chair


      American Portfolios Financial Services
      4250 Veterans Memorial Highway
      Holbrook, NY 11741

      (631) 439-4600
      (631) 439-1325 fax

      Hans L. Reich
      Regional Director, District 10


      One Liberty Plaza
      165 Broadway
      New York, NY 10006

      (212) 858-4000
      (212) 858-4078 fax

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary


      NASD
      1735 K Street, NW
      Washington, DC 20006

      (202) 728-8062
      (202) 728-8075 fax

      NAC Industry Member with a Term Expiring in January 2007

      West Region (Districts 1, 2 and 3)

      NAC Incumbent: Neal E. Nakagiri

      If you are interested in nominating yourself or a colleague to represent the West Region for a three-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 July 17, 2006.

      Arlene M. Wilson
      Regional Nominating Committee Chair


      D.A. Davidson & Co.
      8 Third Street North
      Great Falls, MT 59401

      (406) 791-7456
      (406) 268-3045 fax

      Elizabeth P. Owens
      Regional Director, District 1


      525 Market Street
      Suite 300
      San Francisco, CA 94105-2711

      (415) 882-1200
      (415) 546-6991 fax

      Lani M. Sen Woltmann
      District Director, District 2


      300 South Grand Avenue
      Suite 1600
      Los Angeles, CA 90071-3126

      (213) 229-2300
      (213) 617-3156 fax

      Joseph M. McCarthy
      District Director, District 3 (Denver)


      370 17th Street
      Suite 2900
      Denver, CO 80202-5629

      (303) 446-3100
      (303) 620-9450 fax

      James G. Dawson
      District Director, District 3 (Seattle)


      601 Union Street
      Suite 1616
      Seattle, WA 98101-2327

      (206) 624-0790
      (206) 623-2518 fax

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary


      NASD
      1735 K Street, NW
      Washington, DC 20006

      (202) 728-8062
      (202) 728-8075 fax


      EXHIBIT II

      2006 National Adjudicatory Council

      Judith R. MacDonald, Chair Rothschild, Inc.
      Constance E. Bagley Harvard Business School
      Jayne W. Barnard College of William and Mary, Marshall-Wythe School of Law
      Stephanie L. Brown LPL Financial Services
      Thomas Donaldson University of Pennsylvania, Wharton School of Business
      W. Dennis Ferguson Sterne Agee Clearing
      Kathleen M. Hagerty Northwestern University, Kellogg School of Management
      Timothy Henahan Baker & Co., Inc.
      David M. Levine Deutsche Bank AG
      Harold O. Levy Kaplan, Inc.
      Neal E. Nakagiri NPB Financial Group, LLC
      James M. Rogers J.J.B. Hilliard, W.L. Lyons, Inc.
      William Wang University of California, Hastings College of the Law
      Samuel Wolff Akin Gump Strauss Hauer & Feld LLP

      EXHIBIT III

      National Adjudicatory Council Nomination Procedures

      1. NASD maintains Regional Nominating Committees in the manner specified in Article VI of the NASD Regulation By-Laws.
      2. Members located in the New York and West Regions are hereby notified of the upcoming election of members to the National Adjudicatory Council and are encouraged to submit names of potential candidates to the Chair of the Regional Nominating Committee, NASD Regional or District Directors, or the NASD Corporate Secretary, Barbara Z. Sweeney (see Exhibit I) by July 17, 2006.
      3. Nominees will be asked to complete a Candidate Profile Sheet, which will be reviewed by the appropriate 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 staff and shall propose to the National Nominating Committee one or more candidates for the National Adjudicatory Council. 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 August 23, 2006, the Regional Nominating Committee shall notify in writing the Executive Representatives and branch offices of the NASD members in the region of the name of the candidate or candidates it will propose to the National Nominating Committee for 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 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 NASD Regulation 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 NASD Regulation By-Laws. The By-Laws can be found in the online NASD Manual at www.nasd.com.

      EXHIBIT IV

      Please download Candidate Profile Sheet in PDF format.

    • 06-28 SEC Approves New Rule 3210 Applying Short Sale Delivery Requirements to Non-Reporting OTC Equity Securities; Effective Date: July 3, 2006

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      GUIDANCE

      Short Sale Delivery Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      Short Sales
      Rule 3210

      Executive Summary

      On April 4, 2006, the Securities and Exchange Commission (SEC) approved new Rule 3210, Short Sale Delivery Requirements, which applies short sale delivery requirements to those equity securities not otherwise covered by the delivery requirements of Regulation SHO, namely non-reporting OTC equity securities.1 Rule 3210, among other things, requires participants of registered clearing agencies to take action on failures to deliver that exist for 13 consecutive settlement days in certain non-reporting securities. In addition, if the fail to deliver position is not closed out in the requisite time period, a participant of a registered clearing agency or any broker-dealer for which it clears transactions is prohibited from effecting further short sales in the particular specified security without borrowing, or entering into a bona-fide arrangement to borrow, the security until the fail to deliver position is closed out.

      Rule 3210, as adopted, is set forth in Attachment A of this Notice. Also included in this Notice is information about the list of non-reporting securities that meet the requirements of Rule 3210 ("Rule 3210 Threshold Securities List") that NASD will publish. The rule becomes effective on July 3, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed as follows: for questions regarding Rule 3210, contact the Legal Section, Market Regulation, at (240) 386-5126; or Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071. For questions regarding the Rule 3210 Threshold Securities List, contact NASD Operations at (866) 776-0800.

      Background and Discussion

      On June 23, 2004, the SEC adopted Regulation SHO under the Exchange Act, which provides a new regulatory framework governing the short selling of equity securities.2 Regulation SHO includes several new provisions relating to short sales, one of which imposes delivery requirements on clearing agency participants for certain securities that have a substantial level of failures to deliver.3 Specifically, Regulation SHO requires clearing agency participants to close out all failures to deliver in a "threshold security" that have existed for 13 consecutive settlement days. Regulation SHO defines a" threshold security" as any equity security of an issuer that is registered under Section 12 of the Exchange Act or that is required to file reports under Section 15(d) of the Exchange Act (referred to as "reporting securities") that (1) for five consecutive settlement days had aggregate fails to deliver at a registered clearing agency of 10,000 shares or more; (2) the level of fails is equal to a least one-half of one percent of the issue's total shares outstanding; and (3) is included on a list published by a self-regulatory organization.

      The Regulation SHO delivery requirements apply only to reporting securities. NASD believes applying delivery requirements to non-reporting securities is an important step in reducing long-term fails to deliver in this sector of the marketplace. Therefore, NASD proposed, and the SEC approved, new Rule 3210, which applies a delivery framework to non-reporting OTC equity securities substantially similar to the Regulation SHO delivery framework. Rule 3210 requires clearing agency participants to close out all failures to deliver in "non-reporting threshold securities" that have existed for 13 consecutive settlement days. For purposes of Rule 3210, a non-reporting threshold security is any equity security that is not a reporting security and, for five consecutive settlement days, has: (1) aggregate fails to deliver at a registered clearing agency of 10,000 shares or more; and (2) a reported last sale during normal market hours (9:30 a.m. to 4 p.m., Eastern Time (ET)) for the security on that settlement day that would value the aggregate fail to deliver position at $50,000 or more.4

      If the fail to deliver position is not closed out in the requisite time period, a clearing agency participant or any broker-dealer for which it clears transactions would be prohibited from effecting further short sales in the particular specified security without borrowing, or entering into a bona-fide arrangement to borrow, the security until the fail to deliver position is closed out. To the extent that the participant can identify the broker-dealer(s) that have contributed to the fail to deliver position, the requirement to borrow or arrange to borrow prior to effecting further short sales may apply only to those particular broker-dealers to which the participant has allocated such fail to deliver position.

      NASD will publish daily a list of the non-reporting securities that meet the threshold requirements of Rule 3210 (Rule 3210 Threshold Securities List). To be removed from the Rule 3210 Threshold Securities List, a security must not meet either of the threshold tests in Rule 3210 for five consecutive settlement days.

      NASD intends to apply and interpret the requirements of Rule 3210 consistent with the SEC's application and interpretation of Regulation SHO. In this regard, the SEC Division of Market Regulation published Responses to Frequently Asked Questions Concerning Regulation SHO, in which the SEC staff addresses, among other things, questions relating to the Regulation SHO delivery requirements, close-out requirements and pre-borrow requirements. A copy of the interpretive guidance is available on the SEC's Web site at www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm. NASD encourages members and other interested parties to review the interpretive guidance.

      Rule 3210 becomes effective July 3, 2006. Consistent with the application and interpretation of Regulation SHO, open fail positions in non-reporting securities that exist prior to July 3, 2006 will not be required to be closed out under Rule 3210.5 As such, on July 3, 2006, NASD will begin the calculations necessary to determine whether securities qualify as non-reporting threshold securities, and July 11, 2006 is the first day for which NASD will publish a non-reporting threshold list. Until a security appears on a non-reporting threshold list for 13 consecutive settlement days and an open fail position for such security exists for that same period, Rule 3210 does not require a broker-dealer to close out the open fail position. Therefore, the first day on which a close-out action would be required under Rule 3210 is July 28, 2006.

      Questions and Answers Relating to New Rule 3210

      To help members implement Rule 3210, NASD is publishing the following questions and answers relating to the Rule 3210 Threshold Securities List.

      Q1 What is a non-reporting threshold security?

      A1  As defined in Rule 3210, a "non-reporting threshold security" is any equity security of any issuer that is not registered under Section 12 of the Exchange Act, and for which the issuer is not required to file reports under Section 15(d) of the Exchange Act, where, (1) for five consecutive settlement days:

      •  There are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more; and
      •   The reported last sale during normal market hours (9:30 a.m. to 4 p.m., Eastern Time (ET)) for the security on that settlement day would value the aggregate fail to deliver position at $50,000 or more; and

      (2) The security is included on a list published by NASD.

      A security ceases to be a non-reporting threshold security if it does not meet either of the threshold tests in (1) above for five consecutive settlement days.

      Q2 How can I access the Rule 3210 Threshold Securities List?

      A2  NASD will calculate the Rule 3210 Threshold Securities List on a daily basis. The Rule 3210 Threshold Securities List will be combined with the Regulation SHO Threshold Security List currently posted on www.nasdaqtrader.com/aspx/regsho.aspx. The combined list will contain a separate column indicating that the security is subject to Rule 3210.

      Q3 What will be the format of the file?

      A3  The file layout and data field definitions are the same as the Regulation SHO file layout and data fields, found at: www.nasdaqtrader.com/aspx/regsho.aspx.

      Q4 What does the date in the file name mean?

      A4  The date in the file name reflects the settlement date that the data is based on. For example, the file name for the file posted containing July 11, 2006 settlement date data will be 20060711.

      Q5 How can I tell what time the Rule 3210 Threshold Securities List was created?

      A5  The end of the data file will contain a file creation timestamp, reflecting the date and time the file is complete. The timestamp will be in the following format: yyyymmddhhmmss.

      Q6 What if the Rule 3210 Threshold Securities List is posted late?

      A6  Consistent with guidance provided by staff of the SEC Division of Market Regulation regarding the Regulation SHO Threshold List, firms will be permitted to use the previous settlement day's Rule 3210 Threshold Securities List to comply with Rule 3210 if the file is unavailable by midnight (00:00 ET). Firms are still obligated to analyze the current settlement day's data when it becomes available to determine compliance with Rule 3210's close-out requirements.

      Q7 When will the Rule 3210 Threshold Securities List be posted?

      A7  As noted above, Rule 3210 defines a "non-reporting threshold security" as one that exceeds the specified level of fails for five consecutive settlement days. Since the new rule takes effect on July 3, 2006, the first date a security can meet this definition will be five settlement days after the effective date. Accordingly, the first Rule 3210 Threshold Securities List will be posted before midnight on July 10, 2006, and will be available before the opening of trading on July 11, 2006.


      1 See Securities Exchange Act Release No. 53596 (April 4, 2006), 71 FR 18392 (April 11, 2006) (File No. SR-NASD-2004-044).

      2 See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004).

      3 The term "clearing agency participants" refers to "participants" (as defined in Section 3(a)(24) of the Exchange Act) of a "registered clearing agency," meaning a clearing agency (as defined in Section 3(a)(23)(A) of the Exchange Act) that is registered with the SEC pursuant to Section 17A of the Exchange Act.

      4 In the event there is no reported last sale on any settlement day during such five-day period, the value of the aggregate fail position would be based on the previously reported last sale.

      5 See Division of Market Regulation: Responses to Frequently Asked Questions Concerning Regulation SHO (Question 5.1). As noted in Question 5.1, this does not affect the obligations of sellers of securities to deliver those securities to buyers under existing delivery and settlement guidelines.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      3210. [Reserved.]Short Sale Delivery Requirements

      (a) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days, the participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity.
      (b) The provisions of this rule shall not apply to the amount of the fail to deliver position that the participant of a registered clearing agency had at a registered clearing agency on the settlement day immediately preceding the day that the security became a non-reporting threshold security; provided, however, that if the fail to deliver position at the clearing agency is subsequently reduced below the fail to deliver position on the settlement day immediately preceding the day that the security became a non-reporting threshold security, then the fail to deliver position excepted by this paragraph (b)(1) shall be the lesser amount.
      (c) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days, the participant and any broker or dealer for which it clears transactions, including any market maker that would otherwise be entitled to rely on the exception provided in paragraph (b)(2)(iii) of SEC Rule 203 of Regulation SHO, may not accept a short sale order in the non-reporting threshold security from another person, or effect a short sale in the non-reporting threshold security for its own account, without borrowing the security or entering into a bona-fide arrangement to borrow the security, until the participant closes out the fail to deliver position by purchasing securities of like kind and quantity.
      (d) If a participant of a registered clearing agency reasonably allocates a portion of a fail to deliver position to another registered broker or dealer for which it clears trades or for which it is responsible for settlement, based on such broker or dealer's short position, then the provisions of this rule relating to such fail to deliver position shall apply to the portion of such registered broker or dealer that was allocated the fail to deliver position, and not to the participant.
      (e) A participant of a registered clearing agency shall not be deemed to have fulfilled the requirements of this rule where the participant enters into an arrangement with another person to purchase securities as required by this rule, and the participant knows or has reason to know that the other person will not deliver securities in settlement of the purchase.
      (f) For the purposes of this rule, the following terms shall have the meanings below:
      (1) the term "market maker" has the same meaning as in section 3(a)(38) of the Exchange Act.
      (2) the term "non-reporting threshold security" means any equity security of an issuer that is not registered pursuant to section 12 of the Exchange Act and for which the issuer is not required to file reports pursuant to section 15(d) of the Exchange Act:
      (A) for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and for which on each settlement day during the five consecutive settlement day period, the reported last sale during normal market hours for the security on that settlement day that would value the aggregate fail to deliver position at $50,000 or more, provided that if there is no reported last sale on a particular settlement day, then the price used to value the position on such settlement day would be the previously reported last sale; and
      (B) is included on a list published by NASD.

      A security shall cease to be a non-reporting threshold security if the aggregate fail to deliver position at a registered clearing agency does not meet or exceed either of the threshold tests specified in paragraph (f)(2)(A) of this rule for five consecutive settlement days.
      (3) the term "participant" means a participant as defined in section 3(a)(24) of the Exchange Act, that is an NASD member.
      (4) the term "registered clearing agency" means a clearing agency, as defined in section 3(a)(23)(A) of the Exchange Act, that is registered with the Commission pursuant to section 17A of the Exchange Act.
      (5) the term "settlement day" means any business day on which deliveries of securities and payments of money may be made through the facilities of a registered clearing agency.
      (g) Pursuant to the Rule 9600 Series, the staff, for good cause shown after taking into consideration all relevant factors, may grant an exemption from the provisions of this rule, either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities, or to any person or class of persons, if such exemption is consistent with the protection of investors and the public interest.

    • 06-27 SEC Approves Amendments to Rule 6740 Relating to Submission of SEC Rule 15c2-11 Information to NASD; Effective Date: June 29, 2006

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      GUIDANCE

      Amendments to Rule 6740

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading
      Form 211
      Rule 6740
      SEC Rule 15c2-11

      Executive Summary

      On March 27, 2006, the Securities and Exchange Commission (SEC) approved amendments to NASD Rule 6740 relating to submission of SEC Rule 15c2-11 information to NASD prior to quotation of non-NASDAQ securities.1 The rule change relieves members of their obligation to file with NASD copies of information that is electronically accessible through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. In addition, the rule change creates an exclusion from the requirements of Rule 6740 for quotation activity for which the SEC has granted an exemption under SEC Rule 15c2-11(h).

      The amended rule language is set forth in Attachment A of this Notice. The amendments become effective on June 29, 2006. As of that date, members will be required to use a revised Form 211 to demonstrate compliance with Rule 6740 and SEC Rule 15c2-11. A copy of the revised Form 211 is included as Attachment B of this Notice. It will also be available at www.otcbb.com.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071. For compliance questions regarding Form 211, please contact Ken Worm, Associate Director, Market Regulation, at (240) 386-5121.

      Background and Discussion

      NASD Rule 6740 prohibits a member from initiating or resuming the quotation of a non-NASDAQ security2 in a quotation medium unless the member has demonstrated compliance with the requirements of SEC Rule 15c2-11 pertaining to the review and maintenance of information about the security and its issuer. Generally, SEC Rule 15c2-11 requires that a broker-dealer review and maintain in its records specified information about a security and issuer (e.g., prospectuses, offering circulars and annual reports) prior to publishing a quotation for a security in any quotation medium. In addition, SEC Rule 15c2-11 requires that upon reviewing the specified information, a broker-dealer must have a reasonable basis to believe that the information is accurate in all material respects and the sources of such information are reliable.

      To demonstrate compliance with both Rule 6740 and SEC Rule 15c2-11, a member must file with NASD a Form 211, together with the information required under SEC Rule 15c2-11(a), at least three business days before the quotation is published or displayed.

      Submission of Information Available through SEC's EDGAR System

      Much of the information that is required under SEC Rule 15c2-11(a) for reporting issuers is publicly available through the SEC's EDGAR system. As amended, Rule 6740(b) relieves members of the obligation to file with NASD copies of information that is accessible through EDGAR and thus, eliminates the administrative burden and cost imposed on members in furnishing such information to NASD. Although members are no longer required to file copies of EDGAR information with NASD, they nonetheless remain obligated to review and maintain information as required by SEC Rule 15c2-11.

      In addition, members currently are required to identify on Form 211 the type and date of each report or statement that is submitted to NASD.3 The rule change does not relieve members of this obligation. Thus, where copies of documents are not submitted to NASD because they are available through EDGAR, members must identify on Form 211 the type and date of each report or statement that the member relied upon in satisfying its information review obligations under Rule 6740 and SEC Rule 15c2-11(a). In addition, members must provide the date the report or statement became available through EDGAR, as well as the requisite identifying information for any subsequent amendments to the report or statement. Finally, members also must provide the 10-digit Central Index Key (CIK) number for issuers that are EDGAR filers.4

      Exemptions under SEC Rule 15c2-11(h)

      Rule 6740(a) currently tracks the exceptions to the information review and maintenance requirements of SEC Rule 15c2-11(f), including, for example, an exception for quotations of NASDAQ securities or securities admitted to trading on a national securities exchange. Rule 6740(a), however, does not contain an exclusion for those quotations with respect to which the SEC has granted an exemption, upon request or its own motion, under SEC Rule 15c2-11(h).

      As amended, Rule 6740(a) relieves members of their obligations under Rule 6740 in the event that the SEC has granted an exemption for a quotation pursuant to SEC Rule 15c2-11(h). Thus, members will not be required to review, maintain and file information under the NASD rule if there is no similar obligation under the SEC rule. To the extent that the SEC's exemptive relief applies any terms and conditions to such relief, those same terms and conditions would apply to the exclusion under Rule 6740.

      1 See Securities Exchange Act Release No. 53556 (March 27, 2006), 71 FR 16603 (April 3, 2006) (File No. SR-NASD-2005-098).

      2 For purposes of this rule, "non-NASDAQ security" is defined in Rule 6710(c) as "any equity security that is neither included in The NASDAQ Stock Market nor traded on any national securities exchange."

      3 Under Rule 6740(b), members must also identify on the Form 211 the issuer, the issuer's predecessor in the event of a merger or reorganization within the previous 12 months, the type of non-NASDAQ security to be quoted (e.g., ADR, warrant, unit, or common stock), the quotation medium to be used, the member's initial or resumed quotation, and the particular subsection of SEC Rule 15c2-11 with which the member is demonstrating compliance.

      4 The CIK is a unique identifier assigned by the SEC to all persons and entities that file disclosure documents through EDGAR.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      6740. Submission of Rule 15c2-11 Information on Non-Nasdaq Securities

      (a) Except as provided in SEC Rule 15c2-11(f)(1), (2), (3), and (5) and 15c2-11(h) under the Act, no member shall initiate or resume the quotation of a non-Nasdaq security in any quotation medium unless the member has demonstrated compliance with this rule and the applicable requirements for information maintenance under Rule 15c2-11. A member shall demonstrate compliance by making a filing with, and in the form required by, [the Association] NASD, which filing must be received at least three business days before the member's quotation is published or displayed in the quotation medium.
      (b) The information to be filed shall contain one copy of all information required to be maintained under SEC Rule 15c2-11(a)(1), (2), (3)(iii), (4)(ii), or (5), including any information that may be required by future amendments thereto. Members are not required to file with NASD copies of any information that is available through the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system; provided, however, that the filing with NASD shall contain identifying information for each issuer report or statement available through EDGAR that was relied upon in satisfying the member's obligations under this Rule and SEC Rule 15c2-11(a), including the type of report, report date and any other information as may be requested by NASD. In addition, this filing shall identify the issuer, the issuer's predecessor in the event of a merger or reorganization within the previous 12 months, the type of non-Nasdaq security to be quoted (e.g., ADR, warrant, unit, or common stock), the quotation medium to be used, the member's initial or resumed quotation, and the particular subsection of Rule 15c2-11 with which the member is demonstrating compliance. Additionally, if a member is initiating or resuming quotation of a non-Nasdaq security with a priced entry, the member's filing must specify the basis upon which that priced entry was determined and the factors considered in making that determination.

      ATTACHMENT B—FORM 211

      Please download Form 211 in PDF format.

    • 06-26 Amendments to Margin Rules to Reflect Additional Complex Option Spread Strategies

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      GUIDANCE

      Margin Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Margin
      Options
      Operations
      Senior Management
      Margin Requirements
      Options
      Rule 2520
      Rule 2522

      Executive Summary

      On April 3, 2006, NASD filed with the Securities and Exchange Commission (SEC) for immediate effectiveness a rule change to amend NASD Rules 2520 and 2522 that revised the margin requirements to recognize specific additional complex option spread strategies for purposes of determining required margin, and has amended the provisions relating to "permitted offsets" for certain listed option transactions.1 Rules 2520 and 2522, as amended, are set forth in Attachment A of this Notice. The effective date and the implementation date of the amendments was April 3, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, at (202) 728-8411; or Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 974-2974.

      Background and Discussion

      NASD has amended Rule 2520 to recognize specific additional complex option spread strategies for purposes of determining required margin, and has amended the provisions relating to "permitted offsets" for certain listed option transactions. In addition, NASD amended Rule 2522 to include definitions relating to the amendments to Rule 2520 and to make certain other conforming changes. The amendments to Rules 2520 and 2522 are consistent with recent margin rule amendments by the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE), which were approved by the SEC.2

      Complex Option Spread Strategies

      NASD has amended Rule 2520 and the corresponding definitions in Rule 2522 to recognize specific additional complex option spread strategies, and has set margin requirements commensurate with the risk of such spread strategies. These complex option spread strategies are the net result of combining two or more spread strategies that were already recognized in NASD's margin rules. The netting of contracts in option series common to each of the already recognized spreads in an aggregation reduces it to the complex spread strategies noted below. The purpose and benefit of the recent amendments is to set levels of margin that more precisely represent actual net risk of the option positions in the account and enable customers to implement these strategies more efficiently.

      To be eligible for the margin requirements set forth below, a complex spread must be consistent with one of the seven patterns specified below. The expiration months and the sequence of the exercise prices must correspond to the same pattern, and the intervals between the exercise prices must be equal.

      Members are required to obtain initial and maintenance margin for the subject complex spreads, whether established outright or through netting, of not less than the sum of the margin required on each basic spread in the equivalent aggregation.

      The basic requirements are as follows: (a) the complex option spreads must be carried in a margin account; and (b) European-style options3 are prohibited for complex spread combinations having a long option series that expires after the other option series (i.e., those that involve a time spread such as items 5, 6, and 7 below). Only American-style options may be used in these combinations. Additionally, the intervals between exercise prices must be equal, and each complex spread must comprise four option series, with the exception of item 4 below, which must comprise three option series.

      The sum of the margin required on each currently recognized spread in each of the applicable aggregations renders margin requirements for the subject complex spread strategies as stated below. The additional complex option spread strategies and maintenance margin requirements are as follows:

      (1) A Long Condor Spread is comprised of two long Butterfly Spreads. The rule requires initial and maintenance margin of full cash payment of the net debit incurred when this spread strategy is established. Full payment of the net debit incurred will cover any potential risk to the carrying broker-dealer.
      (2) A Short Iron Butterfly Spread is comprised of one long Butterfly Spread and one short Box Spread. The establishment of a long Butterfly Spread results in a margin requirement equal to the net debit incurred. The establishment of a short Box Spread requires margin equal to the aggregate difference between the exercise prices. The net proceeds from the sale of short option components may be applied to the margin requirement. Accordingly, to cover the risk to the carrying broker-dealer, the rule requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required.
      (3) A Short Iron Condor Spread is comprised of two long Butterfly Spreads and one short Box Spread. The establishment of long Butterfly Spreads results in a margin requirement equal to the net debit incurred. The establishment of a short Box Spread requires margin equal to the difference in the strike price. Accordingly, to cover the risk to the carrying broker-dealer, the rule requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required.
      (4) A Long Calendar Butterfly Spread is comprised of one long Calendar Spread and one long Butterfly Spread. The rule requires initial and maintenance margin of full cash payment of the net debit incurred when this spread strategy is established. Full payment of the net debit incurred will cover any potential risk to the carrying broker-dealer.
      (5) A Long Calendar Condor Spread is comprised of one long Calendar Spread and two long Butterfly Spreads. The rule requires initial and maintenance margin of full cash payment of the net debit incurred when this spread strategy is established. Full payment of the net debit incurred will cover any potential risk to the carrying broker-dealer.
      (6) A Short Calendar Iron Butterfly Spread is comprised of one long Calendar Spread plus one long Butterfly Spread and one short Box Spread. To cover the risk to the carrying broker-dealer, the rule requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required.
      (7) A Short Calendar Iron Condor Spread is comprised of one Long Calendar Spread plus two long Butterfly Spreads and one short Box Spread. To cover the risk to the carrying broker-dealer, the rule requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required.

      Permitted Offsets

      Rule 2520(f)(2)(J) addresses margin requirements for members that clear and carry the listed options transactions of registered specialists, registered market makers or registered traders in options, and recognizes certain offset positions in establishing the margin requirements. Prior to the recent amendments, the rule limited permitted offsets for these parties to options series that are "in or at the money," which was defined to mean "the current market price of the underlying security is not more than two standard exercise intervals below (with respect to a call option) or above (with respect to a put option) the exercise price of the option."

      Recently, various option exchanges have provided for the listing of options with onedollar strike intervals in a number of classes. As a result, the use of securities to hedge options series that have one-dollar strike intervals has unintentionally become more restrictive. The recent amendments eliminated the definition of "in or at the money," thereby eliminating the two standard exercise interval limitation for listed options. In addition, the amended rule requires permitted offset transactions to be effected for specialist or market-making purposes such as hedging, risk reduction, rebalancing of positions, liquidation or accommodation of customer orders, or other similar specialist or market-making purposes.

      The amendments to Rules 2520 and 2522 became effective April 3, 2006.


      1 See Exchange Act Release No. 53743 (April 28, 2006), 71 FR 26797 (May 8, 2006) (File No. SR-NASD-2006-045). Under Section 19(b) of the Securities Exchange Act of 1934, the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 See Exchange Act Release No. 52951 (December 14, 2005), 70 FR 75523 (December 20, 2005) (SR-NYSE-2004-39); Exchange Act Release No. 52950 (December 14, 2005), 70 FR 75512 (December 20, 2005) (SR-CBOE-2004-53).

      3 A European-style option is an option contract that can be exercised only on its expiration date.

      4 An American-style option is an option contract that can be exercised at any time between the date of purchase and its expiration date.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      * * * * *

      2520. Margin Requirements

      (a) through (e) No Change.
      (f) Other Provisions
      (1) No Change.
      (2) Puts, Calls and Other Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants
      (A) through (B) No Change.
      (C) For purposes of this subparagraph (f)(2), obligations issued by the United States Government shall be referred to as United States Government obligations. Mortgage pass-through obligations guaranteed as to timely payment of principal and interest by the Government National Mortgage Association shall be referred to as GNMA obligations.

      In the case of any put, call, currency warrant, currency index warrant, or stock index warrant carried "long" in a customer's account that expires in nine months or less, initial margin must be deposited and maintained equal to at least 100% of the purchase price of the option or warrant.

      Long Listed Option or Warrant With An Expiration Exceeding Nine Months. In the case of a put, call, index stock group option, or stock index warrant that is issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the current market value of the option or warrant; provided that the option or warrant has a remaining period to expiration exceeding nine months.

      Long OTC Option or Warrant With An Expiration Exceeding Nine Months. In the case of a[n OTC] put, [or ]call, index stock group option,[ on a stock or stock index, and a] or stock index warrant[,] carried long that is not issued by a registered clearing agency[ with an expiration exceeding 9 months], margin must be deposited and maintained equal to at least 75% of the option's or warrant's "in-the-money" amount plus 100% of the amount, if any, by which the current market value of the option or warrant exceeds its "in-the-money" amount provided the option or warrant:[. Options or warrants margined pursuant to this paragraph must:]
      (i) [be valued at all times for margin purposes at an amount not to exceed, the in-the-money amount,]
      [(ii) be]is guaranteed by the carrying broker-dealer, [and]
      (ii) [(iii) have]has an American-style exercise provision, and
      (iii) has a remaining period to expiration exceeding nine months.
      (D) through (F) No Change.
      (G)
      (i) through (iv) No Change.
      (v) The following requirements set forth the minimum amount of margin that must be maintained in margin accounts of customers having positions in components underlying options, and stock index warrants, when such components are held in conjunction with certain positions in the overlying option or warrant. The option or warrant must be issued by a registered clearing agency or guaranteed by the carrying broker/dealer. In the case of a call or warrant carried in a short position, a related long position in the underlying component shall be valued at no more than the call/warrant exercise price for margin equity purposes.
      a. Long Option or Warrant Offset. When a component underlying an option or warrant is carried long (short) in an account in which there is also carried a long put (call) or warrant specifying equivalent units of the underlying component, the minimum amount of margin that must be maintained on the underlying component is 10% of the [aggregate] option/warrant exercise price plus the "out-of-the-money" amount, not to exceed the minimum maintenance required pursuant to paragraph (c) of this Rule.
      b. Conversions. When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and [there] is also carried with a long put or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short call or warrant, the minimum amount of margin that must be maintained for the underlying component shall be 10% of the [aggregate] exercise price.
      c. Reverse Conversions. When a put or warrant carried in a short position is covered by a short position in equivalent units of the underlying component and is also carried with a long call or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short put or warrant, the minimum amount of margin that must be maintained for the underlying component shall be 10% of the [aggregate] exercise price plus the amount by which the exercise price of the put exceeds the current market value of the underlying, if any.
      d. Collars. When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and is also carried with a long put or warrant specifying equivalent units of the same underlying component and having a lower exercise price and the same expiration date as the short call/warrant, the minimum amount of margin that must be maintained for the underlying component shall be the lesser of 10% of the [aggregate] exercise price of the put plus the put "out-of-the-money" amount or 25% of the call aggregate exercise price.
      e. Butterfly Spread. This subparagraph applies to a butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer.
      1. No Change.
      2. With respect to a short butterfly spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the [aggregate] difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the [aggregate] difference between the two highest exercise prices with respect to short butterfly spreads comprised of puts. The net proceeds from the sale of short option components may be applied to the requirement.
      f. Box Spread. This subparagraph applies to box spreads as defined in Rule 2522, where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer.
      1. With respect to a long box spread as defined in Rule 2522, the net debit must be paid in full.
      2. With respect to a short box spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the [aggregate] difference between the exercise prices. The net proceeds from the sale of the short option components may be applied to the requirement.
      g. Long Box Spread in European-Style Options. With respect to a long box spread as defined in Rule 2522, in which all component options have a European-style exercise provision and are issued by a registered clearing agency or guaranteed by the carrying broker/dealer, margin must be deposited and maintained equal to at least 50% of the [aggregate] difference in the exercise prices. The net proceeds from the sale of short option components may be applied to the requirement. For margin purposes, the long box spread may be valued at an amount not to exceed 100% of the [aggregate] difference in the exercise prices.
      h. Long Condor Spread. This subparagraph applies to a long condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a long condor spread as defined in Rule 2522, the net debit must be paid in full.
      i. Short Iron Butterfly Spread. This subparagraph applies to a short iron butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short iron butterfly spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
      j. Short Iron Condor Spread. This subparagraph applies to a short iron condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short iron condor spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
      k. Long Calendar Butterfly Spread. This subparagraph applies to a long calendar butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a long calendar butterfly spread as defined in Rule 2522, the net debit must be paid in full.
      l. Long Calendar Condor Spread. This subparagraph applies to a long calendar condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a long calendar condor spread as defined in Rule 2522, the net debit must be paid in full.
      m. Short Calendar Iron Butterfly Spread. This subparagraph applies to a short calendar iron butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short calendar iron butterfly spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
      n. Short Calendar Iron Condor Spread. This subparagraph applies to a short calendar iron condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short calendar iron condor spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
      (H) through (I) No Change.
      (J)
      (i) Registered specialists, market makers or traders—Notwithstanding the other provisions of this subparagraph (f)(2), a member may clear and carry the listed option transactions of one or more registered specialists, registered market makers or registered traders in options (whereby[which] registered traders are deemed specialists for all purposes under the Act, pursuant to the rules of a national securities exchange) (hereinafter referred to as "specialist(s)"), upon a "Good Faith" margin basis satisfactory to the concerned parties, provided the "Good Faith" margin requirement[s] is not less than the Net Capital haircut deduction of the member [organization] carrying the transaction pursuant to SEC Rule 15c3-1 under the Act. In lieu of collecting the "Good Faith" margin requirement, a carrying member [organization] may elect to deduct in computing its Net Capital the amount of any deficiency between the equity maintained in the account and the "Good Faith" margin required.

      For purposes of this paragraph (f)(2)(J), a permitted offset position means, in the case of an option in which a specialist or market maker makes a market, a position in the underlying asset or other related assets, and in the case of other securities in which a specialist or market maker makes a market, a position in options overlying the securities in which a specialist or market maker makes a market. Accordingly, a specialist or market maker in options may establish, on a share-for-share basis, a long or short position in the securities underlying the options in which the specialist or market maker makes a market, and a specialist or market maker in securities other than options may purchase or write options overlying the securities in which the specialist or market maker makes a market, if the account holds the following permitted offset positions:
      a. A short option position which[ is "in or at the money" and] is not offset by a long or short option position for an equal or greater number of shares of the same underlying security which is "in the money";
      b. A long option position which[ is "in or at the money" and] is not offset by a long or short option position for an equal or greater number of shares of the same underlying security which is "in the money";
      c. A short option position against which an exercise notice was tendered;
      d. A long option position which was exercised;
      e. A net long position in a security (other than an option) in which a specialist or market maker makes a market;
      f. A net short position in a security (other than an option) in which the specialist or market maker makes a market; or
      g. A specified portfolio type as referred to in SEC Rule 15c3-1, including its appendices, or any applicable SEC staff interpretation or no-action position.
      Permitted offset transactions must be effected for specialist or market making purposes such as hedging, risk reduction, rebalancing of positions, liquidation, or accommodation[s] of customer orders, or other similar [market making]specialist or market maker purpose. The specialist or market maker must be able to demonstrate compliance with this provision.

      For purposes of this paragraph (f)(2)(J),[ the term "in or at the money" means the current market price of the underlying security is not more than two standard exercise intervals below (with respect to a call option) or above (with respect to a put option) the exercise price of the option;] the term "in the money" means the current market price of the underlying asset or index is not below (with respect to a call option) or above (with respect to a put option) the exercise price of the option; and, the term "overlying option" means a put option purchased or a call option written against a long position in an underlying asset; or a call option purchased or a put option written against a short position in an underlying asset.
      (ii) Securities, including options, in such accounts shall be valued conservatively in the light of current market prices and the amount which might be realized upon liquidation. Substantial additional margin must be required or excess [n]Net [c]Capital maintained in all cases where the securities carried:
      a. through b. No Change.
      c. in one or more or all accounts, including proprietary accounts combined, are such that they cannot be liquidated promptly or represent undue concentration of risk in view of the carrying member's [n]Net [c]Capital and its overall exposure to material loss.
      (K) through (L) No Change.
      (M) Cash account transactions—A member may make option transactions in a customer's cash account, provided that:
      (i) No Change.
      (ii) Spreads. A European-style cash-settled index stock group option or stock index warrant carried in a short position is deemed a covered position, and eligible for the cash account, provided a long position in a European-style cash-settled stock group index option, or stock index warrant having the same underlying component or index that is based on the same aggregate current underlying value, is held in or purchased for the account on the same day, provided that:
      a. through b. No Change.
      c. there is held in the account at the time the positions are established, or received into the account promptly thereafter:
      1. cash or cash equivalents of not less than any amount by which the [aggregate] exercise price of the long call or call warrant (short put or put warrant) exceeds the [aggregate] exercise price of the short call or call warrant (long put or put warrant), to which [requirement of] net proceeds from the sale of the short position may be applied, or
      2. an escrow agreement.

      The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement i. cash, ii. cash equivalents, or iii. a combination thereof having an aggregate market value at the time the positions are established of not less than any amount by which the [aggregate] exercise price of the long call or call warrant (short put or put warrant) exceeds the [aggregate] exercise price of a short call or call warrant (long put or put warrant) and that the bank will promptly pay the member such amount in the event the account is assigned an exercise notice or that the bank will promptly pay the member funds sufficient to purchase a warrant sold short in the event of a buy-in.
      d. No Change.
      (iii) Long Butterfly Spreads, Short Butterfly Spreads, Long Condor Spreads, Short Iron Butterfly Spreads, or Short Iron Condor Spreads. Put or call options carried in a short position are deemed covered positions and eligible for the cash account provided that the account contains long positions of the same type which in conjunction with the short options, constitute a long butterfly spread, short butterfly spread, long condor spread, short iron butterfly spread, or short iron condor spread as defined in Rule 2522 and provided that:
      a. through d. No Change.
      e. all components options expire concurrently;
      [e]f. with respect to a long butterfly spread or long condor spread as defined in Rule 2522, the net debit is paid in full; and
      [f]g. with respect to a short butterfly spread, short iron butterfly spread or short iron condor spread as defined in Rule 2522, there is held in the account at the time the positions are established or received into the account promptly thereafter:
      1. cash or cash equivalents of not less than the amount of the [aggregate] difference between the two lowest exercise prices with respect to short butterfly spreads comprised of call options or the [aggregate] difference between the two highest exercise prices with respect to short butterfly spreads comprised [or] of put options, to which [requirement] the net proceeds from the sale of short option components may be applied; or
      2. an escrow agreement.

      The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement i. cash, ii. cash equivalents or iii. a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the [aggregate] difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the [aggregate] difference between the two highest exercise prices with respect to short butterfly spreads comprised of puts and that the bank will promptly pay the member such amount in the event the account is assigned an exercise notice on the call (put) with the lowest (highest) exercise price.
      (iv) Box Spreads. Puts and calls carried in a short position are deemed covered positions and eligible for the cash account provided that the account contains long positions which in conjunction with the short options constitute a box spread as defined in Rule 2522 provided that:
      a. through d. No Change.
      e. all component options expire concurrently;
      [e]f. with respect to a long box spread as defined in Rule 2522, the net debit is paid in full; and
      [f]g. with respect to a short box spread as defined in Rule 2522, there is held in the account at the time the positions are established, or received into the account promptly thereafter:
      1. cash or cash equivalents of not less than the amount of the [aggregate] difference between the exercise prices, to which [requirement] the net proceeds from the sale of short option components may be applied; or
      2. an escrow agreement.

      The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement i. cash, ii. cash equivalents or iii. a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the [aggregate] difference between the exercise prices and that the bank will promptly pay the member such amount in the event the account is assigned an exercise notice on either short option.
      (3) through (11) No Change.

      * * * * *

      2522. Definitions Related to Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants Transactions.

      (a) The following definitions shall apply to the margin requirements for options, currency warrants, currency index warrants and stock index warrants transactions:
      (1) through (5) No Change.
      (6) Box Spread

      The term "box spread" means an aggregation of positions in a long call and short put with the same exercise price ("buy side") coupled with a long put and short call with the same exercise price ("sell side") [all of which have the same underlying component or index and time of expirations, and are based on the same aggregate current underlying value, and are] structured as[;]: (A) a "long box spread" in which the sell side exercise price exceeds the buy side exercise price or (B) a "short box spread" in which the buy side exercise price exceeds the sell side exercise price[.], all of which have the same contract size, underlying component or index and time of expiration, and are based on the same aggregate current underlying value.
      (7) through (8) No Change.
      (9) Butterfly Spread

      The term "butterfly spread" means an aggregation of positions in three series of either puts or calls, [all having the same underlying component or index, and time of expiration, and based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, which positions are] structured as either: (A) a "long butterfly spread" in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price or (B) a "short butterfly spread" in which two long options in the same series offset one short option with a higher exercise price and one short option with a lower exercise price[.], all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in ascending order.
      (10) Calendar Spread

      The term "calendar spread" or "time spread" means the sale of one option and the simultaneous purchase of another option of the same type, both specifying the same underlying component with the same exercise price or different exercise prices, where the "long" option expires after the "short" option.
      (10) through (22) renumbered as (11) through (23).
      [(23)](24) Escrow Agreement The term "escrow agreement," when used in connection with cash settled calls, puts, currency warrants, currency index warrants, or stock index warrants carried short, means any agreement issued in a form acceptable to [the Association]NASD under which a bank holding cash, cash equivalents, one or more qualified equity securities or a combination thereof in the case of a call [option] or warrant or cash, cash equivalents or a combination thereof in the case of a put [option ]or warrant is obligated (in the case of an option) to pay the creditor the exercise settlement amount in the event an option is assigned an exercise notice or, (in the case of a warrant) the funds sufficient to purchase a warrant sold short in the event of a buy-in.

      [The term "escrow agreement" when used in connection with non cash settled call or put options carried short, means any agreement issued in a form acceptable to the Association under which a bank holding the underlying security (in the case of a call option) or required cash or cash equivalents or a combination thereof (in the case of a put option) is obligated to deliver to the creditor (in the case of a call option) or accept from the creditor (in the case of a put option) the underlying security against payment of the exercise price in the event of the call or put is assigned an exercise notice.]
      (24) through (40) renumbered as (25) through (41).
      (42) Long Calendar Butterfly Spread

      The term "long calendar butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as two short options with the same exercise price, offset by a long option with a lower exercise price and a long option with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar butterfly spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread and one long butterfly spread, as defined in this rule.
      (43) Long Calendar Condor Spread

      The term "long calendar condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar condor spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread and two long butterfly spreads, as defined in this rule.
      (44) Long Condor Spread

      The term "long condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads, as defined in this rule.
      (41) through (60) renumbered as (45) through (64).
      (65) Short Calendar Iron Butterfly Spread

      The term "short calendar iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron butterfly spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread, one long butterfly spread, and one short box spread, as defined in this rule.
      (66) Short Calendar Iron Condor Spread

      The term "short calendar iron condor spread" means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices and a long call with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron condor spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread, two long butterfly spreads, and one short box spread, as defined in this rule
      (67) Short Iron Butterfly Spread

      The term "short iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of one long butterfly spread and one short box spread, as defined in this rule.
      (68) Short Iron Condor Spread

      The term "short iron condor spread" means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices, and a long call with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads and one short box spread, as defined in this rule.
      (61) through (77) renumbered as (69) through (85).

    • 06-25 Establishment of Branch Office System Processing Fee and Waiver of Branch Office System Processing Fee and Annual Branch Office Registration Fee For One Branch Office Per Member Per Year; Effective Date: July 3, 2006

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      GUIDANCE

      Branch Office System Processing Fee

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registration
      Senior Management
      Branch Office Registration Fee
      Branch Office System Processing Fee
      Fees
      Schedule A to NASD By-Laws

      Executive Summary

      Effective July 3, 2006, NASD members will be assessed an annual $20 branch office system processing fee. Also effective July 3, 2006, NASD will waive for one branch office per NASD member per year: (1) the annual branch office registration fee for those NASD members who are assessed an annual registration fee pursuant to Section 4(a)(1)(i) of Schedule A to the NASD By-Laws; and (2) the annual branch office system processing fee for all NASD members.

      The rule change became effective immediately upon filing with the Securities and Exchange Commission (SEC) on May 23, 2006, and will become operative on July 3, 2006.1 Attachment A contains the text of the amendments.

      Questions/Further Information

      Questions regarding this Notice may be directed to Richard E. Pullano, Associate Vice President and Chief Counsel, Registration and Disclosure, at (240) 386-4821; and Chip Jones, Vice President and State Liaison, Registration and Disclosure, at (240) 386-4797.

      Background

      On September 30, 2005, the SEC approved NASD's proposed Uniform Branch Office Registration Form (Form BR), which became effective on October 31, 2005. The Form BR replaces Schedule E of the Form BD, the New York Stock Exchange, LLC. (NYSE) Branch Office Application Form and certain state branch office forms. The Form BR enables firms to register branch offices electronically with NASD, the NYSE and states that require branch registration or reporting via a single filing through the Central Registration Depository (CRD® or CRD system).

      Branch office registration through the CRD system creates efficiencies for firms by, among other things, making it easier for firms to register or report branch offices and to manage their ongoing registration and/or reporting responsibilities with regard to those branch offices. In addition to being able to submit a single filing to fulfill the branch office registration requirements of NASD, the NYSE and states, firms benefit from the centralized fee collection, online work queues, electronic notifications and other features available through the CRD system. Firms are also able to link their registered persons to the physical location from which they work via the Form BR, which not only aids regulators' examination efforts, but helps firms in meeting certain recordkeeping requirements.

      Branch Office System Processing Fee

      The purpose of the branch office system processing fee is to recover the cost to NASD of developing and implementing the Form BR, as well as ongoing branch office system maintenance and enhancements. The fee is $20 upon the registration of a branch office and $20 annually thereafter per registered branch.

      NASD will begin assessing the branch office system processing fee during the third quarter of 2006 for all branch offices in existence as of July 3, 2006. NASD will bill firms for all branch offices in existence as of July 3, 2006 via invoices, rather than through the CRD system. For any branch office that is registered on or after July 3, 2006, NASD will assess and collect the branch office system processing fee through the CRD system at such time as the firm registers that new branch office.2 Starting in December 2006 (for the calendar year 2007), all firms will be assessed $20 annually for each existing branch office as part of the CRD renewal program.

      Annual Waiver of the Branch Office Registration Fee and Branch Office System Processing Fee

      NASD is waiving for one branch office per NASD member per year: (1) the annual branch office registration fee for those NASD members who are assessed an annual registration fee pursuant to Section 4(a)(1)(i) of Schedule A to the NASD By-Laws; and (2) the annual branch office system processing fee for all NASD members. This waiver is prospective only, and will take effect for the year 2006 on July 3, 2006. Firms that have already paid their annual $75 branch office fees for the year 2006 pursuant to Section 4(a)(1)(i) of Schedule A to the NASD By-Laws will receive a $75 credit for one branch office.


      1 See SR-NASD-2006-065 (Establishment of Branch Office System Processing Fee and Waiver of Branch Office System Processing Fee and Annual Branch Office Registration Fee For One Branch Office Per Member Per Year). Under Section 19(b) of the Securities Exchange Act of 1934, the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 The CRD system will be available on July 3, 2006 for purposes of registering branch offices, but will not be available on July 4, 2006. Firms will again be able to register branch offices through the CRD system on July 5, 2006.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      * * * * *

      SCHEDULE A TO NASD BY-LAWS

      * * * * *

      Section 4—Fees

      (a) Each member shall be assessed a registration fee of $75.00 [for] and a branch office system processing fee of $20.00 upon the registration of each branch office, as defined in the By-Laws. Each member also shall be assessed: (1) an annual registration fee [for each branch office] in an amount equal to the lesser of [(1)] (i) $75.00 per registered branch, or [(2)] (ii) the product of $75.00 and the number of registered representatives and registered principals associated with the member at the end of NASD's fiscal year; and (2) an annual branch office system processing fee of $20.00 per registered branch. As of July 3, 2006, NASD shall waive, for one branch office per member per year, payment of the $75.00 annual registration fee (where such fee has been assessed pursuant to paragraph (a)(1)(i)) and the $20.00 annual branch office system processing fee assessed pursuant to paragraph (a)(2).
      (b) through (h) No Change.

      * * * * *

    • 06-24 NASD Informs Members of Upcoing District Committee and District Nominating Committee Elections

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      GUIDANCE

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections

      Executive Summary

      The purpose of this Special Notice to Members is to inform members of the upcoming nomination and election process to fill forthcoming vacancies on NASD District Committees and District Nominating Committees.

      Information on District Committee and District Nominating Committee members currently serving through 2007, 2008 and 2009 is included in Attachment A. Information on District Election Procedures is included in Attachment B. A blank candidate profile sheet is also included (Attachment C).

      Background

      The NASD District Committees serve an important role within NASD by supporting NASD's mission to regulate securities markets for the ultimate benefit and protection of investors. Among other things, District Committee members:

      •  Alert staff to industry trends that could be a potential regulatory concern.
      •  Consult with NASD staff on proposed policies and rule changes brought to a District Committee for its views.
      •  Serve on Disciplinary Panels in accordance with NASD Rules.
      •  Promote NASD's mission and stated positions.

      Committee members must have the experience, ability and commitment to fulfill these responsibilities, including:

      •  Understanding the issues facing the securities industry and possessing the ability to apply knowledge and expertise to these issues to develop solutions.
      •  Fostering member interest and participation in NASD.
      •  Educating members in their District on the work of NASD.
      •  Attending regularly and participating professionally, effectively, and in a collegial manner in District Committee meetings.
      •  Remaining objective and unbiased in the performance of District Committee matters.

      Committee members must also adhere to certain prohibitions and restrictions. These include:

      •  Refraining from serving as an expert witness in NASD disciplinary hearings or arbitrations.
      •  Being sensitive to conflicts, and refraining from participating in a particular matter when a conflict exists.
      •  Refraining from using membership on the District Committee for commercial purposes, or otherwise suggesting special access to NASD.
      •  Keeping sensitive, non-public, or propriety information confidential.

      Nomination Process

      Individuals from member firms of all sizes and segments of the industry are encouraged to submit names for consideration for membership on the 11 District Committees and District Nominating Committees. In this election, each District Committee will have three vacancies to fill, with the exception of District 10, which will have four.1 The term of office for District Committee members is three years. Each District Nominating Committee will have five vacancies to fill for a one-year term. Persons who are interested in serving on the District Committee or the District Nominating Committee within their district must complete a candidate profile sheet (Attachment C) and submit it by hand delivery, courier service, mail or facsimile to the District Director. Completed candidate profile sheets must be received by the District Director on or before June 23, 2006. Persons who submit candidate profile sheets after this date will not be considered. NASD encourages current and former committee members to assist NASD by soliciting candidates for both committees.

      Article VIII, Sections 8.2 and8.9 of the NASD Regulation By-Laws establish formal eligibility requirements for members of the District Committee and District Nominating Committee. They provide that such members:

      1) Be registered with an NASD member eligible to vote in the district for District Committee elections; and
      2) Work primarily from such NASD member's principal office or a branch office that is located within the district where the member serves on a District Committee or District Nominating Committee.

      Completed nomination forms that are received by June 23, 2006, will be provided to all members of the appropriate District Nominating Committee for review. It is anticipated that on or before July 28, 2006, each District Director, acting on behalf of the District Nominating Committee, will notify the Secretary of NASD of each candidate nominated by the District Nominating Committee and the committee to which the candidate is nominated.

      Members are reminded of the importance to accurately maintain their Executive Representative name and email address information, as well as their firm's main postal address. This will ensure that member mailings, such as election information, will be properly directed. Failure to keep this information accurate may jeopardize the member's ability to participate in District elections as well as other member votes. To update the Executive Representative name and email address, firms should access the NASD Contact System, located on NASD's Web site at www.nasd.com/ncs.

      To update postal address information, the firm must file a Form BD Amendment via the Web CRD system. For assistance updating either of these systems, you may contact our Call Center at (301) 590-6500.

      Questions/Further Information

      Questions concerning this Special Notice may be directed to the District Director noted, or to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8062, or via email at barbara.sweeney@nasd.com.


      1 In some cases, a District Committee may have additional vacancies to fill if a member of the District Committee has resigned since the last election, as indicated in Attachment A.


      ATTACHMENT A

      District 1

      Elisabeth P. Owens, Regional Director, West Region
      525 Market Street, Suite 300, San Francisco, CA 94105-2711
      (415) 882-1201
      (415) 546-6991 fax

      District Committee for District 1—Chair: William A. Evans
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      William A. Evans Stone & Youngberg, LLC San Francisco, CA
      Mansoor Kisat Citigroup Global Markets, Inc. Santa Rosa, CA
      Arthur E. Raitano Hoefer & Arnett, Inc. San Francisco, CA
           
      Committee Members to Serve Until January 2008
      Howard Bernstein Pacific Growth Equities, LLC San Francisco, CA
      Bruce Nollenberger, Vice Chair Nollenberger Capital Partners, Inc. San Francisco, CA
      Daniel W. Roberts Roberts & Ryan Investments Inc. San Francisco, CA
           
      Committee Members to Serve Until January 2009
      Christopher D. Charles Wulff, Hansen & Co. San Francisco, CA
      Kevin T. Kitchin Wachovia Securities, LLC San Francisco, CA
      Edward M. Stephens FSC Securities Corporation Santa Rosa, CA

      District Nominating Committee for District 1—Chair: Nicholas C. Cochran
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      S. Katherine Campbell Protected Investors of America Berkeley, CA
      Nicholas C. Cochran American Investors Company San Ramon, CA
      Gerard P. Gloisten GBS Financial Corporation Santa Rosa, CA
      Robert A. Muh Sutter Securities, Inc. San Francisco, CA
      Francis X. Roches II RBC Dain Rauscher, Inc. San Francisco, CA

      District 2

      Lani M. Sen Woltmann, District Director
      300 South Grand Avenue, Suite 1600, Los Angeles, CA 90071-3126
      (213) 613-2601
      (213) 617-3156 fax

      District Committee for District 2—Chair: Stephen B. Benton
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Stephen B. Benton Financial Network Investment Corporation El Segundo, CA
      James M. S. Dillahunty Fixed Income Securities, LP San Diego, CA
      J. Derek Lewis JDL Securities Corp. Newport Beach, CA
           
      Committee Members to Serve Until January 2008
      Kenneth R. Hyman Partnervest Securities, Inc. Santa Barbara, CA
      Bryan R. Plank Merrill Lynch San Diego, CA
      Valorie Seyfert, Vice Chair CUSO Financial Services, L.P. San Diego, CA
           
      Committee Members to Serve Until January 2009
      Steven K. Klein Farmers Financial Solutions, LLC Simi Valley, CA
      Ishmael Manzanares, Jr. Madison Avenue Securities, Inc. San Diego, CA
      Gary A. Martino brokerXpress, LLC Thousand Oaks, CA

      District Nominating Committee for District 2—Chair: Don Dalis
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      M. LaRae Bakerink WBB Securities, LLC San Diego, CA
      James E. Biddle The Securities Center Incorporated Chula Vista, CA
      Don Dalis UBS Financial Services, Inc Newport Beach, CA
      Barbara A. Kelley Pacific Global Investment Glendale, CA
      Joel H. Ravitz Quincy Cass Associates Los Angeles, CA

      District 3

      Joseph M. McCarthy, District Director
      370 17th Street, Suite 2900
      Denver, CO 80202–5629
      (303) 446-3100
      (303) 620-9450 fax

      James G. Dawson, District Director
      601 Union Street, Suite 1616
      Seattle, WA 98101–2327
      (206) 624-0790
      (206) 623-2518 fax

      District Committee for District 3—Chair: Arlene M. Wilson
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Curtis J. Hammond Morgan Stanley Dean Witter, Inc. Bellevue, WA
      J. Keith Kessel AFS Brokerage, Inc. Greenwood Village, CO
      Arlene M. Wilson D.A. Davidson & Co. Great Falls, MT
           
      Committee Members to Serve Until January 2008
      Kathryn M. Dominick Welton Street Investments LLC Denver, CO
      Craig A. Jackson, Vice Chair Northwest Consulting, LLC Roseburg, OR
      Harry I. Striplin Paulson Investment Company, Inc. Portland, OR
           
      Committee Members to Serve Until January 2009
      David J. Director McAdams Wright Ragen, Inc. Seattle, WA
      Daniel Lind Wells Fargo Investments Tucson, AZ
      Steven M. Youhn M Holdings Securities, Inc Portland, OR

      District Nominating Committee for District 3—Chair: Bridget M. Gaughan
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      Gregory R. Anderson MCL Financial Group, Inc. Denver, CO
      L. Hoyt DeMers Wells Fargo Investments, LLC Seattle, WA
      Bridget M. Gaughan AIG Financial Advisors, Inc. Phoenix, AZ
      John W. Goodwin Goodwin Browning & Luna Securities, Inc. Albuquerque, NM
      C. Frederick Roed McAdams Wright Ragen, Inc. Bellevue, WA

      District 4

      Thomas D. Clough, District Director
      120 W. 12th Street, Suite 900, Kansas City, MO 64105
      (816) 802-4708
      (816) 421-5029 fax

      District Committee for District 4—Chair: Mark T. Lasswell
      Committee members to be elected to terms expiring January 2010: 3
      Committee member to be elected to term expiring January 2008: 1

      Committee Members to Serve Until January 2007
      Joseph D. Fleming RBC Dain Rauscher Inc. Minneapolis, MN
      Mark T. Lasswell Wells Fargo Brokerage Services, LLC Minneapolis, MN
      Arthur S. Montgomery Walnut Street Securities, Inc. St. Louis, MO
           
      Committee Members to Serve Until January 2008
      Allen J. Moore SMITH HAYES Financial Services Lincoln, NE
      Minoo Spellerberg Princor Financial Services Corporation Des Moines, IA
      Vacancy1    

      1 This vacancy was created by the resignation of Stephen R. Oliver. The term expires in January 2008.

      Committee Members to Serve Until January 2009
      Steven F. McWhorter Securities America, Inc. Omaha, NE
      Brian D. Murphy Woodbury Financial Services, Inc. Woodbury, MN
      Andrew C. Small Scottrade, Inc. St. Louis, MO

      District Nominating Committee for District 4—Chair: Jeffrey A. Schuh
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      Deborah M. Castiglioni Cutter & Company, Inc. Chesterfield, MO
      Robert M. Chambers A.G. Edwards & Sons, Inc. West Des Moines, IA
      Frank H. Kirk Wachovia Securities, LLC Kansas City, MO
      Kevin P. Maas PrimeVest Financial Services, Inc. St. Cloud, MN
      Jeffrey A. Schuh Residential Funding Securities Corporation Minneapolis, MN

      District 5

      Warren A. Butler, Jr., Regional Director, South Region
      1100 Poydras Street, Energy Centre, Suite 850
      New Orleans, LA 70163-0802
      (504) 522-6527
      (504) 522-4077 fax

      District Committee for District 5—Chair: R. Patrick Shepherd
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Jennifer Carty Scola Carty & Company, Inc. Memphis, TN
      R. Patrick Shepherd Avondale Partners, L.L.C. Nashville, TN
      Donald Winton Crews & Associates, Inc. Little Rock, AR
           
      Committee Members to Serve Until January 2008
      Philip J. Dorsey, Vice Chair Dorsey & Company, Inc. New Orleans, LA
      Fred G. Eason Delta Trust Investments, Inc. Little Rock, AR
      Harold L. Gladney Vining Sparks IBG, L.P. Memphis, TN
           
      Committee Members to Serve Until January 2009
      Curtis F. Bradbury, Jr. Stephens Inc. Little Rock, AR
      William A. Geary Morgan Keegan & Company, Inc. Jackson, MS
      Jefferson G. Parker Howard Weil Incorporated New Orleans, LA

      District Nominating Committee for District 5—Chair: John J. Dardis
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      John J. Dardis Jack Dardis & Associates, Ltd. Metairie, LA
      Carolyn R. May Simmons First Investment Group, Inc. Little Rock, AR
      Douglas W. McQueen The Baker Group, LP Oklahoma City, OK
      LeRoy H. Paris, II InvestLinc Securities, LLC Jackson, MS
      David W. Wiley, III Wiley Bros.—Aintree Capital, L.L.C. Nashville, TN

      District 6

      Virginia F. M. Jans, District Director
      12801 N. Central Expressway, Suite 1050, Dallas, TX 75243
      (972) 701-8554
      (972) 716-7646 fax

      District Committee for District 6—Chair: Cynthia E. Besek
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Karen Banks Frost Brokerage Services, Inc. San Antonio, TX
      Cynthia E. Besek Maplewood Investment Advisors, Inc. Dallas, TX
      Brent T. Johnson Multi-Financial Securities Corporation Houston, TX
           
      Committee Members to Serve Until January 2008
      Bryan T. Emerson Starlight Investments, LLC Houston, TX
      William H. Lowell Lowell & Co., Inc. Lubbock, TX
      Michael A. Pagano, Vice Chair 1st Global Capital Corp. Dallas, TX
           
      Committee Members to Serve Until January 2009
      Alan K. Goldfarb Oakbrook Financial Group, LLC Dallas, TX
      John Christopher Melton Coastal Securities, L.P Houston, TX
      Ralph E. Poppell Stanford Group Company Houston, TX

      District Nominating Committee for District 6—Chair: V. Keith Roberts
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      William D. Felder Southwest Securities, Inc. Dallas, TX
      Sennett Kirk, III Kirk Securities Corporation Denton, TX
      Gary V. Murray Murray Traff Securities Tyler, TX
      John R. Muschalek First Southwest Company Dallas, TX
      V. Keith Roberts Stanford Group Company Huston, TX

      District 7

      Daniel J. Stefek, District Director
      One Securities Centre, Suite 500
      3490 Piedmont Road, NE
      Atlanta, GA 30305
      (404) 239-6128
      (404) 237-9290 fax

      Mitchell C. Atkins, District Director
      Crystal Corporate Center
      2500 N. Military Trail, Suite 302
      Boca Raton, FL 33434
      (561) 443-8010
      (561) 443-7995 fax

      District Committee for District 7—Chair: Susan J. Hechtlinger
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Susan J. Hechtlinger Banc of America Investment Services, Inc. Charlotte, NC
      Landrum H. Henderson, Jr. Legg Mason Wood Walker, Inc. Charlotte, NC
      Alan L. Maxwell, Jr. Wachovia Capital Markets, LLC Charlotte, NC
           
      Committee Members to Serve Until January 2008
      Erick R. Holt, Esq. AMVESCAP Atlanta, GA
      William G. McMaster, Vice Chair Scott & Stringfellow, Inc. Columbia, SC
      Charles F. O'Kelley Atlantic Coast Securities Corporation Tampa, FL
           
      Committee Members to Serve Until January 2009
      John B. Busacca North American Clearing, Inc. Longwood, FL
      Marc A. Ellis GunnAllen Financial, Inc. Tampa, FL
      Ronald J. Kovack Kovack Securities, Inc. Ft. Lauderdale, FL

      District Nominating Committee for District 7—Chair: Roark A. Young
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      Richard G. Averitt, III Raymond James Financial Services, Inc. St. Petersburg, FL
      Joseph B. Gruber FSC Securities Corporation Atlanta, GA
      Dennis S. Kaminski Mutual Service Corporation West Palm Beach, FL
      James A. Klotz FMSBonds, Inc. North Miami Beach, FL
      Roark A. Young Young, Stovall and Company Miami, FL

      District 8

      Carla A. Romano, Regional Director, Midwest Region
      55 West Monroe Street, Suite 2700, Chicago, IL 60603-5052
      (312) 899-4324
      (312) 899-4399 fax

      District Committee for District 8—Chair: Michael E. Bosway
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Michael E. Bosway City Securities Corporation Indianapolis, IN
      Mari Buechner Coordinated Capital Securities, Inc. Madison, W
      Robert J. Michelotti Ferris, Baker Watts Incorporated Auburn Hills, MI
           
      Committee Members to Serve Until January 2008
      Richard M. Arceci ValMark Securities, Inc. Akron, OH
      Ronald J. Dieckman. J.J.B. Hilliard, W.L. Lyons, Inc. Louisville, KY
      Julie E. Vander Weele Mesirow Financial, Inc. Chicago, IL
           
      Committee Members to Serve Until January 2009
      Stephen F. Anderson Waterstone Financial Group, Inc. Itasca, IL
      Eric A. Bederman Bernardi Securities, Inc. Chicago, IL
      Barbara A. Turner The O.N. Equity Sales Company Cincinnati, OH

      District Nominating Committee for District 8—Chair: Carol P. Foley
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      George E. Bates Bates Securities, Inc. Rockford, IL
      Carol P. Foley Podesta & Company Chicago, IL
      Ruth Hanneberg2 Mesirow Financial, Inc. Chicago, IL
      Jill R. Powers Oberlin Financial Corpora Bryan, OH
      James J. Roth Pershing LLC A BNY Securities Group Oak Brook, IL

      2 Ms. Hanneberg was appointed to fill the vacancy created by the resignation of Bernard A. Breton. Ms. Hanneberg's term expires in January 2007.

      District 9

      Gary K. Liebowitz, Regional Director,
      North Region
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095
      (732) 596-2025
      (732) 596-2001 fax

      John P. Nocella, District Director
      1835 Market Street, Suite 1900
      Philadelphia, PA 19103
      (215) 963-1992
      (215) 963-7442 fax

      District Committee for District 9—Chair: Harold N. Peremel
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      Wayne F. Holly Sage, Rutty & Co., Inc. Rochester, NY
      Peter P. Jenkins Credit Suisse First Boston LLC Baltimore, MD
      Harold N. Peremel Mercantile Brokerage Services Inc. Baltimore, MD
           
      Committee Members to Serve Until January 2008
      Michael T. Corrao Knight Equity Markets LP Jersey City, NJ
      Scott L. Fagin The Jeffrey Matthews Financial Group, L.L.C. Millburn, NJ
      Rebecca L. Kohler Fidelity Investments Tax-Exempt Services Co. Roanoke, VA
           
      Committee Members to Serve Until January 2009
      John M. Ivan Janney Montgomery Scott LLC Philadelphia, PA
      Brand F. Meyer Wachovia Securities, LLC Richmond, VA
      Thomas T. Wallace Johnston, Lemon & Co. Incorporated Washington, DC

      District Nominating Committee for District 9—Chair: Michael B. Row
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      Richard Grobman Oppenheimer & Co. Inc. Philadelphia, PA
      W. Dean Karrash Burke, Lawton, Brewer & Burke Spring House, PA
      Gregg A. Kidd Pinnacle Investments Inc. East Syracuse, NY
      Michael S. Mortensen PNC Investments Pittsburgh, PA
      Michael B. Row Pershing LLC Jersey City, NJ

      District 10

      Hans L. Reich, Regional Director, New York Region
      One Liberty Plaza, 49th Floor, 165 Broadway, New York, NY 10006
      (212) 858-4180
      (212) 858-4078 fax

      District Committee for District 10—Chair: Howard R. Plotkin
      Committee members to be elected to terms expiring January 2010: 4

      Committee Members to Serve Until January 2007
      Richard Berenger Sky Capital, LLC New York, NY
      Lon T. Dolber American Portfolios Financial Services, Inc. Holbrook, NY
      George T. Mimura Nomura Securities International, Inc. New York, NY
      Howard R. Plotkin Lehman Brothers, Inc. New York, NY
           
      Committee Members to Serve Until January 2008
      Vincent A. Buchanan Buchanan Associates, Inc. New York, NY
      Clifford H. Goldman Marco Polo Securities Inc. New York, NY
      Jeffrey T. Letzler Instinet, LLC New York, NY
      Howard Spindel Integrated Management Soluti New York, NY
           
      Committee Members to Serve Until January 2009
      Barry M. Cash Citigroup Global Markets Inc. New York, NY
      Joseph DeBellis Sanford C. Bernstein & Co., LLC New York, NY
      Robyn Jeffrey Oppenheimer & Co. Inc. New York, NY
      Allen Meyer Credit Suisse First Boston LLC New York, NY

      District Nominating Committee for District 10—Chair: Jennifer A. Connors
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      Margaret M. Caffrey Schonfeld & Company, LLC Jericho, NY
      Jennifer A. Connors Lehman Brothers Inc New York, NY
      Raymond C. Holland, Sr. Triad Securities Corp. New York, NY
      Richard J. Paley Carey Financial Corporation New York, NY
      Mark W. Ronda Oppenheimer & Co. Inc. New York, NY

      District 11

      Frederick F. McDonald, Jr., District Director
      99 High Street, Suite 900, Boston, MA 02110
      (617) 532-3401
      (617) 451-3524 fax

      District Committee for District 11—Chair: David K. Booth
      Committee members to be elected to terms expiring January 2010: 3

      Committee Members to Serve Until January 2007
      David K. Booth Jefferson Pilot Securities Corp. Concord, NH
      Thomas F. Hollenbeck J.P. Morgan Invest, LLC Boston, MA
      Curtis L. Snyder, Jr. American Technology Research, Inc. Greenwich, CT
           
      Committee Members to Serve Until January 2008
      Frank L. Chandler Boston Capital Services, Inc Boston, MA
      Joseph Gritzer USI Securities, Inc. Glastonbury, CT
      Moira Lowe Sun Life Financial Wellesley Hills, MA
           
      Committee Members to Serve Until January 2009
      Martin W. Courage Bank of America Investment Services Boston, MA
      Todd A. O'Connor Investors Securities Services LLC Boston, MA
      Robert J. Reilly Piper Jaffray & Co. Boston, MA

      District Nominating Committee for District 11—Chair: Mark R. Hansen
      Committee members to be elected to terms expiring January 2008: 5

      Committee Members to Serve Until January 2007
      Michael C. Braun Moors & Cabot, Inc. Boston, MA
      Andrew F. Detwiler Virtua Research
      An affiliate of Vandham Securities Corp.
      Boston, MA
      Mark R. Hansen Alta Capital Group, LLC Boston, MA
      Lee G. Kuckro Advest, Inc. Hartford, CT
      Wilson G. Saville Barrett & Company Providence, RI

      ATTACHMENT B

      Procedures for Electing District Committee and District Nominating Committee Members

      1. Each NASD District shall maintain a District Nominating Committee in the manner specified in Article VIII of the NASD Regulation By-Laws.
      2. The Secretary of NASD has sent a letter to each District Nominating Committee member and each District Director identifying the members of the District Committee and the District Nominating Committee whose terms expire in January 2007. The letter describes the election procedures to be followed in filling these positions.
      3. The Secretary of NASD and the Corporate Communications Department will email a reminder to all members of their responsibility, and obligation, to keep current and accurate the information on their Executive Representative. The email will contain a reference to the NASD Contact System, located on NASD's Web site at www.nasd.com/ncs, for changing a firm's Executive Representative name, email and postal address. This email will note that failure to keep this information accurate may jeopardize the member's ability to participate in the district elections, as well as in other member votes.
      4. The Secretary of NASD will send a Notice to Members announcing the forthcoming elections to the Executive Representative of all NASD members eligible to vote in each district. The Notice to Members will identify: (a) the number of positions that need to be filled in each district; and (b) the incumbent members of each District Committee. Persons who are interested in serving on the District Committee or the District Nominating Committee within their district must complete a candidate profile sheet and submit it by hand delivery, courier service, mail or facsimile to the District Director. Completed candidate profile sheets must be received by the District Director on or before June 23, 2006. Persons who submit candidate profile sheets after this date will not be considered.

      Completed candidate profile sheets received by the District Director on or before June 23, 2006, will be provided to all members of the appropriate District Nominating Committee for review. During this stage of the election process, the District Nominating Committee identifies and solicits candidates to nominate for election to the District Committee and the District Nominating Committee.
      5. Soon after the expiration of the time allotted in the Notice to Members to submit names and candidate profile sheets for consideration, the District Nominating Committee will meet to determine its slate of candidates for the election. NASD staff will provide the District Nominating Committee members with information considered to be relevant to the nomination process, including:
      •   analytical data pertaining to the district's membership; and
      •   relevant candidate profile sheets.
      6. In determining its slate of candidates for the election, the District Nominating Committee will review the background and qualifications of the proposed candidates, and endeavor to secure appropriate and fair representation on the District Committee and on the District Nominating Committee of the various sections of the district and various classes and types of NASD members engaged in the investment banking or securities business within the district. The slate must include the same number of nominees as there are positions to be filled on the District Committee and the District Nominating Committee.

      A District Nominating Committee may not nominate more than two incumbent members of the District Nominating Committee to succeed themselves, nor may District Nominating Committee members serve more than two consecutive terms. A majority of the members of the District Nominating Committee must include persons who previously have served on a District Committee or who are current or former Governors of the NASD Board.

      The District Nominating Committee may also nominate one alternate candidate for the District Committee and one alternate candidate for the District Nominating Committee. In the event of an uncontested election pursuant to Section 8.19 of the NASD Regulation By-Laws, the alternate candidate would replace any member of the nominated slate of candidates who withdrew or was determined to be ineligible.
      7. On or before July 28, 2006, the District Director, acting on behalf of the District Nominating Committee, will notify the Secretary of NASD of each candidate nominated by the District Nominating Committee and the committee to which the candidate is nominated.
      8. On or before October 1, 2006, the Secretary of NASD will send a Notice to Members to the District Committees and the Executive Representatives of NASD members eligible to vote in each district, identifying the nominees for the District Committees and the District Nominating Committees.

      If the District Nominating Committee nominates the same number of nominees as there are positions to be filled on the District Committee and the District Nominating Committee and no additional candidate comes forward by delivering written notice to the appropriate District Director within 14 calendar days after the date of the Notice to Members identifying the nominees, the candidates nominated by the District Nominating Committee are considered duly elected.
      9. If a person who is otherwise eligible to serve on the District Committee or the District Nominating Committee was not nominated by the District Nominating Committee and wants to be considered for election as an additional candidate, he/she must notify the District Director in writing within 14 calendar days after the date of the Notice to Members referenced in item 8 above. The District Director must make a written record of the time and date of the receipt of such notification.
      10. Promptly following receipt of the additional candidate's timely notice, the Secretary of NASD will provide to the additional candidate a list of all NASD members eligible to vote in the district, their mailing addresses, and their Executive Representatives.
      11. An additional candidate is considered nominated if a petition signed by the Executive Representative of at least 10 percent of the NASD members eligible to vote in the district is filed with the District Nominating Committee within 30 calendar days after the mailing date of the list to the additional candidate referenced in item 10 above.
      12. If an additional candidate secures the required petition within the 30-day designated timeframe, the election is considered a contested election. The Secretary of NASD will send a Notice to Members to the Executive Representatives of NASD members eligible to vote in the district announcing the names of all candidates and describing the contested election procedures.

      Additional information pertaining to the District Committee and District Nominating Committee Election Procedures may be found in Article VIII of the NASD Regulation By-Laws.

      ATTACHMENT C

      Please download Candidate Profile Sheet in PDF format.

    • 06-23 NASD Reminds FINOPs of their Obligations under NASD Rule 1022 and Issues Guidance to FINOPS who Work Part-Time, Work Off-Site or Hold Multiple Registrations

      View PDF File

      Financial and Operations Principals (FINOPs)

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Regulatory
      Senior Management
      Financial and Operations Principal (FINOPs)
      NASD Rule 1022
      SEC Rule 15c3-1 (Net Capital Rule)

      Executive Summary

      NASD is issuing this Notice to Members to remind member firms and registered financial and operations principals (FINOPs) of a FINOP's duties and responsibilities under Rule 1022 (Categories of Principal Registration). These duties are applicable to all FINOPs, regardless of whether they are employed full-time or part-time, perform such duties on-site or off-site of the member firm or hold registrations with more than one firm. This Notice also provides additional guidance to assist FINOPs who are employed part-time, operate off-site or hold multiple registrations in fulfilling their duties. Additionally, NASD reminds members and FINOPs that their failure to meet their responsibilities can result in disciplinary actions against both the FINOP and the member firm employing the FINOP.

      Questions/Further Information

      Questions concerning this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411; or Daniel M. Sibears, Executive Vice President & Deputy, Department of Member Regulation, at (202) 728-6911.

      Background

      Rule 1022 requires each member to designate a qualified financial and operational principal (FINOP). Depending upon a member's net capital requirement, the FINOP will be registered pursuant to either Rule 1022(b) (Limited Principal—Financial and Operations)1 or Rule 1022(c) (Limited Principal—Introducing Broker/Dealer Financial and Operations).2 The FINOP plays an important role in ensuring investor protection by being responsible for the firm's compliance with applicable net capital, recordkeeping and other financial and operational rules. Rule 1022 outlines the specific duties a FINOP must perform to discharge this responsibility:3
      •   Final approval and responsibility for the accuracy of financial reports submitted to any duly established securities industry regulatory body;
      •   Final preparation of such reports;
      •   Supervision of individuals who assist in the preparation of such reports;
      •   Supervision of and responsibility for individuals who are involved in the actual maintenance of the member's books and records from which such reports are derived;
      •   Supervision and/or performance of the member's responsibilities under all financial responsibility rules promulgated pursuant to the provisions of the Securities Exchange Act of 1934 (Exchange Act);
      •   Overall supervision of and responsibility for the individuals who are involved in the administration and maintenance of the member's back office operations; and
      •   Any other matter involving the financial and operational management of the member.

      In 1999, NASD advised members that all FINOPs are fully responsible for each of the above-mentioned duties and that FINOPs are not relieved of these responsibilities because they are employed off-site, work only part-time or hold multiple registrations with different member firms.4 NASD also advised members employing a part-time FINOP to establish procedures that describe the FINOP's duties, thoroughly outline the part-time FINOP's responsibilities so that the firm will properly and timely maintain its financial books and records, and make sure that the part-time FINOP understands and remains current with the federal and state laws and regulations and self-regulatory organization (SRO) rules relating to financial and operational responsibility.5

      Discussion

      During the intervening years since NASD has issued that referenced guidance, members have continued to use part-time FINOPs.6 However, the results of recent Securities and Exchange Commission (SEC) examinations of 36 broker-dealers employing part-time FINOPs reflect that not all members and their part-time FINOPs have been successfully implementing that guidance. Specifically, the SECs examinations, which focused on compliance with the books and records and financial responsibility rules of the Exchange Act, as well as applicable SRO rules, revealed material net capital deficiencies in several firms, as well as net capital computation inaccuracies in firms' books and records at 18 of the 36 firms (50 percent) reviewed. SEC staff observed that these inaccuracies occurred because many of the FINOPs had no role in the supervision or creation, or the maintenance, of the firms' books and records, as required by Rule 1022. The SEC staff also concluded that some of the firms' FINOPs could be over-extended, as at least six of the FINOPs were registered at 16 or more firms. In addition to the SEC's findings in their examination of these 36 firms referenced above, NASD has also found similar regulatory issues during its routine and special financial examinations of firms using the services of part-time FINOPs.

      Based on these findings, examinations will continue to focus on the types of deficiencies detected during the examinations referenced above. This is not to say that any per se violations or deficiencies derive from the use of part-time FINOPs. Moreover, given the continued use of part-time FINOPs and recent regulatory findings, NASD believes that it is appropriate to remind members of the existing guidance mentioned above regarding the use of part-time FINOPs and to urge members to examine their practices to ensure that they are following those guidelines. NASD is also taking this opportunity to remind FINOPs working part-time or off-site, or holding registrations with more than one firm, that their status does not relieve them of their responsibility to comply with all of the duties set forth in Rule 1022.

      In addition, NASD is providing the following supplemental guidance to members that employ FINOPs who work part-time, work off-site, or hold multiple registrations. This guidance is designed to help these members assist their FINOPs in fulfilling Rule 1022's requirements.

      Guidance Applicable to Part-Time, Off-Site or Multiply Registered FINOPs

      On-Site Visits

      Registered FINOPs working part-time, off-site or holding multiple registrations should conduct a minimum number of on-site firm visits each calendar year to review the firm's books and records; that minimum number should be set by the FINOP in consultation with the firm. Some or all of these visits should be on a surprise basis. Additionally, as most firms utilizing the services of a part-time, off-site or multiply registered FINOP file quarterly FOCUS reports, the FINOP should consider making the visits in off-reporting months to ensure compliance with the SEC's Net Capital Rule (Net Capital Rule).7 In addition to a review of the financial accounts and relevant supporting documentation, the FINOP should inquire about and review the following when conducting examinations on site:

      •  Contracts entered into by the member;
      •   Contracts entered into by an affiliate or parent of the member that may impact the firm (e.g., the parent company enters into a contract, but the assets of the member are pledged as collateral to ensure the parent's performance of its contractual obligations);
      •  Any ongoing liabilities that may impact the member's balance sheet, including for example settlements and/or arbitration awards;
      •  Any contingent liabilities that may impact the firm's aggregate indebtedness calculation;
      •   The nature and timing of capital contributions and capital withdrawals;
      •   The proper treatment/handling of Expense Sharing Agreements;9 and
      •   A firm's activities to ensure that the proper net capital requirement, based on those activities, is being reported accurately on the firm's financial reports.10

      On-Site Visit Documentation

      A FINOP should evidence each on-site review by initialing the books and records reviewed or, if impractical, creating a detailed log as to which records were reviewed. In addition, the FINOP should reduce the review to a written report to be submitted to the firm's senior management.

      Access to Books and Records

      A member using a part-time, off-site or multiply registered FINOP should provide that person complete access to all of the firm's books and records. A member may not provide less access to a part-time, off-site or multiply registered FINOP than it would to a full-time, on-site FINOP.

      Establish Procedures Regarding FINOP's Duties

      Members using part-time, off-site or multiply registered FINOPs are urged to establish procedures that describe the FINOP's duties and thoroughly outline the FINOP's responsibilities. A FINOP's responsibilities include understanding and remaining current with the applicable federal and state securities laws and regulations, and SRO rules relating to financial and operational responsibility. One way in which members can assist FINOPs in fulfilling this responsibility is to require that their FINOPs review NASD Notices to Members and other publications relating to their financial and operational work.

      Ongoing Capabilities Assessments

      A member using a part-time, off-site or multiply registered FINOP should conduct ongoing assessments of its FINOP's ability to perform his or her duties. Factors a member may need to take into consideration include whether the FINOP has adequate resources to perform all of the required duties (e.g., financial software, access to applicable current federal laws and regulations, and SRO rules, or ability to meet continuing education requirements), whether a FINOP has any other duties that may make it difficult to perform all of the required duties or whether changes to a firm, such as significant growth in the firm's financial and business operations, would make it difficult for anyone other than a full-time, on-site FINOP to perform the required duties.

      NASD Disciplinary Actions against Firms and FINOPs for Violations of the Net Capital Rule

      Finally, NASD reminds members that it may take disciplinary action against both the FINOP and the member firm employing the FINOP when it finds violations of the Net Capital Rule, other federal securities or regulations, or any SRO rules relating to financial and operational responsibility.10 The Sanction Guidelines for violations of the Net Capital Rule recommend a fine of $1,000 to $50,000 against the firm, the FINOP, or both. The Sanction Guidelines also recommend suspending the firm with respect to any or all activities or functions for up to 30 business days, and suspending the FINOP in any or all capacities for up to 30 business days. In egregious cases, a firm could receive a lengthier suspension of up to two years or expulsion, and the FINOP could receive a suspension of up to two years or a bar.

      Finally, a disciplinary action against a FINOP for misconduct at one firm could have serious consequences for other firms that engage the same FINOP, particularly if the FINOP is barred, suspended or required to re-qualify by examination.11


      1 A person holding this registration category must have taken and passed the Series 27 Financial and Operations Principal Qualification Examination.

      2 A person holding this registration category must have taken and passed the Series 28 Introducing Broker/Dealer Financial and Operations Principal Qualification Examination.

      3 See Rule 1022(b)(2)(A) through (G) and (c)(2)(A) through (G).

      4 NASD Regulatory & Compliance Alert, Volume 13, Number 4, Winter 1999 (pages 15–16).

      5 Id.

      6 Approximately 11 percent of NASD designated firms use the services of a part-time FINOP.

      7 SEC Rule 15c3-1.

      8See NASD Notice to Members 03-63 (SEC Issues Guidance in the Recording of Expenses and Liabilities by Broker/Dealers) and the attached letter from Michael A. Macchiaroli, Associate Director, Division of Market Regulation, SEC, to Elaine Michitsch, NYSE, and Susan DeMando, NASD (July 11, 2003).

      9 For example, a firm with a net capital requirement of $50,000 may receive customer securities, but must promptly forward those securities or be subject to a net capital requirement of $250,000. See SEC Rule 15c3-1(a)(2)(i) and (iv). An introducing firm otherwise subject to a net capital requirement of only $5,000 that routinely accepts checks in its own name would be subject to a $250,000 net capital requirement. See SEC Rule 15c3-1(a)(2)(i) and (vi).

      10 See Fox & Co., Inv., Exchange Act Release No. 52697, 2005 SEC LEXIS 2822 (Oct. 28, 2005) (SEC sustained NASD disciplinary action against a firm and the person who was the firm's primary owner, president and FINOP and upheld the bar against the person from associating with any member firm as a FINOP) at www.sec.gov/ litigation/opinions/34-52697.pdf. FINOPs and firms that violate the Net Capital Rule also may face SEC disciplinary action. See Harrison Sec. Inc., Exchange Act Release No. 50614, 2004 SEC LEXIS 2477 (Oct. 29, 2004) (SEC administrative proceeding against a firm, the firm's CEO and the firm's FINOP for violations of the Exchange Act's net capital, books and records and reporting provisions) at www.sec.gov/ litigation/aljdec/id256jtk.htm.

      11 NASD Sanctions Guidelines (online edition available at www.nasd.com/sanctionguidelines).

    • 06-22 NASD Requests Comment on Publicly Disseminating in TRACE Information Whether a Transaction was Inter-Dealer or Dealer-Customer and, in Dealer-Customer Transactions, Whether the Broker-Dealer was a Buyer or Seller; Comment Period Expires June 15, 2006

      View PDF File

      REQUEST FOR COMMENT

      Corporate Debt Securities

      SUGGESTED ROUTING

      KEY TOPICS

      Suggested Routing
      Corporate Finance
      Legal and Compliance
      Operations
      Senior Management
      Technology Trading and Market Making Training
      Debt Securities
      Operations
      Rule 6200 Series
      TRACE Rules
      Transaction Reporting

      Executive Summary

      Currently, NASD members that are parties to a transaction in a TRACE-eligible security report several types of information to the Trade Reporting and Compliance Engine (TRACE) system. Among other things, for each transaction, the member reports that it is a buyer (Buyer) or a seller (Seller) (Buy/Sell information) and the member's counterparty is another broker-dealer (Dealer) or a customer (Customer) (Customer/Dealer information). The Buy/Sell and Customer/Dealer information is not currently disseminated. NASD requests comment on publicly disseminating the Buy/Sell information and the Customer/Dealer information.

      Action Requested

      NASD encourages all interested parties to comment on this proposal. Comments must be received by June 15, 2006. Members and interested persons can submit their comments using the following methods:

      •  Mail comments in hard copy to the address on the address below; or
      •  Email written comments to pubcom@nasd.com.

      To help NASD process and review comments more efficiently, persons commenting on this proposal should use only one method. Comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, D.C. 20006-1506
      Important Notes: The only comments that will be considered are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the NASD Web site. Generally, comments will be posted on the NASD Web site one week after the end of the comment period.1

      Before becoming effective, a proposed rule change (or certain policies) must be authorized for filing with the Securities and Exchange Commission (SEC) by the NASD Board, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Questions/Further Information

      As noted above, hard-copy comment should be mailed to Barbara Z. Sweeney. Questions regarding this Notice may be directed to Elliot Levine, Chief Counsel, Transparency Services, Markets, Services and Information (MSI), at (202) 728-8405; David H. Lefferts, Vice President, Transparency Services, MSI, at (212) 858-4389; or Sharon K. Zackula, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8985.

      Background and Discussion

      Currently, NASD publicly disseminates the following information for each transaction in a TRACE-eligible security that is required to be disseminated under TRACE Rule 6250: the bond identifier (e.g., the TRACE symbol), the price inclusive of any mark-up, markdown or commission, the quantity (expressed as the total par value),3 the yield, the time of execution and, if the transaction was executed on a day other than when the information is being disseminated, the actual day of execution of the transaction. For inter-dealer (Dealer) trades, NASD receives a TRACE report from each member, but disseminates the sell side only; for dealer-customer (Customer) trades, NASD receives only one TRACE report (from the member) and disseminates information from that TRACE report, which may be either of a dealer's buy from a customer (Buy) or a dealer's sale to a customer (Sell).

      NASD is proposing that the Buy/Sell information and Customer/Dealer information (but not the MPID or identity of the dealer) be disseminated publicly for each transaction because dealers and investors need it to compare prices. Investors also need it to request better, lower prices (i.e., prices including mark-ups (or mark-downs) and commissions). In addition, dealers require it to aid them in complying with a dealer's best execution obligations under Rule 2320 and the fair and reasonable mark-up/mark-down requirements under Rule 2440 and other provisions of the federal securities laws.4

      Under current law and NASD's proposed debt mark-up interpretation (Proposed Debt Mark-Up Interpretation or Proposal),5 when a dealer is pricing, or determining mark-ups (or markdowns) by referring to last-sale transaction prices other than the dealer's own price, a dealer must be able to determine if the trade was an inter-dealer trade representing an arms-length negotiation between two market professionals, or a trade between a dealer and a customer, and to identify which side the dealer price reflected when engaging in a Customer or a Dealer transaction.6 Disseminating the Buy/Sell and Customer/Dealer information would allow dealers to more accurately identify the type of pricing information disseminated by TRACE, and would permit them to use the information for mark-up (or mark-down) and best execution determinations.

      Currently, the TRACE price disseminated is an "all-in" price that includes, if it is a principal trade with a customer, a mark-up (or a mark-down) and, if it is an agency trade with a customer, a commission. As noted above, a TRACE data user cannot readily identify those transactions reflecting inter-dealer prices (generally considered the most reliable measure of the prevailing market price of a security after dealer's contemporaneous cost) for mark-up (or mark-down) purposes, because inter-dealer prices are intermingled with dealer-customer prices. Adding the Customer/Dealer information would solve this problem and make inter-dealer pricing clearly identifiable for mark-up (or mark-down) and best execution purposes.

      In addition, given the limited frequency of transactions in certain sectors of the debt markets, including the corporate debt sector, the need to understand whether each of the prices that is available reflects Dealer or Customer prices and which side of the market the dealer stood on the trade is even more crucial. The Buy/Sell information, combined with the Customer information, makes clear that the disseminated price includes a mark-down or a commission (i.e., the dealer was a buyer or facilitating finding a buyer) or the disseminated price includes a mark-up or a commission (i.e., the dealer was a seller or facilitating finding a seller). Given both Customer/Dealer and Buy/Sell information, TRACE data users, whether dealers or customers, will be able to knowledgeably assess and compare the disseminated "all-in price" of their purchases and sales with other customer transactions. In addition, dealers will be able to determine approximate levels of inter-dealer pricing by "backing out" of a disseminated all-in price clearly labeled as a Customer transaction, a mark-up (or mark-down) or commission amount if inter-dealer pricing is not available in TRACE for both mark-up and best execution purposes.

      The MSRB determined that disseminating the Buy/Sell and Customer/Dealer information was an important part of providing transparency in the municipal securities market. The MSRB currently disseminates both Buy/Sell and Customer/Dealer information real-time together with other price, quantity and yield information per transaction.7

      In April 2005, a commenter on the Proposed Debt Mark-Up Interpretation highlighted the deficiencies in TRACE, noting that TRACE data does not differentiate between Customer and Dealer transactions, thus making the identification of inter-dealer pricing difficult.8 (In the absence of applicable contemporaneous transactions, inter-dealer pricing is a highly reliable indicator of the prevailing market price of a security.) In October 2005, in NASD's response to the comments on the Proposal, NASD indicated that NASD was "evaluating enhancing the quality of disseminated TRACE information to show, for each trade, whether the trade is inter-dealer or customer, as is now indicated in real-time disseminated municipal securities transaction data."9

      Over a two-and-one-half-year period, NASD staff has received many comments from dealers requesting that indicators distinguishing Customer and Dealer and Buy and Sell transactions be added to the publicly disseminated TRACE data to assist firms in their pricing and their mark-up analyses. In many instances, these comments arose in the context of NASD seminars for members on debt mark-ups. In addition, at public events and industry conferences, both NASD staff and SEC staff have indicated that debt mark-ups are an area of regulatory concern and focus. In this regard, in 2005, member firm personnel attending NASD debt mark-up seminars expressed concern that NASD was delaying the implementation of the dissemination of Customer/Dealer and Buy/Sell information beyond 2005, given NASD's and SEC's regulatory focus on debt securities pricing and debt mark-ups.

      In contrast, NASD recently received comments from The Bond Market Association on behalf of various dealers and members of its Asset Managers' Forum stating that the dissemination of the Buy/Sell and Customer/Dealer information raises concerns among large dealers and some large institutional customers. They believe that such dissemination may permit market participants to identify and reverse-engineer their trading strategies, especially in illiquid TRACE-eligible securities.

      NASD seeks input from members, other market participants and the public regarding the efficiencies, benefits and costs to the market, market participants and all TRACE data users of adding the Customer/Dealer and Buy/Sell information; the regulatory costs and benefits of adding such information for all members subject to regulatory review for fair debt mark-ups and best execution; and all other benefits and costs to members, non-members and the public.


      1 See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments). Personal identifying information, such as names or email addresses, will not be edited from submissions. Submit only information that you wish to make publicly available.

      2 Section 19 of the Securities Exchange Act of 1934 (Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and the rules thereunder.

      3 If a transaction in a TRACE-eligible security is Investment Grade and exceeds $5 million, or is Non-Investment Grade and exceeds $1 million, the quantities disseminated are, respectively, $5 million and $1 million, followed by an "E," indicating that the volume figure is estimated.

      4 An excessive or unreasonable mark-up/markdown is a violation of Rule 2110, Rule 2440, IM-2440 (except in connection with municipal securities) and, in some cases, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. For transactions in municipal securities, mark-ups (or markdowns) and other fair pricing issues are analyzed under Municipal Securities Rulemaking Board (MSRB) Rule G-30, Rule G-18 and Rule G-17, and, in some cases, Section 10(b) of the Exchange Act and Rule 10b-5.

      5 See File No. SR-NASD-2003-141, filed September 17, 2003, and amendments thereto.

      6 Under current law and the pending Proposal, a dealer must mark-up a transaction from the prevailing market price. The dealer's contemporaneous cost is presumed to be the most reliable indicator of the prevailing market price unless the dealer has no contemporaneous transaction(s) or can show that the dealer's contemporaneous cost is not indicative of the prevailing market price.

      When the dealer has no such costs or certain events have occurred, the Proposal lists several categories of information containing pricing information (factors) that the dealer must consider to identify prevailing market price and to calculate the dealer's mark-up (or markdown). TRACE is the source of most or all of the last-sale pricing information available for corporate bonds, and when a dealer looks to pricing information other than the dealer's own, TRACE should be the richest source of reliable data. When reviewing the TRACE data, it is important for the dealer to be able to identify Buy/Sell and Customer/Dealer information as part of the analytical process of determining if the dealer's cost remains contemporaneous or is stale, and to judge the applicability of the following factors containing reference prices or yields:

      (1) Inter-dealer prices—Customer/Dealer information is needed to identify Dealer transactions in TRACE (under current law, dealers are required to analyze this type of pricing information when the dealer's contemporaneous cost is not considered to be indicative of prevailing market price);
      (2) Prices of contemporaneous dealer purchases (sales) in the security in question from (to) certain institutional accounts as defined in the Proposal—Customer/Dealer and Buy/Sell information would assist significantly in identifying these trades and side of market;
      (3) Prices of contemporaneous inter-dealer transactions in similar securities as described in the Proposal—Customer/ Dealer information is required (under current law, it may be necessary for dealers to analyze this type of pricing information in certain instances);
      (4) Prices of contemporaneous dealer purchase (sale) transactions in similar securities with certain institutional accounts—Customer/ Dealer and Buy/Sell information is required;
      (5) Yield calculated from prices of contemporaneous inter-dealer transactions in similar securities—Customer/Dealer information is required; and
      (6) Yield calculated from prices of contemporaneous dealer purchase (sale) transactions in similar securities with certain institutional accounts—Customer/Dealer and Buy/Sell information is required.

      In addition, in many cases under the Proposal and in current practice, a dealer refers to transactions in similar securities, and, under the Proposal, a dealer must know side of market (Buy/Sell information) to determine the relative comparability of a transaction in a similar security to the transaction that is being marked.

      7 Disseminated municipal securities transaction prices, like TRACE-disseminated prices, are "all-in prices."

      8 Letter from The Bond Market Association (regarding File No. SR-NASD-2003-141), to Jonathon G. Katz, Secretary, SEC, dated April 5, 2005, p. 13 ("[T]he NASD's TRACE system does not differentiate between inter-dealer trades and customer trades in its disseminated reports, making the identification of an inter-dealer trade difficult.").

      9 Response to Comments on Additional Mark-Up Policy for Transactions in Debt Securities (regarding File No. SR-NASD-2003-141), to Katherine A. England, Assistant Director, Division of Market Regulation, SEC, dated October 4, 2005, p. 13.

    • 06-21 NASD and NYSE Issue Joint Guidance on Charitable Contributions

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      GUIDANCE

      Charitable Contributions

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Institutional
      Internal Audit
      Legal & Compliance
      Registered Representatives
      Senior Management
      Charitable Giving
      Charitable Solicitation

      Executive Summary

      The solicitation of substantial charitable contributions by employees or agents of a customer acting in a fiduciary capacity raises potential conflicts of interest that deserve careful consideration by member firms. NASD and NYSE have jointly issued this Notice to suggest some of the policies and procedures that firms should consider adopting to address these conflicts. As discussed below, the joint guidance provided in this Notice does not address customary charitable giving initiated by member firms or their foundations, solicitations received directly from charitable organizations, nor charitable giving by persons in their individual capacities.

      Questions/Further Information

      Questions concerning this Notice should be directed to Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-8104; or Brant K. Brown, Assistant General Counsel, OGC, RPO, at (202) 728-6927.

      Discussion

      The solicitation of substantial charitable contributions by employees or agents of a customer acting in a fiduciary capacity raises potential conflicts of interest that deserve careful consideration by members.1 This Joint Memorandum is intended to suggest some of the policies and procedures that firms should consider adopting to address these conflicts.2 This guidance does not address charitable giving by persons in their individual capacities.3

      Many of the same concerns that led to the adoption of NYSE Rule 350 (Gifts and Gratuities) and NASD Rule 3060 (Influencing or Rewarding Employees of Others), and the proposal of NYSE Rule 350A4 (Business Entertainment) and NASD IM-30605 (Entertainment of the Employees of Persons who are Customers of a Member) are present when employees of a customer acting in a fiduciary capacity (e.g., employees of an investment company, pension fund or investment manager) solicit substantial charitable contributions6 from members with whom they conduct or intend to conduct business. Making substantial charitable contributions in response to these types of solicitations raises potential conflicts of interest that require members to act carefully, and in a manner consistent with the best interests of the customer.

      To address these conflicts, we encourage members to establish written procedures concerning their charitable giving. The written procedures should take into account a firm's structure and its manner of charitable giving. For example, certain procedures that may be appropriate for firms with a practice of decentralized charitable giving may not be necessary for firms in which all charitable giving is centralized (e.g., approved by the CEO).

      In many cases, a member's procedures could require appropriate approval for charitable contributions that exceed specific dollar thresholds or certain intervals of frequency or that are made by a member's associated person on behalf of the firm. These thresholds could distinguish customary and minor charitable contributions from substantial contributions that could, by their size or frequency, create potential conflicts of interest. Any dollar thresholds established by a member should take into account the nature of the firm's business and its customary practice of charitable giving. Under no circumstances should the threshold for charitable contributions be based upon the level of actual or anticipated business done by the customer soliciting the charitable contribution since that customer is acting in a fiduciary capacity.7

      Members may find that establishing a dollar threshold for charitable contributions resolves many of the potential conflicts raised by charitable solicitations from employees of a customer. However, for requests that exceed the specified thresholds, firms may wish to implement additional procedures, including obtaining specific approval from an appropriate representative of the customer (i.e., a person who is not involved in soliciting the charitable contribution or in conducting business with the member firm), and reviewing the business received from the customer employing the person soliciting the charitable contribution. After being alerted to the request, the customer will be in a position to take necessary steps to ensure that any charitable contribution made by the member in response to the request does not cause the person who made the solicitation to act in a manner contrary to the interests of his or her employer. Such procedures should also recognize the greater potential for a conflict of interest arising from solicitations for contributions on behalf of charities that are closely aligned with the employee making the request (e.g., an organization in which the employee serves as an officer, or a charity sponsored by the employee) rather than those aligned with the ultimate client for whom the employee works.


      1 Members, in this context, are NASD member firms and NYSE member organizations.

      2 This guidance does not address customary charitable giving initiated by members or their foundations (provided such giving does not raise the conflicts addressed below and is not intended to circumvent a firm's procedures in addressing these conflicts), nor does it address direct solicitations from charitable organizations.

      3 However, NASD and NYSE remind firms that they must not seek to circumvent this guidance by making charitable contributions through their employees (or other personnel) in their personal capacity, nor should an employee's (or other personnel's) personal charitable contributions be indirect contributions by the firm.

      4 See SR-NYSE-2006-6.

      5 See SR-NASD-2006-044.

      6 For these purposes, a "charitable contribution" refers to a donation to an organization exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.

      7 No such issue is raised, of course, where a retail customer investing his or her own funds solicits a charitable contribution.

    • 06-20 NASD Implements Changes to the Regulation Filing Applications System; Effective Date: July 3, 2006

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      GUIDANCE

      Short Interest Reporting

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Technology
      Training
      NASD Rule 3360
      Short Interest Reporting
      Short Sales

      Executive Summary

      NASD is issuing this Notice to inform members of changes to the Regulation Filing Applications system, a Web-based system used by members to report, among other things, their monthly short interest positions to NASD. Specifically, NASD is modifying the Regulation Filing Applications system for reporting short interest positions to: (1) reject member submissions of short interest reports for the current reporting month that are submitted prior to the designated settlement date; (2) require that members append an exchange or market code for each issue symbol and short interest position reported; and (3) implement a validation process for all short interest reports to ensure that all exchange/market codes and issue symbols are valid and reject member reports that fail such validation. NASD will make the Regulation Filing Applications test site available with these changes as of June 1, 2006. The changes to the Regulation Filing Applications system are effective July 3, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071; or Jocelyn Mello, NASD Market Regulation, at (240) 386-5091.

      Background and Discussion

      Short Interest Reporting

      NASD Rule 3360 requires each NASD member to maintain a record of "total" short positions in all customer1 and proprietary accounts in NASDAQ securities and OTC equity securities2 (and securities listed on a registered national securities exchange if not reported to another self-regulatory organization) and to regularly report that information in the manner prescribed by NASD. Rule 3360 further requires that NASD members report short positions as of the close of the settlement date designated by NASD and that the data be received by NASD no later than the second business day following the reporting settlement date designated by NASD.3

      Since February 2000, NASD members have been required to report short interest positions using the Shorts section of the Web-based Regulation Filing Applications system (hereinafter "the Shorts system"). During the time the Shorts system has been in place, NASD has noted several data integrity and other issues described in more detail below relating to the validation of issue symbols. To address these issues, NASD is implementing several technological changes to the Shorts system that are effective July 3, 2006.

      Changes to the Regulation Filing Applications System

      Reporting Issue Symbols That Are Active as of the Designated Settlement Date

      NASD requires members to report short interest positions as of the close of a designated settlement date, which is the 15th of each month unless the 15th occurs on a weekend or other non-settlement date, in which case the designated settlement date is the preceding business day.4 NASD is responsible for disseminating short interest data for issues that are active as of the designated settlement date. It is ultimately the responsibility of each member to ensure that it is reporting accurate short interest data, including confirming that issue symbols are valid as of the designated settlement date.

      Currently, the Shorts system permits NASD members to submit short interest reports as early as the trade date that corresponds to the designated settlement date for that month. As a result, the Shorts system will allow members to report short interest positions using issue symbols that are valid on trade date, but may no longer be valid issue symbols as of the designated settlement date. For example, a company's issue symbol on trade date is ABCD; on the designated settlement date, however, the issue symbol changes to EFGH. Although the Shorts system will initially accept a member's filing made on trade date that contains a short interest position for the symbol of ABCD, the Shorts system will not ultimately process the member's filing because the issue symbol is no longer valid on the designated settlement date. The only valid issue symbol in the Shorts system is EFGH. Consequently, each month NASD staff must manually review all issue symbols that change between the trade date and the designated settlement date and note, as applicable, in their monthly validation letters to members any discrepancies.

      To ensure that NASD is collecting members' short interest positions for issue symbols that are valid as of the designated settlement date, the Shorts system will be modified so that it will no longer accept short interest reports for the current reporting month prior to the designated settlement date. Upon implementation of the modified Shorts system, the system will begin accepting filings for the current month as of 8 a.m. ET on the designated settlement date. The filing period for each submission will be validated to determine whether the filing is for the current or a previous month.5 Should a firm attempt to submit a short interest filing through either the File Transfer Protocol (FTP) or upload process prior to the designated settlement date for the current reporting month, the submission will be rejected and members will receive the following message:

      "The system is not prepared to accept any filings for the specified filing period at this point. Please resubmit this filing between the published Settlement Date (not before 8 AM Eastern Time) and the Due Date for the period."

      If a member submits short interest filings by manually entering the data into the Web-based system, the member will not be able to edit the draft filings generated by the Shorts system until 8 a.m. ET on the designated settlement date, at which time the Shorts system will be available to accept such submissions.

      Designating an Exchange or Market Code for Each Issue Symbol

      Currently, the Shorts system does not permit issue symbols to contain special characters, which are commonly used elements in issue symbols. In submitting short interest filings, NASD members must eliminate any special characters (e.g., ABC.D becomes ABCD). As a result, certain short interest positions may be processed and disseminated under the incorrect issue symbol and/or exchange (e.g., exchange-listed security ABC.D is submitted to the Shorts system as ABCD and is identified by the Shorts system as a NASDAQ or OTC equity security ABCD).

      In light of the potential for misreporting and/or improper processing of short interest data, members will be required to designate the appropriate exchange or market for each issue symbol and short position reported to the Shorts system.6 Members will be obligated to ensure that they are identifying the appropriate exchange or market code as of the designated settlement date for each issue symbol reported.

      Members must append the appropriate exchange or market code to the corresponding issue symbol that represents the primary exchange or market in the United States on which the security is listed as of the designated settlement date, or for unlisted securities, the over-the-counter market.7 It is important to note that the exchange or market on which the short sale transactions that comprise the short interest positions were executed is not relevant and should not be considered. The following exchange and market codes are mandatory and must be included by members as part of their reported short interest positions.8

      Exchange/Market Code Exchange/Market
      A New York Stock Exchange
      B American Stock Exchange
      C Chicago Stock Exchange
      D Philadelphia Stock Exchange
      E Pacific Stock Exchange/ArcaEx
      F Boston Stock Exchange
      G National Stock Exchange (f/k/a Cincinnati Stock Exchange)
      I International Securities Exchange
      K CBOE
      R NASDAQ
      S Over-the-Counter
      Z Other

      Validation Process

      For short interest filings submitted through the upload or FTP process, the Shorts system will perform a two-step validation process on both the exchange/market code and the issue symbol.9 First, as noted above, the exchange/market code must be a valid code.10 Second, the issue symbol must not only be a valid issue symbol for the exchange or market designated by the member, but it also must be a valid issue symbol as of the designated settlement date.11 If any of these conditions are not met, an error message will be generated, the short position will be rejected and removed from the filing, and the filing will be placed in "draft" status.12 Once the filing is in "draft" status, a member is required to review its submission and make corrections to the data by the designated due date. A member can correct the data using either one of the following methods. First, a member can make a correction to the data contained in the upload or FTP file it generated for the purposes of reporting its short interest data and resubmit the file through the upload or FTP process into the Shorts system. Second, the member can correct the data manually through the Shorts system by using the "Add Symbols" functionality.

      The same validation process described above also will be applicable to filings that are manually entered into the Shorts system. NASD notes that neither the exchange/market code nor issue symbol fields can be edited while in "draft" status. Therefore, to change either the exchange/market code or issue symbol, members will need to input a value of zero (0) in the "Current Position" column and then re-enter the correct exchange/market code, issue symbol, and current position using the "Add Symbols" functionality.

      Although NASD staff anticipates that these initial validations performed on short interest filings by the Shorts system will result in more accurate submissions, further information requests and analysis by NASD staff will continue to be necessary to ensure that the reported exchange/market code, issue symbol and short positions are accurate.

      Modification to the File Format

      The requirement that members include an exchange/market code will necessitate that members modify the format of the files uploaded or sent via FTP into the Shorts system. Specifically, the records for the short interest data will need to include a field for the exchange/market code.

      To report via the upload or FTP process, the member must create and save an ASCII text file. The file should be created using four types of records. Below is a detailed description of the required file format, including the addition of the exchange/market code.

      Record Type 1—Firm Identification Record

      Record Type 1 must always be the first row in the record submitted to NASD. Members must populate the first field in Record Type 1 with "A1." Members must also populate the SEC number and the firm number fields. These numbers must be correct or the file will be rejected.

      Field Name Type Length Positions Format Description
      1 ID1 CHAR 2 1–2 "A1" Must have the code "A1" to identify the record type.
      2 Firm Name CHAR 30 3–32   Name of the firm reporting the short position.
      3 Firm Number NUMBER 6 33–38   Firm Number (may be the CRD#, NASD# or Broker/Dealer#).
      4 SEC Number NUMBER 5 39–43 XXXXX SEC Number (do not include he "8-" prefix).
      5 NSCC Number NUMBER 4 44–47   NSCC number.
      6 Prepared By CHAR 25 48–72   Name of the person to contact at the firm.

      Record Type 2—Firm Contact Record

      Record Type 2 must always be the second row in the record submitted to NASD. Members must populate the first field in Record Type 2 with "A2."

      Field Name Type Length Positions Format Description
      1 ID1 CHAR 2 1–2 "A2" Must have the code "A2" to identify the record type.
      2 Contact Number NUMBER 12 3–14 nnn-nnn-nnnn Telephone number at firm (include the dashes).
      3 Contact Extension NUMBER 4 15–18   Telephone extension number.
      4 Contact Title CHAR 25 19–43   Title of the Contact Person.
      5 Settlement Date DATE 6 44–49 mmddyy Settlement date.
      6 Trade Date DATE 6 50–55 mmddyy Trade date.
      7 CBOE DEA CHAR 1 56–57 "Y" Enter "Y" if CBOE is the firm's designated examining authority.

      Record Type 3—Short Interest Data

      One record of this type must be created for each short position. Members must populate the first field in this record with the letter "B" followed by a blank space. Record Type 3 will begin at row three.

      Field Name Type Length Positions Format Description
      1 ID3 CHAR 2 1–2 "B" Must have the code "B " (the letter "B" followed by a space) to identify the record type.
      2 Exchange CHAR 1 3   The code supplied should represent the U.S. primary exchange or market on which the security is listed as of the designated Settlement Date.
      3 Symbol CHAR 10 4–13   Symbol for the security, left justified.
      4 Security Name CHAR 30 14–43   Name of the security,left justified.
      5 Position NUMBER 9 44–52   Short position for the security, right justified.

      Record Type 4—Trailer Record

      Record Type 4 must contain data identifying the total number of records in the file. Members must populate the first field in Record Type 4 with "99." Record Type 4 is always the last row in the record.

      Field Name Type Length Positions Format Description
      1 ID4 CHAR 2 1–2 "99" Must have the code "99" to identify the record type.
      2 Total Records NUMBER 5 3–7   Total number of records in the file, including the header records, but excluding the trailer record. This should be right justified.

      Example Short Position Filing:

      A1 ACME SECURITIES, INC 012345099991111JOE SMITH
      A2202-555-1114 VICE PRESIDENT 101598101298
      B RABCD ALPHABET SOUP CO. 000015500
      B BXYZ END OF THE LINE INC. 000009950
      9900004    

      Testing and Implementation of the Changes to the Regulation Filing Applications System

      NASD recognizes that the changes to the Shorts system will require members to make modifications to their systems and processes. Members will have an opportunity to test their program changes as of June 1, 2006 using the Regulation Filing Applications test site, which can be found on NASD's Web site at: https://regfilingtest.nasd.com. For members that encounter technical problems and require assistance, please contact the NASD Help Desk at (800) 321-NASD.

      The changes to the Shorts system are effective July 3, 2006. As such, members must submit short interest reports containing the exchange/market code beginning with the July 2006 filing period.


      1 For purposes of NASD Rule 3360, the term "customer" includes a broker-dealer. Consequently, short positions in accounts held for other broker-dealers must be reported unless the position is otherwise reported to another self-regulatory organization. See Notice to Members 03-08 (January 2003).

      2 On February 3, 2006, the Securities and Exchange Commission (SEC) approved amendments to NASD Rule 3360 that expand the short interest reporting requirements to OTC equity securities. The amended short interest reporting requirements become effective July 3, 2006. See Notice to Members 06-14 (April 2006).

      3 Members are reminded that NASD must receive short interest data for exchange-listed securities no later than 1 p.m., Eastern Time (ET), on the designated due date. Short interest data for NASDAQ and OTC equity securities must be received by NASD no later than 6 p.m., ET, on the designated due date.

      4 A schedule of NASD's designated settlement dates, as well as other relevant dates relating to short interest reporting, can be found on NASD's Web site at www.nasd.com under Regulatory Systems > Regulation Filing Applications > Short Interest Reporting > Schedule of Reporting Dates.

      5 The Shorts system will permit members to submit and/or amend filings for previous filing periods.

      6 This new field requirement is similar to that which currently exists for members that manually input short positions into the Shorts system. For each new issue symbol that is manually added to a filing, the Shorts system requires that members designate an exchange.

      7 For securities that are dually listed, the exchange code should represent the primary U.S. exchange or market on which the security is listed.

      8 All short interest positions reported in NASDAQ-listed securities (currently National Market and NASDAQ Capital Market securities) must be identified with an exchange/market code of "R." All OTC equity securities must be identified with an exchange/market code of "S."

      9 If either an exchange/market code or issue symbol is missing, the entire filing will be rejected.

      10 Members should note that the Shorts system will not validate the issue symbol if the exchange/market code is other than one designated for NASDAQ, Over-the-Counter, or AMEX. Short positions designated with all other exchange/market codes will be compiled and sent to SIAC for distribution to the appropriate exchange or market. Similarly, if the issue symbol is no longer active on the exchange or market designated by a member, the short position will be routed to SIAC.

      11 If a U.S. symbol does not exist for the security (e.g., short interest positions in foreign securities not traded in the U.S.), the member would not be required to report the short interest position to NASD. It is important to note, however, that NASD may require firms to report manually short interest information for these securities upon request.

      12 Members that upload or FTP their short interest reports can view their "error" and "warning" messages using the report posted on the "Job Status" screen of the Shorts system.

    • 06-19 SEC Approves New Rule 3380, Order Entry and Execution Practices; Effective Date: May 25, 2006

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      GUIDANCE

      Trade Shredding

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Senior Management
      Trading
      Market Orders
      Rule 3380
      Trade Shredding

      Executive Summary

      On February 24, 2006, the Securities and Exchange Commission (SEC) approved new Rule 3380, Order Entry and Execution Practices, which prohibits conduct known as "trade shredding."1 Specifically, under the new rule, members and associated persons are prohibited from splitting any order into multiple smaller orders for execution, or any execution into multiple smaller executions for transaction reporting for the primary purpose of maximizing a monetary or in-kind payment to the member or associated persons as a result of the execution of such orders or the transaction reporting of such executions. Rule 3380, as adopted, is set forth in Attachment A of this Notice. The rule becomes effective on May 25, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 974-2974.

      Background and Discussion

      "Trade shredding" is a term used to describe the practice of splitting customer orders for securities into multiple smaller orders (e.g., a 1,000 share order is split into ten 100-share orders) for the primary purpose of maximizing payments or rebates to the member. Among other things, concerns have been raised about market participants increasingly engaging in the practice of trade shredding as a means to increase their share of market data revenues under the joint industry plans (Plans), where a Plan participant has adopted a practice of sharing its Plan revenues with market participants that send it orders.

      To address these concerns, among others, the SEC adopted Regulation NMS, which contains amendments to the current Plan formulas used to allocate Plan income.2 These modifications incorporate a more broad-based measure of a self-regulatory organization's (SRO) contribution to the consolidated trade stream, including both an SRO's quotes and trades, which is intended to reduce the incentives for trade shredding.

      Although these modifications in Plan formulas should reduce the incentives for trade shredding, NASD proposed, and the SEC approved, new Rule 3380 to prohibit such practices. Specifically, new Rule 3380 prohibits members and associated persons from splitting any order into multiple smaller orders for execution or any execution into multiple smaller executions for transaction reporting for the primary purpose of maximizing a monetary or in-kind payment to the member or associated persons as a result of the execution of such orders or the transaction reporting of such executions. For purposes of Rule 3380, "monetary or in-kind amount" includes, but is not limited to, credits, commissions, gratuities, payments for or rebates of fees, or any other payments of value to the member or associated person.

      Rule 3380 becomes effective May 25, 2006.


      1 See Securities Exchange Act Release No. 53371 (February 24, 2006), 71 FR 11008 (March 3, 2006) (File No. SR-NASD-2005-144).

      2 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37469 (June 29, 2005).


      ATTACHMENT A

      New language is underlined.

      3380. Order Entry and Execution Practices

      No member or associated person may engage in conduct that has the intent or effect of splitting any order into multiple smaller orders for execution or any execution into multiple smaller executions for transaction reporting for the primary purpose of maximizing a monetary or in-kind amount to be received by the member or associated person as a result of the execution of such orders or the transaction reporting of such executions. For purposes of this rule, "monetary or in-kind amount" shall be defined to include, but not be limited to, any credits, commissions, gratuities, payments for or rebates of fees, or any other payments of value to the member or associated person.

    • 06-18 SEC Division of Market Regulation Issues Interpretive Guidance Regarding Regulation SHO Close-Out Requirements; Effective Date: May 1, 2006

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      GUIDANCE

      Short Sales

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      Close-Out Requirements
      SEC Regulation SHO
      SEC Rule 203(b)(3)
      Short Sales

      Executive Summary

      NASD is issuing this Notice to highlight recent guidance published by the Securities and Exchange Commission (SEC) relating to the "close-out" requirements under Regulation SHO. Regulation SHO, among other things, imposes uniform delivery requirements on broker-dealers for certain securities that have a substantial level of failures to deliver at a registered clearing agency, referred to as "threshold securities." Regulation SHO requires broker-dealers that are participants of a registered clearing agency (clearing agency participants) to take action to "close-out" failure-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days by purchasing securities of like kind and quantity.

      On March 17, 2006, the SEC Division of Market Regulation published Question and Answer (Q&A) 5.8 providing interpretive guidance relating to the method by which clearing agency participants may apply any reductions to their end-of-day fail-to-deliver positions at the National Securities Clearing Corporation (NSCC) that occur during the applicable 13 consecutive settlement day period. Specifically, the SEC stated that clearing agency participants that choose to apply reductions to their close-out requirements prior to the 13th consecutive settlement day must first apply any reduction to the most recent increase in its fail to deliver position reflected at NSCC. NASD expects that all members will fully implement the methodology set forth in Q&A 5.8 by May 1, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.

      Discussion

      As further detailed in Notices to Members 04-93 (December 2004) and 05-33 (April 2005), on June 23, 2004, the SEC adopted certain provisions of a new short sale regulation, designated Regulation SHO.1 Regulation SHO includes several new provisions relating to short sales, one of which imposes delivery requirements on broker-dealers for certain securities that have a substantial level of failures to deliver at a registered clearing agency, referred to as "threshold securities." Specifically, Rule 203(b)(3) of Regulation SHO requires broker-dealers that are participants of a registered clearing agency to take action to "close-out" failure-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days by purchasing securities of like kind and quantity. If the fail-to-deliver position is not closed out in the requisite time period, the broker-dealer and any broker-dealer for which it clears transactions are prohibited from effecting further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security.

      On March 17, 2006, the staff of the SEC Division of Market Regulation published on its Web site interpretive guidance regarding the close-out requirements under Regulation SHO. Specifically, Q&A 5.8 provides guidance on the method by which clearing agency participants may apply any reductions in their end-of-day fail-to-deliver positions at NSCC that occur during the applicable 13 consecutive settlement day period for purposes of compliance with the Regulation SHO close-out requirements.2 In this interpretive guidance, the SEC provides that, if prior to the 13th consecutive settlement day, the participant chooses to reduce its open fail-to-deliver position and such reduction is reflected in the participant's end-of-day net fail-to-deliver position at NSCC, the participant must first apply the reduction to the most recent increase in its fail-todeliver position reflected at NSCC and then to any increase in its fails position that existed at NSCC on the day preceding that day and so forth until the entire amount of the reduction has been applied. The SEC guidance also provides specific examples to illustrate how to apply such reductions in accordance with the required methodology.

      A copy of the interpretive guidance is available on the SEC's Web site at www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm. NASD encourages members and other interested parties to review the interpretive guidance, as NASD expects that all members will fully implement the methodology set forth in Q&A 5.8 by May 1, 2006.


      1 See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004).

      2 See Division of Market Regulation: Responses to Frequently asked Questions Concerning Regulation SHO, Question and Answer 5.8 (March 17, 2006).

    • 06-17 NASD Extends Compliance Date for Recent Amendments to NASD's Order Audit Trail System Rules; Compliance Date: July 10, 2006

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      GUIDANCE

      OATS Reporting Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      OATS
      Rules 6950–6958
      Rule 9610(a)

      Executive Summary

      In November 2005, NASD issued Notice to Members (NTM) 05-78 announcing Securities and Exchange Commission (SEC) approval of amendments to Rules 6950 through 6957 (OATS Rules) relating to the Order Audit Trail System (OATS), as well as questions and answers regarding the application of the amended OATS reporting requirements. In April 2006, NASD issued NTM 06-15 announcing SEC approval of further amendments to the OATS Rules that expanded NASD's exemptive authority relating to manual orders to include the OATS electronic recording requirements. The compliance date of these amendments was May 8, 2006. NASD is issuing this Notice to advise members that on April 20, 2006, NASD filed a rule change for immediate effectiveness to extend the compliance date of these recent amendments to July 10, 2006.1 The text of Rules 6957(c) and 6958(c), as amended, is set forth in Attachment A.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.

      For technical questions regarding OATS reporting, please contact the OATS Help Desk at (800) 321-NASD. Detailed information relating to OATS may be found on NASD's OATS Web site at www.nasd.com/oats.

      Discussion

      On September 28, 2005, the SEC approved amendments to the OATS Rules.2 The amendments to the OATS Rules: (1) implement the OATS reporting requirements for manual orders (OATS Phase III); (2) provide that members are required to capture and report the time the order is received by the member from the customer for all orders; (3) expand the order transmittal requirements to include orders routed to a member's trading desk or trading department; (4) exclude certain members from the definition of "Reporting Member" for those orders that meet specified conditions and are recorded and reported to OATS by another member; and (5) permit NASD to grant exemptive relief from the OATS reporting requirements for manual orders to members that meet specified criteria.

      On March 30, 2006, the SEC approved further amendments to the OATS Rules that expand NASD's OATS exemptive authority relating to manual orders to include electronic recording requirements.3 As amended, NASD has the authority to grant exemptive relief from the OATS electronic recording and reporting requirements for manual orders to members that meet specified criteria.

      As described in NTMs 05-78 and 06-15, the compliance date of these amendments was scheduled for May 8, 2006. Since approval of these amendments, certain firms and service bureaus have requested that the compliance date of the amended OATS requirements be delayed, noting the significant technological changes required to implement the OATS requirements for manual orders, in particular. In response to the concerns raised by firms and service bureaus, on April 20, 2006, NASD filed a rule change for immediate effectiveness to extend the compliance date to July 10, 2006. NASD believes that the extended effective date will assist firms by providing additional time to ensure that all the necessary system changes can be tested and implemented, thereby helping to ensure the integrity and accuracy of OATS data.

      In addition, as described in NTM 06-15, NASD has granted exemptions from the OATS requirements for a period of six months to those members that meet the specified criteria set forth in Rule 6958. Exemptions granted thus far were scheduled to begin on May 8, 2006 and expire on November 8, 2006. Given the delayed compliance date, all exemptions granted to date will commence on July 10, 2006 and expire on January 10, 2007. Members already granted exemptions need not resubmit an exemption request to extend their exemption to January 10, 2007.


      1 See File No. SR-NASD-2006-052.

      2 See Securities Exchange Act Release No. 52521 (September 28, 2005), 70 FR 57909 (October 4, 2005) (File No. SR-NASD-00-23). See also NTM 05-78 (November 2005).

      3 See Securities Exchange Act Release No. 53580 (March 30, 2006), 71 FR 17529 (April 6, 2006) (File No. SR-NASD-2006-040). See also NTM 06-15 (April 2006).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      6950. Order Audit Trail System

      * * * * *

      6957. Effective Date

      The requirements of the Order Audit Trail System shall be effective in accordance with the following schedule:

      (a) and (b) No Change.
      (c) Manual Orders

      The requirements of the Order Audit Trail System shall be effective on July 10, 2006[six months after publication of the revised OATS Reporting Technical Specifications] relating to SR-NASD-00-23, for all manual orders, provided that firms shall be required to report information item (18) specified in Rule 6954(b) only to the extent such item is available to them.
      (d) No Change.

      * * * * *

      6958. Exemption to the Order Recording and Data Transmission Requirements

      (a) through (b) No Change.
      (c) This Rule shall be in effect until July 10, 2011[May 8, 2011].

    • 06-16 NASD Amends Rule 1013 to Adopt a Standardized Application Form (Form NMA) to be Used by All New Member Applicants; Implementation Date: May 20, 2006

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      New Member Applications

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      New Member Applications
      Rule 1013
      Rule 1014(a)
      Standardized Application Form

      Executive Summary

      NASD is issuing this Notice to inform members and applicants for membership that NASD has amended Rule 1013 (New Member Application and Interview) to adopt a standardized application form, Form NMA, to be used by all new applicants applying for membership to NASD. NASD has also made several technical changes to Rule 1013 and Rule 1014 (Department Decision).

      The proposed rule changes, which were filed with the Securities and Exchange Commission (SEC), became effective upon filing.1 The implementation date of the amendment, which is also the date on which applicants must begin using Form NMA to apply for NASD membership, is May 20, 2006. Attachment A contains the text of the amendment. Attachment B contains a sample Form NMA.

      Questions/Further Information

      Questions regarding this Notice may be directed to Karin Marshall, Membership Manager, Regulation Policy, NASD Department of Member Regulation, at (202) 728-6954.

      Background

      Applying for NASD membership is a comprehensive process requiring the submission of extensive information, considerable attention to detail and a substantial time commitment. Rule 1013 identifies the requirements for submitting a new member application for NASD membership, including a listing of the documents required and a requirement that the applicant submit a "substantially complete" application.2 Failure to submit complete and accurate information in a timely manner can result in the cancellation of an application and the loss of a portion of the application fee paid to NASD.3

      Despite Rule 1013's listing of the requirements for a new member application submission, NASD continues to receive incomplete or inadequate membership applications. These applications may require significant information requests to obtain missing documentation and require a great deal of time and resources to process them appropriately. Additionally, as noted above, if there is insufficient information contained in the original submission for the application, NASD's Department of Member Regulation may determine that the application is not "substantially complete" and reject the application.

      Discussion

      To address these issues and to make the membership application process more efficient, NASD has created a standardized form, Form NMA, to assist new member applicants in the preparation of a complete application package and amended Rule 1013 to require the submission of Form NMA as part of the new membership application. Form NMA does not establish new or additional content requirements, which are already set forth in Rule 1013, but, rather, is a means to assist new member applicants in the preparation of a complete application package. Form NMA is organized according to the 14 individual standards for membership enumerated in Rule 1014 and lists the forms and supporting documentation required in an application submission.

      Additionally, the Form classifies certain information as mandatory for submission with the initial application, including detailed financial and source of capital information, an organizational chart, a completed Form BD, a business plan and written supervisory procedures. If the required information is not received in the initial submission, NASD's Department of Member Regulation may not deem the application as "substantially complete" pursuant to Rule 1013(a)(4) and may reject it. Accordingly, the identified information must be included in the application when it is first submitted and will be reviewed for content by NASD staff before the application can be deemed substantially complete.

      By requiring the submission of the Form NMA with all new membership applications, NASD expects to streamline the application process by creating a more consistent application process and clearly outlining the information that must be submitted to process the application. Form NMA can be accessed directly at www.nasd.com/NMAform. Alternatively, persons can access the form by going to NASD's Web site (www.nasd.com), selecting the tab at the top of the page entitled "Registration & Qualifications" and following the links: Member Firms > How to Become a Member> Forms & Additional Documents. The implementation date of the rule amendment is May 20, 2006. Accordingly, all new membership applications submitted on or after that date must be on Form NMA.


      1 See Exchange Act Release No. 53564 (March 29, 2006); 64 F.R. 16847 (April 4, 2006) (SR-NASD-2006-038). Under Section 19(b) of the Securities Exchange Act of 1934, the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing..

      2 See generally Rule 1013.

      3 See Rule 1013(a)(4) ("If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department may reject the application and deem it not to have been filed... [NASD] shall refund the application fee, less $350, which shall be retained by [NASD] as a processing fee.").


      ATTACHMENT A

      Text of approved rule changes.
      New text is underlined; deleted text is bracketed.

      1013. New Member Application and Interview

      (a) Filing of Application
      (1)—No Change.
      (2) Contents
      An Applicant shall submit an application using NASD Form NMA. The application shall include:
      (A) through (Q) No Change.
      (R) [a Web CRD entitlement request form]an NASD Entitlement Program Agreement and Terms of Use and an NASD Member Firm Account Administrator Entitlement Form[a Member Contact Questionnaire user access request form].
      (3) Electronic Filings

      Upon approval of the Applicant's [Web CRD entitlement request form] NASD Member Firm Account Administrator Entitlement Form, the Applicant shall submit its Forms U4 for each Associated Person who is required to be registered under NASD Rules, any amendments to its Forms BD or U4 and any Form U5 electronically via Web CRD. [Upon approval of the Applicant's membership, the Applicant shall submit any amendments to its Member Contact Questionnaire electronically.]
      (4) through (5) No Change.
      (b) Membership Interview
      (1) through (7) No Change.
      * * * * *

      1014. Department Decision

      (a). Standards for Admission
      (1) through (5) No Change.
      (6) The communications and operational systems that the Applicant intends to employ for the purpose of conducing business with customers and other members are adequate and provide reasonably for business continuity in each area set forth in Rule 1013(a)(2)([F]E)(xii);
      (7) through (14) No change.
      * * * * *
      (b) Not applicable.
      (c) Not applicable.

      ATTACHMENT B

      NASD New Member Application Form (Form NMA)

      I. Contents Of The Membership Application

      NASD's New Member Application Form (Form NMA) is designed to assist Applicants in the preparation of an NASD New Member Application Package. The completed and signed Form, including all required forms and supporting documentation, is to be filed with NASD's Department of Member Regulation at the District Office in the District in which the Applicant intends to have its principal place of business (as defined in Rule 1011(l)). The Form must be accompanied by an application fee of $5,000 for clearing and self-clearing firms or $3,000 for all other firms. A complete listing of registration and examination fees can be found on the NASD Web site.

      II. Using This Form

      This Form references information required by NASD Membership Rules. Some items may not be applicable to the Applicant's specific business plan. Additional documents may be requested once the Staff has an opportunity to review the application.

      PLEASE Note: The Staff will NOT commence review of an application until it is substantially complete. Certain items that are always required to make an application substantially complete are indicated in the right column of the checklist provided on the Form with a "Y." These items must be included in the application when it is first submitted and will be reviewed for content by the Staff prior to deeming an application substantially complete. If an application is not deemed substantially complete, NASD shall refund the application fee, less a $350 processing fee. If the Applicant determines to continue to seek membership, the Applicant must submit a new application and fee. See Rule 1013(a)(4).

      Although only certain items are required to commence processing an application, all of the items indicated below, to the extent relevant to the Applicant's proposed business, are required to be submitted to NASD and will be reviewed before the application can be approved. NASD encourages Applicants to include as much of the required information as possible in the initial application package. Experience shows that applications containing complete information can be processed more quickly, with less need for the Staff to ask for supplemental information. Complete applications also help the Staff gain a prompt understanding of the Applicant's business plan, which facilitates NASD's ability to evaluate whether the Applicant meets the standards for admission to NASD. Applicants are also encouraged to consider consulting with District Office staff in advance of filing an application for membership in cases involving complex or novel business arrangements. Underneath each line item in the space provided, please indicate that the information is enclosed and where it can be found in the application, when it will be forthcoming if it is not enclosed, or an "N /A" and an explanation of why it is not applicable to the application. Each line item in the application must be addressed when the application is first submitted. Applicants may use additional pages as necessary to provide the required information.

      III. Obtaining Online Documents

      Please note that documents available online are highlighted throughout this checklist with hyperlinks. In the interest of a thorough application, it is recommended that Applicants review both How to Become a Member on the NASD Web site, as well as The Guide to Continuing Membership, which contains product and service specific questions and other relevant information that the Applicant should address, as applicable, in its New Member Application.

      IV. Organization

      The Form is organized by reference to the 14 standards for admission set forth in Rule 1014(a). It is strongly recommended that the completed application be organized such that supporting documentation for each standard is separated and identified by tabs for ease of reference and review.

      Documentation or Information Description Required for Initial Package
      Standard 1: The application and all supporting documents are complete and accurate.  

      1. The Applicant must submit a detailed business plan that adequately and comprehensively describes all material aspects of the business that will be, or are reasonably anticipated to be, performed at and after the initiation of business operations. The business plan should also address future business expansion plans, if any, and include the following information:

      Note: The business plan is one of the most important components of the New Member Application. It is the Applicant's responsibility to fully detail and communicate its proposed method of operation, administration, and supervision.

      Y
      A. A detailed description of each business activity to be conducted by the Applicant, including, but not limited to:
      a. Number of markets to be made, if any, the type and volatility of the products, and the anticipated maximum inventory positions.
      b. Any plan to enter into contractual commitments, such as underwritings or other securities-related activities.
      c. Any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and the speculative nature of the products.
      Y
      Response:

       

      B. A list of the types of securities to be offered and sold and the types of retail or institutional customers to be solicited.
      Y
      Response:

       
      C. A description of the methods and media to be employed to develop a customer base and to offer and sell products and services to customers, including the use of the Internet, telephone solicitations, seminars, or mailings.
      Y
      Response:

       
      D. A detailed description of how each of the respective business activities will be effected (e.g., a description of how securities will be bought and sold, and who will be responsible for execution and trade reporting).
      Y
      Response:

       
      E. How transactions will be settled and cleared (e.g., fully disclosed, etc.).
      Y
      Response:

       
      F. The capacity in which the Applicant will act (principal or agency).
      Y
      Response:

       
      G. If the Applicant intends to use e-commerce to effect securities transactions, submit copies of all disclosure documents to be provided to the customer, a description of how accounts will be opened and transactions supervised, and sample screens to be used. The Applicant must provide the staff with access to any Web site the Applicant will use and the URL address.
      Y
      Response:

       
      H. A management organizational chart. This chart should reflect the organizational hierarchy of the firm's management and, at a minimum, should identify by name, title, and CRD number (or Social Security number) the firm's Chief Executive Officer, President, Chief Compliance Officer, key supervising principals, and Financial and Operations Principal ("FinOp").
      Y
      Response:

       
      I. An ownership organizational chart. This chart should reflect the ownership structure of the Applicant, including the percentage of ownership held by each individual or entity. Include a list of all affiliated entities or entities with common ownership. Include a description of the business conducted, officers and directors, and the owners with their corresponding ownership interest in such entities.
      Y
      Response:

       
      J. Copies of all corporate formation documents for Applicant and all control affiliated entities. For example, in the case of a corporation, include the Corporate Resolutions identifying officers/directors/owners and the Articles of Incorporation. In the case of a partnership, the partnership agreement, and in the case of a Limited Liability Company, the operating agreement and certificate of LLC.
       
      Response:

       

      2. The completed Form NMA.

      Y

      Documentation or Information Description Required for Initial Package

      Standard 2: The Applicant and its Associated Persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations.

       
      1. One originally signed and notarized paper Form BD with applicable schedules. Include evidence of request for:
      a. Registration with the Securities and Exchange Commission ("SEC").
      b. Registration with states where firm will conduct business as required by state law.
           Note: Certain states may require additional information for approval. It is the Applicant's responsibility to determine the registration requirements of each state in which the Applicant wishes to register.
      Y
      Response:

       
      2. A list with name and CRD number of each associated person of the Applicant (as defined in Rule 1011(b)). With respect to each proposed associated person include the following:
      a. Title. (Specifically identify the persons who will serve as the Applicant's Executive Representative, AML Compliance Officer, and Chief Compliance Officer.)
      b. CRD Number.
      c. A statement as to whether the individual will be registered as a principal and/or representative with the Applicant.
      d. The registrations and licenses currently held by each individual.
      e. Any registration or licenses the individual intends to obtain and the date by which such examination will be scheduled as well as the anticipated date of completion of the examination.
           Note: Pursuant to Rule 3013, each member must identify a principal to serve as Chief Compliance Officer. Additionally, pursuant to Rule 1013(a)(3), upon arrival of the Applicant's NASD Entitlement Program Agreement and Terms of Use and NASD Member Firm Account Administrator Entitlement Form (see Item 13 under Standard 2), the Applicant shall submit its Forms U4 electronically for each Associated Person who is required to be registered under NASD Rules.
      Y
           Note: Applications for NASD membership should not be submitted until all individuals required to be registered are prepared to complete all examination and qualification requirements. Failure to schedule and successfully complete examinations in a timely manner may result in a significant delay of the application review process, or a lapse or denial of the application. It is strongly suggested that any examination(s) be scheduled within the first 45 days of the application process and that all registration requirements be completed within the first 90 days of the application process.
       
      Response:

       
      3. If the Applicant is seeking a waiver of the two (2) principal requirement in Rule 1021(e), provide a detailed explanation that demonstrates the reason(s) for the waiver. Additionally, provide a contingency plan for situations where the sole General Securities Principal becomes unavailable to carry out his or her responsibilities.
           Note: Each Applicant is required to register two principals and a Financial and Operations Principal. In addition, certain business activities may require additional principal registrations (e.g., options, municipals, etc.). Refer to Rules 1020 and 1030 for appropriate registration of principals and representatives.
       
      Response:

       
      4. A description of duties and responsibilities of any non-registered officers, directors, owners, and control persons. See Rules 10201022 and 1060 and Notice to Members 99-49. Provide an attestation for officers, directors, owners, and control persons who will not participate in the day-to-day securities operations of the Applicant or act in any capacity that would require that these individuals become registered. Sample forms are provided.
       
      Response:

       
      5. One original NASD-approved fingerprint card for each associated person subject to SEC Rule 17f-2.

      OR Corresponding exemption notice(s) pursuant to SEC Rule 17f-2.
           Note: Fingerprint cards must be submitted promptly upon filing an electronic Form U4 for each person applying for