BackText onlyPrint

You need the Flash plugin.

Download Macromedia Flash Player



  • 2005

    • 05-85 SEC Approves a Proposed Rule Change to Revise the Mediation Rules of the NASD Code of Arbitration Procedure; Effective January 30, 2006

      View PDF File

      GUIDANCE

      NASD Code of Arbitration Procedure Mediation Rules

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance Code of Arbitration Procedure
      Mediation

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved a proposed rule change to revise the mediation rules of the NASD Code of Arbitration Procedure (Code) to simplify the language and to reorganize these rules into a separate code for mediations (Mediation Code).1

      The text of the amendment is set forth in Attachment A. The amendment will become effective on January 30, 2006 and will apply to any matters filed in mediation with NASD on or after January 30, 2006.

      Questions/Further Information

      Questions regarding this Notice may be directed to Mignon McLemore, Assistant Chief Counsel, NASD Dispute Resolution, at (202) 728-8151 or mignon.mclemore@nasd.com; or Kenneth Andrichik, Senior Vice President and Director of Mediation and Business Strategies, Dispute Resolution, NASD, at (212) 858-3915 or ken.andrichik@nasd.com.

      Background and Discussion

      The revision of the mediation rules is part of a comprehensive plan to reorganize and simplify the Code. NASD has proposed to reorganize its dispute resolution rules in a more logical, user-friendly way, including creating two separate Codes for customer and industry arbitrations,2 and one for mediations. The proposed rule change establishes a separate Mediation Code by rewriting the mediation rules using plain English, in accordance with the SEC's plain English guidelines.3

      NASD did not make any substantive changes to its current rules governing mediations in the proposed rule change. The Mediation Code does, however, contain a new comprehensive definitions rule, which includes definitions of terms used throughout the Mediation Code. NASD believes that this addition to the Mediation Code will provide useful clarification for parties and mediators. There are no substantive changes to the Mediation Code, and the procedures for filing a matter in mediation remain unchanged.

      Effective Date Provisions

      The amendment described in this Notice will become effective on January 30, 2006. The amendment will apply to any matters filed in mediation with NASD on or after January 30, 2006.


      1 Exchange Act Release No. 52705 (Oct. 31, 2005) (File No. SR-NASD-2004-013), 70 Federal Register 67525 (Nov. 7, 2005).

      2 NASD has filed two proposed rule changes with the SEC to revise the Customer and Industry Portions of the Code. See Securities Exchange Act Rel. No. 34-51856 (June 15, 2005); 70 Fed. Reg. 36442 (June 23, 2005) (Customer Code) and Securities Exchange Act Rel. No. 34-51857 (June 15, 2005); 70 Fed. Reg. 36430 (June 23, 2005) (Industry Code).

      3 NASD intends to renumber the rules in the Mediation Code to be consistent with the Customer Code and Industry Code when they are approved and become effective.


      ATTACHMENT A

      New language is underlined; deletions in brackets.

      Code of Arbitration Procedure

      * * *

      [10400–10407 Mediation Rules]—(Deleted in their entirety.)

      10400. NASD CODE OF MEDIATION PROCEDURE

      10401. Definitions

      Unless otherwise defined in the Code, terms used in the Code and interpretive material, if defined in the NASD By-Laws, shall have the meaning as defined in the NASD By-Laws.

      (a) Board

      The term "Board" means the Board of Directors of NASD Dispute Resolution, Inc.
      (b) Code

      The term "Code" means the NASD Code of Mediation Procedure.
      (c) Director

      The term "Director" in the Rule 10400 Series refers to the Director of Mediation at NASD Dispute Resolution. Unless the Code or any other NASD rule provides otherwise, the term includes NASD staff to whom the Director of Mediation has delegated authority.
      (d) Matter

      The term "matter" means a dispute, claim, or controversy.
      (e) NAMC

      The term "NAMC" means the National Arbitration and Mediation Committee of the Board of Directors of NASD Dispute Resolution, Inc.
      (f) NASD

      Unless the Code specifies otherwise, the term "NASD" includes NASD, Inc., and NASD Dispute Resolution, Inc.
      (g) Reserved.
      (h) Reserved.
      (i) Submission Agreement

      The term "Submission Agreement" means the NASD Mediation Submission Agreement. The NASD Mediation Submission Agreement is a document that parties must sign at the outset of a mediation in which they agree to submit to mediation under the Code.

      10402. Applicability of Code

      The Code applies to any matter submitted to mediation at NASD.

      10403. National Arbitration and Mediation Committee

      (a) Pursuant to Part V(C)(1)(b) of the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries ("Delegation Plan"), the Board shall appoint a National Arbitration and Mediation Committee ("NAMC").

      (1) The NAMC shall consist of no fewer than ten and no more than 25 members. At least 50 percent of the NAMC shall be Non-Industry members.
      (2) The Chairperson of the Board shall name the Chairperson of the NAMC.
      (b) Pursuant to the Delegation Plan, the NAMC shall have the authority to recommend rules, regulations, procedures and amendments relating to arbitration, mediation, and other dispute resolution matters to the Board. All matters recommended by the NAMC to the Board must have been approved by a quorum, which shall consist of a majority of the NAMC, including at least 50 percent of the Non-Industry committee members. If at least 50 percent of the Non-Industry committee members are either (i) present at or (ii) have filed a waiver of attendance for a meeting after receiving an agenda prior to such meeting, the requirement that at least 50 percent of the Non-Industry committee members be present to constitute the quorum shall be waived. The NAMC has such other power and authority as is necessary to carry out the purposes of this Code.
      (c) The NAMC may meet as frequently as necessary, but must meet at least once a year.

      10404. Director of Mediation

      The Board shall appoint a Director of Mediation to administer mediations under the Code. The Director will consult with the NAMC on the administration of mediations, as necessary.

      The Director may delegate his or her duties when appropriate, unless the Code provides otherwise.

      10405. Mediation Under the Code

      (a) Mediation under the Code is voluntary, and requires the written agreement of all parties. No party may be compelled to participate in a mediation or to settle a matter by NASD, or by any mediator appointed to mediate a matter pursuant to the Code.
      (b) If all parties agree, any matter that is eligible for arbitration under the NASD Code of Arbitration Procedure, or any part of any such matter, or any dispute related to such matter, including procedural issues, may be submitted for mediation under the Code.
      (c) A matter is submitted to mediation when the Director receives an executed Submission Agreement from each party.
      (d) The Director shall have the sole authority to determine if a matter is eligible to be submitted for mediation.

      10406. Effect of Mediation on Arbitration Proceedings

      (a) Unless the parties agree otherwise, the submission of a matter for mediation will not stay or otherwise delay the arbitration of a matter pending at NASD. If all parties agree to stay an arbitration in order to mediate the matter, the arbitration will be stayed, notwithstanding any provision to the contrary in this Code or any other NASD rule.
      (b) If mediation is conducted through NASD, no adjournment fees will be charged for staying the arbitration in order to mediate.

      10407. Mediator Selection

      (a) A mediator may be selected:
      • By the parties from a list supplied by the Director;


      • By the parties from a list or other source of their own choosing; or


      • By the Director if the parties do not select a mediator after submitting a matter to mediation.
      (b) For any mediator assigned or selected from a list provided by NASD, the parties will be provided with information relating to the mediator's employment, education, and professional background, as well as information on the mediator's experience, training, and credentials as a mediator.
      (c) Any mediator selected or assigned to mediate a matter shall comply with the provisions of Rule 10312(a), (b), and (c) of the NASD Code of Arbitration Procedure, unless, with respect to a mediator selected from a source other than a list provided by NASD, the parties elect to waive such disclosure.
      (d) No mediator may serve as an arbitrator of any matter pending in NASD arbitration in which he served as a mediator; nor may the mediator represent any party or participant to the mediation in any subsequent NASD arbitration relating to the subject matter of the mediation.

      10408. Limitation on Liability

      NASD, its employees, and any mediator named to mediate a matter under the Code shall not be liable for any act or omission in connection with a mediation administered under the Code.

      10409. Mediation Ground Rules

      (a) The following Ground Rules govern the mediation of a matter. The parties to a mediation may agree to amend any or all of the Ground Rules at any time. The Ground Rules are intended to be standards of conduct for the parties and the mediator.
      (b) Mediation is voluntary and any party may withdraw from mediation at any time prior to the execution of a written settlement agreement by giving written notice of withdrawal to the mediator, the other parties, and the Director.
      (c) The mediator shall act as a neutral, impartial, facilitator of the mediation process and shall not have any authority to determine issues, make decisions or otherwise resolve the matter.
      (d) Following the selection of a mediator, the mediator, all parties and their representatives will meet in person or by conference call for all mediation sessions, as determined by the mediator or by mutual agreement of the parties. The mediator shall facilitate, through joint sessions, caucuses and/or other means, discussions between the parties, with the goal of assisting the parties in reaching their own resolution of the matter. The mediator shall determine the procedure for the conduct of the mediation. The parties and their representatives agree to cooperate with the mediator in ensuring that the mediation is conducted expeditiously, to make all reasonable efforts to be available for mediation sessions, and to be represented at all scheduled mediation sessions either in person or through a person with authority to settle the matter.
      (e) The mediator may meet with and communicate separately with each party or the party's representative. The mediator shall notify all other parties of any such separate meetings or other communications.
      (f) The parties agree to attempt, in good faith, to negotiate a settlement of the matter submitted to mediation. Notwithstanding that a matter is being mediated, the parties may engage in direct settlement discussions and negotiations separate from the mediation process.
      (g) Mediation is intended to be private and confidential.

      (1) The parties and the mediator agree not to disclose, transmit, introduce, or otherwise use opinions, suggestions, proposals, offers, or admissions obtained or disclosed during the mediation by any party or the mediator as evidence in any action at law, or other proceeding, including a lawsuit or arbitration, unless authorized in writing by all other parties to the mediation or compelled by law, except that the fact that a mediation has occurred shall not be considered confidential.
      (2) Notwithstanding the foregoing, the parties agree and acknowledge that the provisions of this paragraph shall not operate to shield from disclosure to NASD or any other regulatory authority, documentary or other information that NASD or other regulatory authority would be entitled to obtain or examine in the exercise of its regulatory responsibilities.
      (3) The mediator will not transmit or otherwise disclose confidential information provided by one party to any other party unless authorized to do so by the party providing the confidential information.

      10410. Mediation Fees

      (a) Filing Fees: Cases Filed Directly in Mediation

      Each party to a matter submitted directly to a mediation administered under the Code must pay an administrative fee to NASD in the amounts indicated in the schedule below, unless such fee is specifically waived by the Director.
      Amount in Controversy Customer and Associated
      Person Fee
      Member Fee
      $.01–$25,000 $ 50 $150
      $25,000.01–$100,000 $150 $300
      Over $100,000 $300 $500
      (b) Filing Fees: Cases Initially Filed in Arbitration

      When a matter is initially filed in arbitration and subsequently submitted to mediation under the Code, each party must pay an administrative fee to NASD in the amounts indicated in the schedule below, unless such fee is specifically waived by the Director.
      Amount in Controversy Customer and Associated
      Person Fee
      Member Fee
      $.01–$25,000 $ 0 $ 0
      $25,000.01–$100,000 $100 $150
      Over $100,000 $250 $500
      (c) Mediator Fees and Expenses

      The parties to a mediation administered under the Code must pay all of the mediator's charges, including the mediator's travel and other expenses. The charges shall be specified in the Submission Agreement and shall be apportioned equally among the parties unless they agree otherwise. Each party shall deposit with NASD its proportional share of the anticipated mediator charges and expenses, as determined by the Director, prior to the first mediation session.

      * * *

    • 05-84 NASD Announces Election Results for the District Committee for District 7

      View PDF File

      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections

      Executive Summary

      Through this Notice, NASD announces the results of the contested election for membership on the District Committee for District 7. Six candidates were seeking to fill the three open seats on the District Committee for District 7. Three of the candidates were nominated by the District Nominating Committee for District 7. Three additional candidates satisfied the requirements of Article VIII of the By-Laws of NASD Regulation to contest the election.

      The Executive Representative of each NASD member eligible to vote in District 7 was asked to vote for up to three of the six candidates listed on the ballot, and to return the ballot postmarked on or before December 5, 2005. The ballots were counted on December 9, 2005 at the District 7 Atlanta Office by an independent Inspector of Elections. It was determined that the three individuals identified in Attachment A received the largest number of votes cast and were therefore declared elected. The newly elected members of the District Committee for District 7 will serve until January 2009.

      Questions/Further Information

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


      ATTACHMENT A

      District 7

      Daniel J. Stefek, District Director

      One Securities Centre, Suite 500
      3490 Piedmont Rd., NE
      Atlanta, GA 30305-9290
      (404) 239-6100

      Georgia, North Carolina and South Carolina

      Mitchell C. Atkins, District Director

      2500 N. Military Trail
      Suite 302
      Boca Raton, FL 33431
      (561) 443-8000

      Florida, Puerto Rico, the Canal Zone and the Virgin Islands

      District Committee for District 7—Incoming Members

      John B. Busacca North American Clearing, Inc. Longwood, FL
      Marc A. Ellis GunnAllen Financial, Inc. Tampa, FL
      Ronald J. Kovack Kovack Securities, Inc. Fort Lauderdale, FL

    • 05-83 NASD Notice of Meeting and Proxy

      View PDF File

      INFORMATIONAL

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives Board Elections

      Executive Summary

      The Annual Meeting of Members of NASD will be held on February 3, 2006 at 10 am in the NASD Visitors Center, 1735 K Street, NW, in Washington, DC. The purpose of the meeting is to conduct the election of Governors to the NASD Board. Members can raise other topics for discussion by properly notifying NASD of these topics.1 The record date for the Annual Meeting is the close of business on December 29, 2005.

      It is important that all members be represented at the Annual Meeting. Members are urged to vote in the election of Board members using one of the methods described below. In order for a proxy to be considered valid, it must be signed by the executive representative of a member firm eligible to vote in the election.

      Board of Governors Election

      There are four vacancies to be filled at this meeting: two Industry governorships, one of which is required by the NASD By-Laws to be filled by a representative of a regional retail or independent financial planning member firm2; one Non-Industry governorship, which is required by the NASD By-Laws to be filled by a representative of an issuer of investment company shares or an affiliate of such an issuer3; and one Public governorship. Attachment A lists the persons nominated by the NASD National Nominating Committee (NNC) and those persons who, pursuant to Section 10 of Article VII of the NASD By-Laws i) presented the requisite number of petitions in support of their nomination; and ii) have been certified by the Secretary of NASD as satisfying the classification of the governorship to be filled.

      The nominees elected will serve for terms specified in Attachment A. Attachment B includes the biographies of the NNC's nominees. Attachment C includes the biographies of the nominees by petition. Attachment D contains the names of the current Board of Governors.

      Since this proxy mailing coincides with the year-end holiday season, it is anticipated that a second proxy document will be mailed, followed by telephone reminders during the period between January 6, 2006 and February 2, 2006. This will ensure that sufficient proxies are received to constitute the Annual Meeting quorum requirements of Section 215(c) of Title 8 of the General Corporation Law of the State of Delaware, as well as ensure broad participation in the election by NASD members who are eligible to vote.

      Proxy Submission Methods

      Members will be able to submit a proxy using either of the following methods:

      • U.S. mail


      • Internet

      The enclosed proxy contains detailed instructions on the proxy submission procedures.

      Questions/Further Information

      Questions regarding this Notice may be directed to:

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary
      1735 K Street, NW
      Washington, DC 20006-1500
      (202) 728-8062

      ATTACHMENT A

      The following persons have been nominated by the National Nominating Committee, or are candidates by virtue of having obtained the requisite number of member signatures (Nominees by Petition), to serve on the NASD Board of Governors for a term of three years or until their successors are duly elected or qualified. Terms of office run from February 3, 2006 to January 2009.

      INDUSTRY

      For the Industry candidates specified below, members are asked on the proxy to vote for up to two of the candidates listed. In the event that a member casts a vote for more candidates than there are vacancies on the Board, such proxy will not be counted and will be deemed invalid. Please note that at least one of the Industry candidates elected must be a representative of a regional retail or independent financial planning member firm. The candidates eligible for that position are indicated with an asterisk (*).

      NAME TERM
      National Nominating Committee Nominees
      David A. DeMuro
      Managing Director, Director of Global Compliance and Regulation
      Lehman Brothers, Inc.
      2006–2009
      John S. Simmers*
      Chief Executive Officer
      ING Advisors Network
      2006–2009
      * Representative of a Regional Retail or Independent Financial Planning Member Firm
      Nominees by Petition
      Richard L. Goble
      Founder
      North American Clearing, Inc.
      2006–2009
      Brian J. Kovack*
      President
      Kovack Securities, Inc.
      2006–2009
      * Representative of a Regional Retail or Independent Financial Planning Member Firm

      NON-INDUSTRY

      For the Non-Industry candidate specified below, members are asked on the proxy to vote for the candidate listed.

      NAME TERM
      National Nominating Committee Nominee
      John J. Brennan
      Chairman and CEO
      The Vanguard Group
      2006–2009
      (representative of an issuer of investment company shares)

      PUBLIC

      For the Public candidates specified below, members are asked on the proxy to vote for one of the candidates listed. In the event that a member casts a vote for more than one candidate (there being only one Public vacancy on the Board), such proxy will not be counted and will be deemed invalid.

      NAME TERM
      National Nominating Committee Nominee
      Josh S. Weston
      Chairman and CEO (retired)
      Automatic Data Processing, Inc.
      2006–2009
      Nominee by Petition
      Tyler F. Dedman 2006–2009
      Rear Admiral (retired)
      United States Navy
      2006–2009

      ATTACHMENT B

      Profiles of NASD National Nominating Committee Board Nominees

      Nominees for Industry Governor

      David A. DeMuro

      David A. DeMuro served as Chair of the National Adjudicatory Council in 2001 and 2002. He was first elected to the NASD Board of Governors for a term beginning January 2003 as an Industry Governor representing a national retail firm. Mr. DeMuro is Managing Director, Director of Global Compliance and Regulation at Lehman Brothers. He joined Lehman Brothers in 1984. Prior to that, he held various positions with the Securities and Exchange Commission in Detroit, Chicago, Los Angeles and Washington, D.C. Mr. DeMuro is a current member of the NASD Membership Committee and the NASD Licensing and Registration Council. He is a member of the Executive Committee of the Securities Industry Association's Compliance and Legal Division and served as Chairman of the Securities Industry/Regulatory Council on Continuing Education. He currently serves on the NYSE's content committee for the Continuing Education Regulatory Element supervisor's program. He is also a member of the Compliance Advisory panels of the NYSE and CBOE, and of the Board of Trustees of the Securities Industry Institute, a joint venture of the Securities Industry Association and the Wharton School of the University of Pennsylvania. He is on the advisory board of The Journal of Investment Compliance, a publication of Institutional Investor, Inc. Mr. DeMuro is also a member of the Board of Trustees of the Theta Xi Fraternity Foundation. He holds a B.A. from the University of Michigan and a J.D. from the University of Notre Dame.

      John S. Simmers

      John S. Simmers is Chief Executive Officer of ING Advisors Network. In 1983, he co-founded Financial Network Investment Corporation, a leading independent broker-dealer firm, where he served as Chief Operating Officer and as a member of its Board of Directors. Mr. Simmers also served as Chief Operating Officer for a national independent broker-dealer firm and in a management capacity for NASD. He is a former President and Director of the California Association of Independent Broker Dealers (CAIBD); a former member of the Investment Adviser and Independent Firm Committees for the Securities Industry Association (SIA); and served on a number of committees for the Financial Planning Association (FPA). For NASD, he was vice co-chairman of the District 2 South Business Conduct Committee as well as a member of numerous regional and national committees. Currently, Mr. Simmers serves on the Board of Directors for the Financial Services Institute (FSI). He is a graduate of the Ohio State University.

      Nominee for Non-Industry Governor

      John J. Brennan

      John J. Brennan is Chairman and Chief Executive Officer, and a member of the Board of Directors of each of the mutual funds in the Vanguard Group. Mr. Brennan joined Vanguard in July 1982. He was elected President in 1989, Chief Executive Officer in 1996 and Chairman of the Board in 1998. Prior to his career at Vanguard, Mr. Brennan had been employed at S.C. Johnson & Son in Racine, Wisconsin and the New York Bank of Savings. Mr. Brennan is the past Chairman of the Investment Company Institute and is a Trustee of the United Way of America. He graduated from Dartmouth College in 1976 with an AB degree, and received an MBA from the Harvard Business School in 1980.

      Nominee for Public Governor

      Josh Weston

      Josh Weston is the former Chairman and CEO of Automatic Data Processing, Inc. (ADP) and currently is Honorary Chairman of ADP. Mr. Weston has been with ADP in various management positions since 1970. Prior to this, he worked at J. Crew's predecessor. Mr. Weston currently serves on the Boards of Russ Berrie & Co., Inc., Gentiva Health Services and J. Crew. He is also active on numerous pro bono and Advisory Boards. Mr. Weston is a graduate of the City College of New York and the University of New Zealand, where he received a Master's degree in economics while on a Fulbright Scholarship. He holds five Honorary Doctorate degrees.


      ATTACHMENT C

      Profiles of Board Nominees by Petition

      Nominees for Industry Governor

      Richard L. Goble

      Richard L. Goble is the founder and principal shareholder of North American Clearing, Inc., a clearing firm providing back-office clearing and securities executions to approximately 45 small-to-medium sized broker-dealers. In 1990, he founded, with $10,000, an Introducing Discount Broker-Dealer, which became a successful online trading firm and an Independent Retail Branch firm.

      In 1995, using the money generated from the retail firm, Mr. Goble founded North American Clearing as an equity execution and Correspondent Clearing Firm. North American Clearing is serving broker-dealers in all fifty states and Puerto Rico. From 1992 until the present, Mr. Goble has been leading the way for new and advanced technology for online trading, self-clearing technology for introducing broker-dealers, and accounting software for Independent Retail Branch Offices. Mr. Goble has worked in the securities industry for approximately 20 years.

      Mr. Goble is the past President of the Florida Securities Dealers Association and currently sits on the Securities Industry Association Clearing Committee.

      Mr. Goble attended The Wharton School in 1999 for the Directors Institute, and in 2000 for the Mergers and Acquisitions Program. He holds a Bachelor of Science Degree from Wright State University.

      Brian J. Kovack

      Brian J. Kovack is co-Founder and President of Kovack Securities, Inc., a capacity in which he has served since 1998. From 1996 to 1998, Mr. Kovack was a financial planner where he gained expertise in gift, income and estate taxation, and provided advice regarding the tax advantages of limited partnerships, reverse split-dollar and charitable remainder trusts.

      Mr. Kovack participated in the NASD Institute-Wharton Certificate Program and earned the Certified Regulatory and Compliance Professional (CRCP) designation in 2004.

      He also earned Master of Accounting and Juris Doctor (J.D.) degrees in 2000 from Nova Southeastern University, where he was the founder and first graduate of the joint JD/MACC Program. Mr. Kovack is a Member of the Florida Bar, having been admitted in September 2000.

      Mr. Kovack received a Bachelor of Science in Finance from the University of Florida while also playing varsity football earning two Letters, and SEC Academic Honor Roll awards.

      Mr. Kovack holds the NASD Series 7, 24, 27, 53, 63 and 65 licenses while also licensed to sell life, health, variable annuities and real estate. He also serves as an NASD Dispute Resolution arbitrator.

      Mr. Kovack is a licensed commercial helicopter pilot with the Federal Aviation Administration (FAA) and a licensed 50-ton captain with the United States Coast Guard.

      Nominee for Public Governor

      Tyler F. Dedman

      Tyler F. Dedman is a retired Rear Admiral of the United States Navy. Since 1983, Mr. Dedman has been employed as a licensed insurance investigator and claims adjustor where, in coordination with the Federal Aviation Administration and the National Transportation Safety Board, he investigates aviation accidents and adjusts aviation claims for major aviation insurers. From 1980 to 1982, Mr. Dedman served as Commander, Iberian Atlantic Area where he directed NATO forces. From 1978 to 1980, he served as Superintendent, U.S. Naval Postgraduate School. From 1974 to 1978, Mr. Dedman served as Deputy Chief of Naval Education and Training where he was Deputy to the Commander of all naval training and education. From 1971 to 1974, he served as Assistant VCNO/Director of Naval Administration where he functioned as a Chief of Staff to the Vice Chief of Naval Operations.

      Mr. Dedman is past-President of the Association of Naval Aviation, Central Florida. He also served as Chairman of the Editorial Board of the U.S. Naval Institute from 1978 to 1980.

      Mr. Dedman completed the Advanced Management Program at the Harvard Business School in 1969 and an MSE from Princeton University in 1957. He also earned a Bachelor of Science in Aero Engineering from the U.S. Naval Postgraduate School and a Bachelor of Science from the U.S. Naval Academy.


      ATTACHMENT D

      Current Board of Governors

      Governors with Terms Expiring in February 2006

      INDUSTRY
      David A. DeMuro Managing Director, Director of Global Compliance and Regulation, Lehman Brothers, Inc. (representative of a national retail firm)
      M. LaRae Bakerink* Chief Executive Officer, WBB Securities, LLC
      Brian T. Shea4 Chief Operating Officer, Pershing LLC (Chair of the National Adjudicatory Council)
      NON-INDUSTRY
      John J. Brennan Chairman and CEO, The Vanguard Group (representative of an issuer of investment company shares)
      Eugene M. Isenberg* Chairman and CEO, Nabors Industries, Inc.
      PUBLIC
      Kenneth M. Duberstein* Chairman and CEO, The Duberstein Group, Inc.

      * Not eligible for re-election

      Governors with Terms Expiring in January 2007

      INDUSTRY
      William C. Alsover, Jr.* Chairman, Centennial Securities Company, Inc. (representative of an NASD member having not more than 150 registered persons)
      Judith R. MacDonald5 Managing Director, Rothschild, Inc. (Chair of the National Adjudicatory Council)
      PUBLIC
      Charles A. Bowsher Former Comptroller General of the United States
      Joel Seligman President, University of Rochester
      Sharon P. Smith* Visiting Fellow in the ILR School at Cornell University

      * Not eligible for re-election

      Governors with Terms Expiring in January 2008

      INDUSTRY
      John W. Bachmann* Senior Partner, Edward D. Jones & Company
      Richard F. Brueckner* Chief Executive Officer, Pershing LLC (representative of a firm that provides clearing services to other NASD members)
      Raymond A. Mason6* Chairman and CEO, Legg Mason, Inc.
      NON-INDUSTRY
      William H. Heyman Vice Chairman and Chief Investment Officer, The St. Paul Travelers Companies, Inc. (representative of an insurance company)
      PUBLIC
      James E. Burton* Chief Executive Officer, World Gold Council
      Sir Brian Corby* Chairman (retired), Prudential Corporation plc
      John Rutherfurd, Jr.* Chairman and CEO (retired), Moody's Corporation

      * Not eligible for re-election


      1 Pursuant to Sections 1 and 3(b) of Article XXI of the NASD By-Laws, an NASD member may properly bring any other business before the Annual Meeting by giving timely notice in writing to the Secretary of NASD. In addition, the member must be an NASD member at the time of the delivery of such notice, and the other business must be a proper matter for member action. To be timely, a member's notice must be delivered to the Secretary at NASD's principal executive offices (the address is listed above) within 25 days after the date of this notice. The member's notice must offer a brief description of the other business, any material interest of the member in such business, and the reasons for conducting such business at the Annual Meeting.

      2 Pursuant to Section 4(a) of Article VII of the NASD By-Laws, Governors elected by the members of NASD must include a representative of a regional retail or independent financial planning member firm. The National Nominating Committee has nominated John S. Simmers to serve on the Board as a representative of an independent financial planning member firm. Brian J. Kovack, a nominee by petition, also qualifies to fill this position.

      3 Pursuant to Section 4(a) of Article VII of the NASD By-Laws, Governors elected by the members of NASD must include a representative of an issuer of investment company shares or an affiliate of such an issuer.

      4 The Chair of the National Adjudicatory Council serves a one-year term on the NASD Board. Judith R. MacDonald will succeed Mr. Shea.

      5 See note 4 (above).

      6 As a result of the completion of the Legg Mason/Citigroup transaction on December 1, 2005, Mr. Mason no longer occupies the position on the NASD serving as a representative of a regional retail or independent financial planning member firm. Mr. Mason retains his classification as an Industry Governor and will continue to serve on the NASD Board in this capacity until the expiration of his term.

    • 05-82 SEC Approves Amendments to Arbitration Fees Applicable to Certain Statutory Employment Discrimination Claims; Effective Date: January 17, 2006

      View PDF File

      INFORMATIONAL

      Statutory Employment Discrimination Arbitration Fees

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance Arbitration Fees

      Executive Summary

      On October 24, 2005, the Securities and Exchange Commission (SEC) approved an amendment to the fee schedule for certain statutory employment discrimination claims.1 Under the new fee schedule, a current or former associated person who brings a statutory employment discrimination claim that is subject to a predispute arbitration agreement will pay no more than a $200 filing fee at the time that the claim is filed. The member that is a party to such a statutory employment discrimination arbitration proceeding will pay the remainder of the filing fee, if any, as well as all forum fees.

      The text of the amendment is set forth in Attachment A.

      The amendment will become effective on January 17, 2006, and will apply to all claims filed on or after that date.

      Questions/Further Information

      Questions regarding this Notice may be directed to John D. Nachmann, Counsel, NASD Dispute Resolution, at (202) 728-8273 or john.nachmann@nasd.com.

      Background and Discussion

      The Rule 10210 Series of the NASD Code of Arbitration Procedure (Code) contains special procedural rules applicable to the arbitration of employment discrimination claims. The Rule 10210 Series, however, does not provide a separate fee schedule for employment discrimination claims. Rather, Rule 10205, which details the schedule of fees for industry and clearing controversies, provides that an associated person shall pay the non-refundable filing fee and hearing session deposit in the amount specified for customer claimants in Rule 10332. Consequently, associated persons who bring statutory employment discrimination claims pay the schedule of fees set forth in Rule 10332, which are based on the dollar value of the claim.

      Beginning in the 1990s, state and federal courts considered whether employers could require mandatory arbitration of statutory employment discrimination claims and then require the employee to pay all or part of the arbitrators' fees. Specifically, the courts disagreed as to whether requiring claimants with federal statutory claims to pay arbitral forum fees and expenses would prevent them from effectively vindicating their claims.

      In order to ensure that those associated persons who are required by their employers to arbitrate statutory employment discrimination claims do not face financial barriers to effectively vindicating such claims, NASD has revised its arbitration fee schedule. Specifically, a current or former associated person who brings a statutory employment discrimination claim that is subject to a predispute arbitration agreement2 will pay no more than a $200 filing fee (which is non-refundable) at the time that the associated person files such a claim.3 The member that is a party to a statutory employment discrimination arbitration proceeding will pay the remainder of the filing fee, if any, as well as all forum fees. The $200 fee is meant to be comparable to what an employee would pay to file a similar claim in court.

      While the filing and forum fees will not be subject to allocation by the arbitrator(s), the panel will have the ability, as it does currently under the Code, to allocate among the parties the various costs associated with arbitration, including costs for the adjournment of hearings (Rule 10319); the production of documents (Rules 10321 and 10322); the appearance of witnesses (10322); and the recording of proceedings (Rule 10326). In addition, arbitrators will still have the ability to allocate attorneys' fees, in accordance with applicable law, as currently provided for in Rule 10215.


      1 Securities Exchange Act Release No. 52658 (October 24, 2005), 70 FR 62362 (October 31, 2005) (File No. SR-NASD-2005-046).

      2 The new rule applies only to disputes that are subject to a predispute arbitration agreement. As provided in Rule 10201(b), a claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated merely because an associated person signed the Form U4. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. The regular fee schedule set forth in Rule 10332 continues to apply to claims that are not subject to a predispute arbitration agreement. Thus, if a member firm does not require its employees to arbitrate employment disputes, but the employee chooses to file a statutory employment discrimination claim in arbitration (and the firm agrees to arbitrate), the employee will be subject to the regular fee schedule.

      3 As previously mentioned, associated persons who have statutory employment discrimination claims currently pay the filing fees and hearing session deposits provided in Rule 10332 at the time that they file a claim. These charges, which are based on the amount of the claim, range from $25 to $600 for filing fees and from $25 to $1,200 for hearing session deposits. Under the new fee schedule, the filing fee will continue to be based on the amount of the claim as set forth in Rule 10332, but will be capped at $200. Thus, for example, an associated person who files a statutory employment discrimination claim requesting damages of $4,000 will pay a $50 filing fee, while the filing fee for an associated person with a $4 million claim will be $200. Hearing session deposits will no longer be required under the new fee schedule.


      ATTACHMENT A

      New text is underlined.

      10210. Statutory Employment Discrimination Claims

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

      * * * * *


      10217. Fees

      (a) For any claim of statutory employment discrimination submitted to arbitration that is subject to a predispute arbitration agreement, a party who is a current or former associated person shall pay a non-refundable filing fee according to the schedule of fees set forth in Rule 10332, provided that:

      (1) In no event shall such a person pay more than $200 for a filing fee;
      (2) A member that is a party to such an arbitration proceeding under this rule shall pay the remainder of all applicable arbitration fees set forth in Rule 10332; and
      (3) No party shall be required to remit a hearing session deposit.
      (b) The arbitration fees described in paragraph (a)(2) are not subject to allocation in the award. The panel, however, may assess to a party who is a current or former associated person those costs incurred under Rules 10319, 10321, 10322, and 10326.

    • 05-81 2006 Trade Date — Settlement Date Schedule

      View PDF File

      INFORMATIONAL

      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:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market® and the securities exchanges will be closed on Monday, January 16, 2006, 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. 10 Jan. 13 Jan. 18
      11 17 19
      12 18 20
      13 19 23
      16 Markets Closed
      17 20 24

      Presidents' Day:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, February 20, 2006, 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. 14 Feb. 17 Feb. 22
      15 21 23
      16 22 24
      17 23 27
      20 Markets Closed
      21 24 Feb. 28

      Good Friday:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market and the securities exchanges will be closed on Good Friday, April 14, 2006. "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 10 April 13 April 18
      11 17 19
      12 18 20
      13 19 21
      14 Markets Closed
      17 20 24

      Memorial Day:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, May 29, 2006, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      May 23 May 26 May 31
      24 30 June 1
      25 31 June 2
      26 June 1 5
      29 Markets Closed
      30 June 2 6

      Independence Day:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market and the securities exchanges will be closed on Tuesday, July 4, 2006, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      June 28 July 3 July 6
      29 5 7
      30 6 10
      July 3 7 11
      4 Markets Closed
      5 10 12

      Labor Day:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, September 4, 2006, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Aug. 29 Sept. 1 Sept. 6
      30 5 7
      31 6 8
      Sept. 1 7 11
      4 Markets Closed
      5 8 12

      Columbus Day:

      Trade Date—Settlement Date Schedule

      The schedule of trade dates—settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 9, 2006. On this day, The NASDAQ Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date Settlement Date Reg. T Date*
      Oct. 3 Oct. 6 Oct. 10
      4 10 11
      5 11 12
      6 12 13
      9 12 16
      10 13 17

      Note:

      October 9, 2006, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on Monday, October 9, will be combined with transactions made on the previous business day, October 6, for settlement on October 12. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sellouts, as provided in the Uniform Practice Code, will not be made and/or exercised on October 9.

      Thanksgiving Day:

      Trade Date—Settlement Date Schedule

      The schedule of trade dates–settlement dates below reflects the observance of the financial community of Thanksgiving Day, Thursday, November 23, 2006. All securities markets will be closed on Thursday, November 23, 2006, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 17 Nov. 22 Nov. 27
      20 24 28
      21 27 29
      22 28 30
      23 Market Closed
      24 29 Dec. 1

      Christmas Day and New Year's Day:

      Trade Date—Settlement Date Schedule

      The NASDAQ Stock Market and the securities exchanges will be closed on Monday, December 25, 2006, in observance of Christmas Day and Monday, January 1, 2007, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Dec. 19 Dec. 22 Dec. 27
      20 26 28
      21 27 29
      22 28 Jan 2, 2007
      25 Markets Closed
      26 29 Jan. 3
      27 Jan. 2 4
      28 3 5
      29 4 8
      Jan 1, 2007 Market Closed
      2 5 9

      Brokers, dealers and municipal securities dealers should use the foregoing settlement dates for purposes of clearing and settling transactions pursuant to the NASD® Uniform Practice Code and the Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

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

    • 05-80 SEC Approves Amendments to IM-8310-2 Regarding the Publication of Decisions Issued by the National Adjudicatory Council (NAC) Pursuant to NASD Rule 1015; Effective Date: January 12, 2006

      View PDF File

      GUIDANCE

      Publication of National Adjudicatory Council Membership Decisions Pursuant to NASD Rule 1015

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management
      IM-8310-2
      Publication of NAC Membership
      Decisions
      Rule 1014
      Rule 1017
      Rule 1015

      Executive Summary

      On October 28, 2005, the Securities and Exchange Commission (SEC) approved amendments to IM-8310-2 to authorize the NAC to release to the public information with respect to any decision issued by the NAC pursuant to NASD Rule 1015.1 The new rule text is contained in Attachment A and is effective on January 12, 2006. NASD will publish only those NAC decisions issued pursuant to Rule 1015 in which the appeal has been filed on or after January 12, 2006.

      Questions/Further Information

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

      Background

      NASD Rule 1015 is part of the NASD Rule 1010 Series governing membership proceedings. These proceedings involve both the review of new member applications (NASD Rule 1014) and continuing membership applications seeking approval of a change in ownership, control or business operations (NASD Rule 1017).

      Under Rule 1014, NASD's Department of Member Regulation (Department) determines whether an applicant meets all of the requisite standards for admission to NASD and serves the applicant with a written decision. Under Rule 1017, the Department considers applications for approval of change in ownership, control or business operations and renders a decision.

      Under Rule 1015 , an aggrieved applicant may file a written request for NAC review of the Department's decision issued under Rule 1014 or Rule 1017. Unlike disciplinary appeals conducted pursuant to the Rule 9300 Series, membership appeal hearings before the NAC are trial-level proceedings that usually involve the submission of new exhibits and testimony, and are not limited to 30-minute appellate argument. The NAC may affirm, modify or reverse the Department's decision or remand the membership proceeding with instructions. The NAC's decision summarizes the evidence, explains its evaluation of the evidence and explains the basis for the decision. The NAC's decisions under Rule 1015 are subject to discretionary review by the NASD Board, which may affirm, modify, reverse or remand the NAC's proposed decision.

      Discussion

      The amendment to IM-8310-2 authorizes NASD to release to the public information with respect to any decision issued by the NAC pursuant to Rule 1015 , including decisions pertaining to new membership applications (Rule 1014) or continuing membership applications (Rule 1017). NASD will release the decisions issued by the NAC pursuant to Rule 1015 in the form issued by the NAC. NASD will publish only those NAC decisions issued pursuant to Rule 1015 in which the appeal has been filed on or after January 12, 2006.

      In structuring its decisions, the NAC may choose the level of detail with which it writes in support of its decision. For example, the NAC's decisions will not routinely name shareholders of a closely held broker-dealer that is being sold insofar as the decision serves to evaluate the qualifications of the proposed buyers. Such drafting decisions would be made to accommodate the interests of persons who are not themselves under consideration or review as part of the membership application process.

      NASD believes that making these decisions available to the public will benefit applicants—both potential NASD members and members that are considering a change in ownership, control or business operations—as well as public investors and the NAC itself. Access to these decisions will assist applicants in understanding the standards that must be met under Rule 1014 or 1017, as appropriate, and the manner in which such standards are applied, especially with respect to applicants that have been denied membership. Potential new NASD members and their investors will have the opportunity to review the rationale supporting the NAC's decision-making, including NAC denials of membership. They will be better informed about the membership process and standards, and may be deterred from pursing meritless appeals. In addition, publishing the NAC's decisions will benefit the NAC members who serve on the subcommittees that conduct these hearings because their decisions could cite to and build upon earlier NAC precedents. NASD also believes that public investors will benefit from the availability of information about any limitations placed on members, where such limitations result from proceedings before the NAC.


      1 Exchange Act Rel. No. 52692 (Oct. 28, 2005), 70 FR 66876 (Nov.3, 2005) (SR-NASD-2005-064).


      ATTACHMENT A

      New text is underlined.

      * * * * *

      IM-8310-2. Release of Disciplinary and Other Information Through the Public Disclosure Program

      (a) through (l) No change.
      (m) NASD shall release to the public, in the form issued by the National Adjudicatory Council, information with respect to any decision issued by the National Adjudicatory Council pursuant to Rule 1015. In its discretion, the National Adjudicatory Council may have redacted certain information from such decisions prior to their issuance.
      * * * * *

    • For Your Information

      View PDF File

      2005–2006 Filing Due Dates

      NASD would like to remind members of their obligation to file the appropriate FOCUS reports, Annual Audits, and Customer Complaints by their due dates. The following schedule outlines due dates for 2005. Questions regarding the information to be filed can be directed to the appropriate District Office. Business questions as to how to file the FOCUS report, resetting passwords & technical questions concerning system requirements, file uploads, submission problems for Web-Based FOCUS and Customer Complaints can all be directed to (800) 321-NASD. Business questions regarding the Short Interest Reporting deadlines should be directed to Yvonne Huber at (240) 386-5034 or Jocelyn Mello at (240) 386-5091.

      2006 FOCUS Due Dates

      Annual Schedule I for 2005 Year End Due Date
      2005 FOCUS Schedule I January 25, 2006

      Annual Schedule I for 2006 Year End Due Date
      2005 FOCUS Schedule I January 25, 2007

      2006 Monthly and Fifth* FOCUS II/IIA Filings

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

      January 31, 2006 February 24, 2006
      February 28, 2006 March 23, 2006
      April 30, 2006 May 23, 2006
      May 31, 2006 June 23, 2006
      July 31, 2006 August 23, 2006
      August 31, 2006 September 26, 2006
      October 31, 2006 November 24, 2006
      November 30, 2006 December 26, 2006

      2006 Quarterly FOCUS Part II/IIA Filings

      Quarter Ending Due Date
      December 31, 2005 January 26, 2006
      March 31, 2006 April 26, 2006
      June 30, 2006 July 26, 2006
      September 30, 2006 October 24, 2006
      December 31, 2006 January 25, 2007

      2006 Annual Audit Filings Due Dates

      Period End Due Date
      January 31, 2006 April 3, 2006
      February 28, 2006 May 1, 2006
      March 31, 2006 May 30, 2006
      April 30, 2006 June 29, 2006
      May 31, 2006 July 31, 2006
      June 30, 2006 August 29, 2006
      July 31, 2006 September 29, 2006
      August 31, 2006 October 30, 2006
      September 30, 2006 November 29, 2006
      October 31, 2006 January 2, 2007
      November 30, 2006 January 30, 2007
      December 31, 2006 March 1, 2007

      2006 3070/Customer Complaints Due Dates

      4th quarter 2005: January 17, 2006
      1st quarter 2006: April 17, 2006
      2nd quarter 2006: July 17, 2006
      3rd quarter 2006: October 16, 2006
      4th quarter 2006: January 16, 2007

      Market Regulation Department 2006 Short Interest Reporting Deadlines

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

      * Trade Date is provided for reference purposes only. Positions are to be reported as of settlement date.

      ** Eastern Standard Time

    • 05-79 Amendments to Section 4 of Schedule A to the NASD By-Laws Governing Continuing Education Regulatory Element and Qualification Examination Fees; Implementation Date: January 1, 2006

      View PDF File

      GUIDANCE

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Legal & Compliance
      Registration
      Senior Management
      Continuing Education—Regulatory
      Element Fees
      Qualification Examination Fees
      Rule 1120 (Continuing Education Requirements)
      Schedule A to NASD By-Laws

      Executive Summary

      NASD has filed for immediate effectiveness amendments to Section 4 of Schedule A to the NASD By-Laws to increase the Continuing Education Regulatory Element session fee and certain qualification examination fees.1 These rule changes will become operative on January 1, 2006.

      As of January 1, 2006, the session fee for the Regulatory Element of Continuing Education will increase from $60 to $75. This fee increase applies to all three Regulatory Element programs: the S201 for Supervisors, the S106 for Series 6 representatives and the S101 General Program for all other registrations. Firms that participate in in-firm delivery of the Regulatory Element will continue to receive a $3 credit to their Central Registration Depository (CRD®) account for the in-firm deliveries they make.

      Also, as of January 1, 2006, the fees assessed for persons taking various qualification examinations will increase, as described below. The affected examinations include the Series 6 (Investment Company Products/Variable Contracts Representative), Series 7 (General Securities Representative), Series 10 (General Securities Sales Supervisor – General Module), Series 22 (Direct Participation Programs Representative), Series 24 (General Securities Principal), Series 27 (Financial and Operations Principal), Series 55 (Limited Representative-Equity Trader), Series 62 (Corporate Securities Limited Representative and Series 72 (Government Securities Representative).

      Attachment A contains the text of the amendments.

      Questions/Further Information

      Questions regarding this Notice to Members may be directed to Joe McDonald, Associate Director, NASD Testing and Continuing Education (T&CE), at (240) 386-5065; Elaine Warren, Lead Analyst, T&CE, at (240) 386-4679; or Amaka Omenka, Continuing Education Coordinator, T&CE, at (240) 386-4140.

      Background and Discussion

      Regulatory Element of Continuing Education

      The Regulatory Element, a computer-based education program that helps ensure that registered persons are kept up-to-date on regulatory, compliance and sales practice matters in the industry, is a component of the Securities Industry Continuing Education Program (Program) under NASD Rule 1120. Member firms currently pay $60 each time one of their registered persons participates in the Regulatory Element.

      The Securities Industry/Regulatory Council on Continuing Education (Council)2 was organized in 1995 to facilitate cooperative industry/regulatory coordination of the administration and future development of the program in keeping with applicable industry regulations and changing industry needs. It is the Council's responsibility to maintain the program on a revenue-neutral basis while maintaining adequate reserves. In its 2005 annual financial review, the Council determined that program reserves would not remain adequate unless the fee for a Regulatory Element session were raised to $75. At its September 2005 meeting, the Council unanimously supported a recommendation to increase the Regulatory Element session fee from $60 to $75, effective January 1, 2006.

      Qualifications Examinations

      Any person associated with a member firm who is engaged in the securities business of the firm must register with NASD. As part of the registration process, securities professionals must pass a qualification examination to demonstrate competence in each area in which they intend to work. Some of these examinations are sponsored (i.e., developed) by NASD, and others are sponsored by other self-regulatory organizations (SROs) such as the New York Stock Exchange, Inc. (NYSE), the Municipal Securities Rulemaking Board (MSRB) or the North American Securities Administrators Association (NASAA). NASD administers these qualification examinations via computer through the PROCTOR® system at test centers operated by vendors under contract with NASD. NASD charges an examination fee to candidates for NASD-sponsored examinations. For those examinations sponsored by an NASD client and administered/delivered by NASD, NASD charges a delivery fee that comprises either a part or all of the fee for these examinations.

      Each year, NASD staff conducts a comprehensive review of the licensing examination fee structure, which includes an analysis of the costs of developing, administering and delivering examinations. Staff's review in 2005 showed that certain operational costs are rising. In particular, these costs consist of: (1) the cost of providing the extensive network of test delivery centers; and (2) technology costs required to maintain the current PROCTOR® system and to redesign the PROCTOR® system. As a result of these cost increases, as of January 1, 2006, there will be an increase in examination fees for certain NASD-sponsored examinations and other examinations that are delivered by NASD and that may be required by NASD for its members3 as follows:

      Series 6 Investment Company Products/Variable Contracts Representative From $70 to $75
      Series 7 General Securities Representative From $225 to $250
      Series 10 General Securities Sales Supervisor—General Module From $95 to $100
      Series 22 Direct Participation Programs Representative From $60 to $70
      Series 24 General Securities Principal From $85 to $95
      Series 27 Financial and Operations Principal From $85 to $95
      Series 55 Limited Representative–Equity Trader From $80 to $85
      Series 62 Corporate Securities Limited Representative From $70 to $75
      Series 72 Government Securities Representative From $80 to $85

      The new fees will be charged for persons who register for one of these examinations beginning January 1, 2006. The individual then has 120 days to take the examination.


      1 See SR-NASD-2005-132 (Regulatory Element Continuing Education session fees) and SR-NASD-2005-133 (Qualification Examination fees). Under Section 19(b) of the Securities Exchange Act of 1934, the Securities and Exchange Commission (SEC) has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 The Council currently consists of 20 individuals, 14 of whom are securities industry professionals associated with NASD member firms and six of whom represent self-regulatory organizations (SROs) (the American Stock Exchange LLC; the Chicago Board Options Exchange, Inc; the Municipal Securities Rulemaking Board; NASD, the New York Stock Exchange, Inc; and the Philadelphia Stock Exchange, Inc.).

      3 NASD also administers and delivers examinations sponsored by NASAA that, while not required by NASD rules, are taken by persons associated with NASD members to obtain certain licenses. NASD notes that the fee for the NASAA–Series 66 (Uniform Combined State Law) also will increase from $110 to $113, effective January 1, 2006; such fee increase is not part of the rule changes discussed in this Notice to Members, however, since the Series 66 is not required by NASD rules.

      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      * * * * *

      SCHEDULE A TO NASD BY-LAWS

      * * * * *

      Section 4—Fees

      (a) and (b) No change
      (c) The following fees shall be assessed to each individual who registers to take an examination as described below as of January 1,
      200[5]6. These fees are in addition to the registration fee described in paragraph (b).
      Series 4 Registered Options Principal $80
      Series 6 Investment Company Products/Variable Contracts Representative [$70]$75
      Series 7 General Securities Representative [$225]$250
      Series 9 General Securities Sales Supervisor–Options Module $60
      Series 10 General Securities Sales Supervisor–General Module [$95]$100
      Series 11 Assistant Representative–Order Processing $60
      Series 17 Limited Registered Represent $65
      Series 22 Direct Participation Programs Representative [$70]$75
      Series 23 General Securities Principal Sales Supervisor Module $75
      Series 24 General Securities Principal [$85]$95
      Series 26 Investment Company Products/Variable Contracts Principal $75
      Series 27 Financial and Operations Principal [$85]$95
      Series 28 Introducing Broker/Dealer Financial and Operations Principal $75
      Series 37 Canada Module of S7 (Options Required) $150
      Series 38 Canada Module of S7 (No Options Required) $150
      Series 39 Direct Participation Programs Principal $75
      Series 42 Registered Options Representative $60
      Series 55 Limited Representative–Equity Trader [$80]$85
      Series 62 Corporate Securities Limited Representative [$70]$75
      Series 72 Government Securities Representative [$80]$85
      Series 82 Limited Representative–Private Securities Offering $75
      Series 86 Research Analysis–Analysis $150
      Series 87 Research Analyst–Regulatory $105
      (1) through (3) No change
      (d) through (j) No change
      (k) There shall be a session fee of [$60.00] $75.00 assessed as to each individual who is required to complete the Regulatory Element of the Continuing Education Requirements pursuant to Rule 1120.
      (l) No change.

      * * * * *

    • 05-78 SEC Approves Amendments to the OATS Rules; Effective Date: May 8, 2006

      View PDF File

      GUIDANCE

      OATS Reporting Requirements

      Effective Date: May 8, 2006

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      OATS
      Rules 6950–6957

      Executive Summary

      On September 28, 2005, the Securities and Exchange Commission (SEC) approved amendments to Rules 6950 through 6957 (OATS Rules) relating to the Order Audit Trail System (OATS).1 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 in certain circumstances to members that meet specified criteria.

      The OATS Rules, as amended, are set forth in Attachment A of this Notice. In this Notice, NASD also is publishing information regarding the registration requirements for OATS reporting, as well as questions and answers regarding the application of the amended OATS reporting requirements. The amended OATS reporting requirements and OATS Phase III become effective May 8, 2006. In addition, NASD is publishing revised OATS Reporting Technical Specifications, incorporating the amendments described herein. The OATS Reporting Technical Specifications can be found on NASD's Web site at Regulatory Systems>OATS>Technical Specifications.

      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.

      Background

      On March 6, 1998, the SEC approved the OATS Rules.2 OATS provides a substantially enhanced body of information regarding orders and transactions that improves NASD's ability to conduct surveillance and investigations of member firms for potential violations of NASD rules and the federal securities laws. OATS is designed, at a minimum, to: (1) provide an accurate, time-sequenced record of orders and transactions, beginning with the receipt of an order at the first point of contact between the broker-dealer and the customer or counterparty and further documenting the life of the order through the process of execution; and (2) provide for market-wide synchronization of clocks used in connection with the recording of market events.

      The OATS Rules generally impose obligations on member firms to record in electronic form and report to NASD on a daily basis certain information with respect to orders originated or received by NASD members relating to securities listed on NASDAQ. OATS captures this order information reported by NASD members and integrates it with quote and transaction information to create a time-sequenced record of orders and transactions. This information is critical to NASD staff in conducting surveillance and investigations of member firms for violations of federal securities laws and NASD rules.

      The OATS requirements were implemented in three phases. All members were required to synchronize their computer system clocks and all mechanical clocks that record times for regulatory purposes by August 7, 1998, and July 1, 1999, respectively. In addition, in Phase I, electronic orders received at the trading department of a market maker and those received by electronic communication networks (ECNs) were required to be reported to OATS as of March 1, 1999. In Phase II, additional information relating to market maker and ECN electronic orders and all other electronic orders were required to be reported to OATS starting on August 1, 1999. As described in more detail below, the OATS Rules will apply to all manual orders (Phase III) as of May 8, 2006.3

      Since the implementation of OATS, NASD staff has reviewed OATS activities with the goal of identifying ways in which to improve OATS and enhance its effectiveness as a regulatory tool. In this regard, NASD staff identified several changes to OATS that it believed would enhance NASD's automated surveillance for compliance with trading and market making rules such as Interpretive Material (IM) 2110-2, (commonly referred to as the "Manning Rule"), the SEC's Order Handling Rules and a member firm's best execution obligations. NASD proposed these changes in SR-NASD-00-23, which the SEC recently approved.

      Specifically, on September 28, 2005, the SEC approved amendments to the OATS Rules to: (1) implement the OATS reporting requirements for manual orders (OATS Phase III); (2) provide that members are required to capture and report the time orders are 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 in certain circumstances to members that meet specified criteria.4

      Implementation of OATS Phase III for Manual Orders

      During Phase II, the OATS Rules apply only to orders in NASDAQ-listed securities that are captured in an electronic order routing or execution system. Upon implementation of Phase III, pursuant to Rule 6957(c), the OATS Rules will apply to all orders for NASDAQ securities received or originated by an OATS Reporting Member. This includes orders received via telephone, email or any other method. Accordingly, OATS reporting requirements will now apply equally to electronic orders and manual orders upon implementation of Phase III with two exceptions: (1) members will not be required to pass a routed order identifier for manually transmitted orders; and (2) members will be required to report the type of account5 for which the order is submitted only to the extent that information is available. NASD anticipates, however, that this account type information should be readily available for most OATS reportable orders.

      Definition of Time of Receipt

      Rule 6954 requires certain identifying information be recorded at various critical points during the life of an order, thereby assisting NASD in carrying out its regulatory responsibilities. In particular, Rule 6954(b)(16) requires that members record and report the date and time the order is originated or received by a Reporting Member ("time of receipt"). During OATS Phase II, which only applies to electronic orders, the time of receipt for an electronic order has been interpreted as the time an order is captured by a firm's electronic order handling or execution system. Upon the implementation of Phase III, the time of receipt for all orders, whether electronic or manual, will be the time the order is received by the member from the customer. As such, depending on the specific facts and circumstances, the time an order is captured in a member's electronic order handling or execution system may not be the time of receipt for OATS purposes.

      Expansion of Order Transmittal Requirements

      In addition to the time that an order is received by the customer, it also is critical to NASD automated surveillance systems that OATS capture the time that an order is received by the trading desk or department.6 Given that orders may be routed to multiple locations within a firm prior to reaching the trading desk, the amendments require firms to capture the various receipt times (customer receipt time, trading desk receipt time, etc.) by expanding the OATS order transmittal requirements that apply to intra-firm routes to include orders routed to the trading department.7 Specifically, if an order is not received immediately at the trading desk or department, members are required to capture information relating to the transfer of that order to the trading department under the order transmittal requirements of Rule 6954(c). The amended OATS Rules also require that members provide information on the nature of the department to which an order was transmitted, the number of shares to which the transmission applies, and any special handling requests. As with other technical requirements relating to OATS, NASD has specified in the OATS Reporting Technical Specifications how firms should report this information.

      Exclusion from the Definition of "Reporting Member"

      Certain members engage in non-discretionary order routing processes whereby, immediately after receipt of a customer order, the member routes the order, by electronic or other means, to another member ("receiving Reporting Member") for further routing or execution at the receiving Reporting Member's discretion. Currently, the OATS Rules generally require both the member with which the order originated and the receiving Reporting Member to create and report new order reports and possibly route reports.8 Because this may result in the receipt of duplicative information by OATS, the OATS Rules have been amended to require, in such instances, that only the receiving Reporting Member report OATS data. Accordingly, pursuant to Rule 6951(n), a member would not be required to report OATS data regarding an order, if the following conditions are met:

      (1) The member engages in a non-discretionary order routing process, pursuant to which it immediately routes, by electronic or other means, all of its orders to a single receiving Reporting Member;9
      (2) The member does not direct or maintain control over subsequent routing or execution by the receiving Reporting Member;
      (3) The receiving Reporting Member records and reports all information required under Rules 6954 and 6955 with respect to the order; and
      (4) The member has a written agreement with the receiving Reporting Member specifying the respective functions and responsibilities of each party to effect full compliance with the requirements of Rules 6954 and 6955.

      In addition to eliminating the reporting of duplicative information to OATS, the amended rule will reduce the regulatory burdens on members, particularly smaller members, that route all their orders to another receiving Reporting Member by means of a non-discretionary order routing process, for execution or further routing purposes.10

      Exemptive Relief from the OATS Reporting Requirements

      New paragraph (d) of Rule 6955 and amended Rule 9610(a) permit NASD to grant exemptive relief to certain members from the reporting requirements of the OATS Rules under the procedures set forth in the Rule 9600 Series. Specifically, members that meet the following criteria would be eligible to request an exemption to the OATS reporting requirements for manual orders:

      (1) The member and current control affiliates and associated persons of the member have not been subject within the last five years to any final disciplinary action, and within the last 10 years to any disciplinary action involving fraud;
      (2) The member has annual revenues of less than $2 million;
      (3) The member does not conduct any market making activities in NASDAQ equity securities;
      (4) The member does not execute principal transactions with its customers (with limited exceptions for error corrections); and
      (5) The member does not conduct clearing or carrying activities for other firms.

      Any exemptive relief granted would expire no later than two years from the date the member receives the exemptive relief. At or prior to the expiration of a grant of exemptive relief, members meeting the specified criteria may request a subsequent exemption. In addition, NASD's exemptive authority will be in effect for five years from May 8, 2006.

      The exemptive authority will provide NASD the ability to grant relief to members meeting the specified criteria in situations where, for example, reporting of such information would be unduly burdensome for the member or where temporary relief from the rules (in the form of additional time to achieve compliance) would permit the member to avoid unnecessary expense or hardship.

      Members should note that this exemption is available only for manual orders and only relieves the member of its obligation to transmit to OATS all information required to be recorded under Rule 6954. Members that are granted an exemption still must record all information as required under Rule 6954 and be prepared to submit that information to NASD on an as-requested basis.

      Implementation of the Amendments to the OATS Rules

      In recognition of the technological burdens that may be imposed on members as a result of the new requirements, the implementation date for the amendments to the OATS Rules is six months from the date of this Notice, which coincides with the publication of the revised OATS Reporting Technical Specifications relating to SR-NASD-00-23. The revised OATS Reporting Technical Specifications can be found on NASD's Web site at Regulatory Systems>OATS>Technical Specifications. In addition, NASD will ensure that adequate time for testing is incorporated into the implementation schedule and will make the testing environment available as of March 27, 2006.

      Registration for OATS Reporting

      Members that have not previously been subject to the OATS Rules that now meet the definition of an OATS Reporting Member, and do not otherwise qualify for, and receive, an exemption from the OATS Rules, must register for OATS by completing a Subscriber Initiation and Registration Form (SIRF) and obtaining an OATS user ID and password. Firms may obtain a SIRF, along with detailed instructions for completing and submitting the form, on NASD's OATS Web site. Information on how to obtain the appropriate user IDs and passwords is also available on NASD's OATS Web site. Members must complete and submit a SIRF, as well as request a user ID and password by no later than April 24, 2006. Members that fail to complete and return a SIRF, as well as obtain a user ID and password by April 24, 2006, will be unable to report OATS data to NASD beginning May 8, 2006.

      If a member qualifies for the exclusion from the definition of a Reporting Member under Rule 6951(n), that member must ensure that a valid written agreement, as required under Rule 6951(n)(4), is in place with the receiving Reporting Member by May 8, 2006. NASD will be monitoring firms' use of this exclusion closely and may periodically request a copy of written agreements as part of its routine OATS surveillance activities.

      If a member chooses to request an exemption from the OATS Rules pursuant to Rule 6955(d), a written request must be submitted to NASD's Market Regulation Department by no later than February 1, 2006 to ensure that the request can be processed by May 8, 2006. NASD will make every effort to expeditiously review each request so that exemptions will be in place beginning May 8, 2006. NASD notes that members meeting the requirements for an exemption from the OATS Rules must formally request and obtain approval from NASD before the exemption becomes effective. Firms meeting the requirements for exemption, but that do not formally request such exemption, are not automatically exempted and will be in violation of the OATS Rules if they do not begin reporting OATS data on May 8, 2006.

      Questions and Answers

      To help members implement the amendments to the OATS Rules and OATS Phase III, NASD staff is publishing the following questions and answers relating to the OATS Rules.

      Q1. What types of orders in NASDAQ equity securities have to be reported to OATS under the new requirements?
      A. All orders, including manual orders, in NASDAQ equity securities must be reported to OATS as of May 8, 2006, including, without limitation, orders received telephonically, orders received via email, orders received via the Internet, orders received at branch offices and orders received via Instant Messenger.
      Q2. Upon implementation of the new requirements, will all of the OATS reporting requirements for manual orders be the same as for electronic orders?
      A. Yes, subject to two exceptions. First, although Routed Order Identifiers have been required for orders routed electronically to other members since March 1, 1999 and for orders routed electronically to ECNs since February 14, 2005, Routed Order Identifiers will not be required to be captured or passed for manually transmitted orders. Second, the account-type code (e.g., proprietary, retail, wholesale) is required for manual orders only if available.
      Q3. Are convertible securities and preferred securities subject to the OATS reporting requirements?
      A. Yes. The OATS Rules apply to orders in all NASDAQ equity securities. There is no exclusion in the OATS Rules for convertible securities or preferred securities.
      Q4. My firm uses a third-party Internet service provider to capture orders. These orders sometimes are captured after trading hours and submitted in batch the next trading day. Further, the order receipt data is not transmitted by the third-party Internet service provider as part of the order data. Do I still have the responsibility to report order receipt time to OATS?
      A. Yes. As with any requirement under the OATS Rules, the decision by a member to use a third-party provider does not change the member's obligation under the rules. As such, the member is required to capture order receipt time on all orders. The batching or other transmittal practices of a third-party provider would not change this requirement.
      Q5. My firm receives an order via the Internet then reviews and releases the order to the routing system. What is the order receipt time?
      A. The firm is required to capture order receipt time on all orders. The time of receipt is the time the order is received by the member from the customer. The review or other release practices of a firm would not change this requirement.
      Q6. Customers type orders directly into my system and my firm does not take any calls. Does the order-received timestamp remain the time it is captured in my system?
      A. In Phase II, the time of receipt for an electronic order is the time an order is captured by a firm's electronic order routing or execution system. In Phase III, the time of receipt, for both electronic and manual orders, is the time the order is received from the customer. If the firm's order-received timestamp captures the time the order is received from the customer, then no changes are required. If, however, the order-received timestamp captures the time the order is captured by the firm's order routing or execution system and such time differs from the customer order receipt time, then the firm will be required to record and report the order receipt time from the customer.
      Q7. If my firm receives an order from its customer and immediately routes the order to the trading desk, is a Desk Report required?
      A. If the time of receipt from the customer and time of transmittal to the trading desk occurs within the same second, no separate Desk Report will be required. A New Order Report is sufficient. However, if the time of receipt from the customer and the time of transmittal to the trading desk is greater than one second, a New Order Report and a Desk Report would be required.
      Q8. How does the term "trading desk" or "trading department" apply, particularly for firms that do not have a trading desk?
      A. NASD previously has issued guidance that the term "trading department" is intended to refer to the function within the firm that is responsible for executing orders in NASDAQ equity securities. This function includes a trading system where orders are executed automatically without trader intervention; or the trading department where orders are executed with the assistance of traders.11
      Q9. My firm sends 100 percent of its orders to our clearing firm and, therefore, I believe we meet the requirements of the exclusion to the definition of a Reporting Member. What do we need to have in our agreement with the clearing firm? Does this change how our clearing firm reports to OATS?
      A. A member can qualify for an exclusion from the definition of Reporting Member if it meets the conditions set forth in Rule 6951(n). Your firm must ensure that it meets and continues to meet each of the conditions necessary for the exclusion. All written documents evidencing the agreement between your firm and the clearing firm must be maintained by each party to the agreement. The receiving Reporting Member responsible for OATS reporting will be required to identify the sending member in each New Order Report and include a code indicating the sending member is a member that qualifies for exclusion from the definition of OATS Reporting Member under Rule 6951(n). This code indicating the exclusion should be included in the Member Type Code Field on the New Order, Combined Order/Route and Combined Order/Execution Reports.
      Q10. My firm meets only one of the conditions to the exclusion from the definition of Reporting Member set forth in Rule 6951(n). Am I subject to the OATS reporting requirements for manual orders?
      A. Yes. Your firm must meet and continue to meet all of the conditions necessary for the exclusion, not just one. As such, to the extent a member does not meet any or all of the conditions for the exclusion, the member would then be deemed a Reporting Member.
      Q11. My firm uses our clearing firm's system and sends 100 percent of our orders to the clearing firm. However, we maintain the capability to route orders to other destinations. Does my firm still have the responsibility to report to OATS?
      A. Pursuant to Rule 6951(n), one of the conditions for a firm not to be considered a "Reporting Member" for purposes of OATS is that the firm engage in a non-discretionary order routing process pursuant to which it immediately routes, by electronic or other means, all of its orders to a single receiving Reporting Member. As such, 100 percent of the firm's orders must be routed to the same reporting member. If the member accepts and routes an order to another venue, or executes an order internally, that member would no longer meet the exclusion to the definition of Reporting Member and would be required to report OATS data for all of its orders, including those sent to its clearing firm on a non-discretionary basis.
      Q12. My firm is a correspondent of a clearing firm to which I send 100 percent of our orders. On occasion, my firm receives a directed order from a customer with instructions to send to a venue other than our clearing firm. Although I enter the order into my clearing firm's system, neither our firm nor our clearing firm has discretion over the order. Would my firm have an OATS reporting responsibility for these orders?
      A. Yes. One of the primary reasons for including an exclusion to the definition of Reporting Member under Rule 6951(n) is to reduce duplicative reporting. If your firm routes orders to multiple venues, as in this example, away from your clearing firm, NASD no longer is assured it will receive all information regarding your orders required by the OATS Rules from a single Reporting Member. Consequently, to ensure NASD has a complete audit trail, once even a single order is directed away from your clearing firm, either based on your own discretion or at the instruction of a customer, your firm no longer qualifies for the exclusion to Reporting Member under Rule 6951(n) and must begin reporting to OATS.
      Q13. What does it mean that a member does not direct or maintain control over subsequent routing or execution by the receiving Reporting Member in the context of the exclusion to Reporting Member under Rule 6951(n)?
      A. To qualify for the exclusion under Rule 6951(n), all orders must be routed to the receiving Reporting Member on a non-discretionary basis. If the receiving Reporting Member provides the ability for the member to direct an order to a venue other than the receiving Reporting Member for execution and the member directs any orders away from the receiving Reporting Member, the member would not qualify for the exclusion. If the member relies on the receiving Reporting Member, or a system provided by the receiving Reporting Member, to determine where the order is routed for execution, the member will not be viewed as directing or maintaining control over subsequent routing or execution by the receiving Reporting Member for purposes of Rule 6951(n).
      Q14. How does my firm apply for an exemption to the OATS Rules pursuant to Rule 6955(d)?
      A. NASD Rule 9600 Series details the procedures for submitting an exemption request to NASD. Specifically, the Rule 9600 Series requires that exemption requests include the member's name and address, the name of a person associated with the member who will serve as the primary contact for the application, the rule from which the member is seeking an exemption, and a detailed statement of the grounds for granting the exemption. Further, if the member does not want the application or the decision on the application to be publicly available in whole or in part, the member must include a detailed statement, including supporting facts, showing good cause for treating the application or decision as confidential in whole or in part.

      Detailed exemption request procedures, including a list of all required supporting documentation, will be published shortly on NASD's OATS Web site. To ensure that exemption requests can be processed prior to the May 8, 2006 implementation date, exemption requests must be submitted to NASD no later than February 1, 2006.
      Q15. If granted an exemption pursuant to Rule 6955(d), will I be exempt from all OATS requirements?
      A. No. Exemptions will be granted only for members' order transmission requirements under Rule 6955 related to manual orders. Even if an exemption is granted, members will still be required to record and maintain OATS data as required under Rule 6954.
      Q16. My firm meets all of the exemption criteria set forth in Rule 6955(d), but we do execute a principal transaction once every six months. Can I still apply for an exemption?
      A. No. One criterion for the exemptive relief is that the member does not execute principal transactions with its customers, other than limited exceptions for error corrections. As such, a member that executes a principal transaction with its customer, even if infrequently, will not be eligible for exemptive relief.
      Q17. Does an exemption expire immediately if one of the criteria for exemption is no longer true?
      A. Yes. Members are required to continuously meet each of the criteria set forth in Rule 6955(d) to qualify for the exemption. As such, to the extent that a member no longer meets all of the threshold exemption criteria, the member would not be eligible for exemptive relief and, thus, would be required to immediately report to OATS.

      1 See Securities Exchange Act Release No. 52521 (September 28, 2005), 70 FR 57909 (October 4, 2005) (File No. SR-NASD-00-23).

      2 See Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998).

      3 See Rule 6957(c).

      4 See supra note 1.

      5 The account type code reflects whether the order was received for the account of an investor, received from another broker-dealer, originated by the member for a proprietary account, or received for the account of an employee.

      6 For purposes of the OATS Rules, the term "trading department" refers to the function within the firm that is responsible for executing orders in NASDAQ equity securities. For an ECN, for example, this may be interpreted as either the trading system (where orders are executed automatically without trader intervention) or the trading department (where orders are executed with the assistance of traders). See Letter from NASD Regulation to Charles R. Hood, dated July 30, 1998.

      7 See amendments to Rule 6954(c). In furtherance of this provision, the OATS Reporting Technical Specifications require that this information be reported to OATS via a "Desk Report" or by populating desk information on the New Order, Combined Order/Route or Combined Order/Execution Reports.

      8 OATS Frequently Asked Questions C29 provides that in instances where a member uses another member firm's electronic order routing or execution system to route orders for execution by that same member firm, the originating member would not be required to report OATS data until Phase III.

      9 If any delay results in the routing of an order due to systems problems or other reasons, the member with which the order originated would be required to report OATS data.

      10 This exclusion does not change a member's requirement to capture and retain the time an order was received from a customer under SEC Rule 17a-3(a)(6).

      11 See Letter from NASD Regulation to Charles R. Hood, dated July 30, 1998.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      6951. Definitions

      For purposes of Rules 6950 through 6957:
      (a) through (m) No Change.
      (n) "Reporting Member" shall mean a member that receives or originates an order and has an obligation to record and report information under Rules 6954 and 6955. A member shall not be considered a Reporting Member in connection with an order, if the following conditions are met:
      (1) the member engages in a non-discretionary order routing process, pursuant to which it immediately routes, by electronic or other means, all of its orders to a single receiving Reporting Member;
      (2) the member does not direct and does not maintain control over subsequent routing or execution by the receiving Reporting Member;
      (3) the receiving Reporting Member records and reports all information required under Rules 6954 and 6955 with respect to the order; and
      (4) the member has a written agreement with the receiving Reporting Member specifying the respective functions and responsibilities of each party to effect full compliance with the requirements of Rules 6954 and 6955.

      * * * * *

      6954. Recording of Order Information

      (a) No Change.
      (b) Order Origination and Receipt
      Unless otherwise indicated, the following order information must be recorded under this Rule when an order is received or originated. For purposes of this Rule, the order origination or receipt time is the time the order is received from the customer.
      (1) through (18) No Change.
      (c) Order Transmittal
      Order information required to be recorded under this Rule when an order is transmitted includes the following.
      (1) When a Reporting Member transmits an order to a[nother] department within the member, [other than to the trading department,] the Reporting Member shall record:
      (A) through (C) No Change.
      (D) an identification of the department and nature of the department to which the order was transmitted, [and]
      (E) the date and time the order was received by that department,
      (F) the number of shares to which the transmission applies, and
      (G) any special handling requests.[;]
      (2) through (6) No Change.
      (d) No Change.

      * * * * *

      6955. Order Data Transmission Requirements

      (a) through (c) No Change.
      (d) Exemptions
      (1) Pursuant to the Rule 9600 Series, the staff, for good cause shown after taking into consideration all relevant factors, may exempt, subject to specified terms and conditions, a member from the order data transmission requirements of this Rule for manual orders, if such exemption is consistent with the protection of investors and the public interest, and the member meets the following criteria:
      (A) the member and current control affiliates and associated persons of the member have not been subject within the last five years to any final disciplinary action, and within the last ten years to any disciplinary action involving fraud;
      (B) the member has annual revenues of less than $2 million;
      (C) the member does not conduct any market making activities in Nasdaq Stock Market equity securities;
      (D) the member does not execute principal transactions with its customers (with limited exception for principal transactions executed pursuant to error corrections); and
      (E) the member does not conduct clearing or carrying activities for other firms.
      (2) An exemption provided pursuant to this paragraph (d) shall not exceed a period of two years. At or prior to the expiration of a grant of exemptive relief under this paragraph (d), a member meeting the criteria set forth in paragraph (d)(1) may request, pursuant to the Rule 9600 Series, a subsequent exemption, which will be considered at the time of the request, consistent with the protection of investors and the public interest.
      (3) This paragraph shall be in effect until May 8, 2011.

      * * * * *

      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 six months after publication of the revised OATS Reporting Technical Specifications relating to[120 days after SEC approval of] 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[ and shall not be required to record and report information items (4) and (5) specified in Rule 6954(b) and information item (1) specified in Rule 6954(c)].
      (d) No Change.

      * * * * *

      9600. Procedures For Exemptions

      9610. Application

      (a) Where to File
      A member seeking an exemption from Rule 1021, 1022, 1070, 2210, 2320, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3210, 3230, 3350, 6955, 8211, 8212, 8213, 11870, or 11900, Interpretive Material 2110-1, or Municipal Securities Rulemaking Board Rule G-37 shall file a written application with the appropriate department or staff of NASD and provide a copy of the application to the Office of General Counsel of NASD.
      (b) and (c) No Change.

    • 05-77 Transactions in TRACE-Eligible Securities That Occur in Connection with Options, Credit Default Swaps, Other Swaps or Similar Instruments Must Be Reported to TRACE

      View PDF File

      GUIDANCE

      Corporate Debt Securities

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal and Compliance
      Operations
      Senior Management
      Technology
      Trading and Market Making
      Training
      Credit Default Swaps
      Debt Securities
      Operations
      Options
      Rule 6200 Series
      TRACE Rules
      Transaction Reporting

      Executive Summary

      NASD provides interpretive guidance under Rule 6230 on the obligation of members to report to the Trade Reporting and Compliance Engine (TRACE) transactions in TRACE-eligible securities executed in connection with the exercise or settlement of options; the termination or settlement of (or other events triggering a transaction in TRACE-eligible securities) credit default swaps or other types of swaps; or the exercise, termination or settlement of (or other events triggering a transaction in TRACE-eligible securities) similar instruments.

      Questions/Further Information

      Questions concerning this Notice should be directed to tracefeedback@nasd.com; Elliot Levine, Chief Counsel, Transparency Services, Markets, Services, and Information, at (202) 728-8405; or Sharon K. Zackula, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8985.

      Interpretive Guidance

      NASD has received inquiries regarding the reporting of transactions in TRACE-eligible securities that occur as a result of the exercise or settlement of options; the termination or settlement of (or other events triggering a transaction in TRACE-eligible securities) credit default swaps (CDSs) or other types of swaps; or the exercise, termination or settlement of (or other events triggering a transaction in TRACE-eligible securities) similar instruments.1

      A member that is a party to a transaction in a TRACE-eligible security that occurs pursuant to, or in connection with an option, a CDS, another type of swap, or a similar instrument must report the transaction to TRACE under Rule 6230. In addition, when such a transaction in TRACE-eligible securities is executed at a price that does not represent current market pricing, the transaction must be reported to TRACE using the "special price" modifier (or flag), as more fully described below.

      Under Rule 6230(d)(4)(A), if "a transaction is not executed at a price that reflects the current market price," the reporting member must select the "special price" modifier.2 NASD interprets the term current market price as an arm's length price agreed upon by a buyer and seller after considering current pricing factors and information, such as current quotes or indications, current transaction information or a current spread to a benchmark. Even if such price is substantially different from the last price, NASD considers such a price to be a current market price.

      The "special price" modifier or flag is appropriately used when a transaction is executed at a price based on arm's length negotiation and done for investment, commercial or trading considerations, but does not reflect current market pricing.3 In this regard, a transaction in TRACE-eligible securities occurring as a result of an exercise or settlement of an option or similar right generally would be reportable to TRACE with a "special price" flag because, in general, options are structured such that the price of the later occurring transaction in TRACE-eligible securities does not reflect a then current market price for those securities. Similarly, a transaction in TRACEeligible securities occurring as a result of the termination or settlement of (or other events triggering a transaction in, TRACE-eligible securities) CDSs or other types of swaps generally would be reported with a "special price" flag for the same reason. In these instruments and the other instruments referenced above, the parties to such agreements generally determine the terms of the price and/or the price of the TRACEeligible securities at arm's length for investment, commercial or trading purposes in a manner that will not reflect current market price as of the day and time that the transaction or transactions will occur.


      1 A CDS is an agreement where one party "sells" risk (the risk-protection buyer) and the counterparty "buys" the risk (the risk-protection seller). The risk-protection buyer, who often owns the underlying security (e.g., a debt security issued by a third party), pays a periodic fee to the risk-protection seller during the life of the CDS. In return, the risk-protection seller agrees to pay the risk-protection buyer a set amount in the event that a credit event occurs during the term of the CDS (e.g., a bankruptcy, default or a credit downgrade). A CDS can expire at the end of the pre-established term of the swap, or, in the event of a triggering credit event, when it is settled and then terminates.

      For example, broker-dealer X (BD X) is contacted by an institutional client (Client M) to enter into a CDS. Client M has credit exposure to an issuer and wishes to reduce such exposure (e.g., Client M owns a large number of bonds issued by an automobile industry sector company (e.g., ABC Autos), and Client M seeks to transfer some or all of the credit risk related to owning the ABC Autos bonds without actually selling the ABC Autos bonds). BD X enters into a CDS with Client M, under which Client M agrees to pay BD X a periodic fee. In exchange for the periodic fee, BD X agrees that, in the event of a credit event relating to ABC Autos (defined in the swap and including events such as a declaration of bankruptcy or a default), BD X will pay Client M a certain predetermined amount of cash, or will buy from Client M the ABC Autos bonds at par value.

      2 A transaction is reported using the special price modifier by setting the "special price" flag to "Y."

      3 See also Notice to Members 02-76 (November 2002), Q&A No. 13.

    • 05-76 Nominees for NASD Board of Governors

      View PDF File

      INFORMATIONAL

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Senior Management
      NASD Board of Governors

      Executive Summary

      The Annual Meeting of NASD members will be held on February 3, 2006.

      The formal notice of the meeting, including the precise time and location, will be mailed on or about December 29, 2005. The individuals nominated by the NASD National Nominating Committee (NNC) for election to the NASD Board of Governors (NASD Board) are identified in this Special Notice. Pursuant to Article VII, Section 10, of the NASD By-Laws, a person who has not been so nominated for election to the NASD Board may be included on the ballot for the election of governors if:

      (a) within 45 days after the date of this Special Notice, such person presents to the Secretary of NASD petitions in support of such nomination duly executed by at least three percent of NASD members. As of the date of this Special Notice, NASD has 5,166 voting members; therefore, the applicable three percent threshold is 155 members. No member may endorse more than one such nominee. If, however, a candidate's name appears on a petition in support of a slate of more than one nominee, the slate must be endorsed by 10 percent of NASD's voting members. The applicable 10 percent threshold is 516 members; and
      (b) the Secretary certifies that such petitions have been duly executed by the executive representatives of the requisite number of NASD members, and the person being nominated satisfies the classification of the governorship to be filled based on the information provided by the person as is reasonably necessary for the Secretary to make the certification.

      Pursuant to Article VII, Section 4 of the NASD By-Laws, the NASD Board must consist of no fewer than 15 and no more than 25 governors. The number of governors within this range is set by the NASD Board. The By-Laws also require that the number of non-industry governors exceed the number of industry governors on the NASD Board.

      On November 1, 2005, the Executive Committee of the NASD Board approved a reduction in the size of the Board from 19 to 18 governors by eliminating one nonindustry seat. It was determined that when the terms of the current Board members who are not eligible for re-election expire in February 2006, the Board would remain balanced, in accordance with the By-Laws, with one fewer non-industry seat. In February 2006, the Board will consist of 18 governors and be properly balanced with two management, seven industry, two non-industry and seven public members.

      On February 3, 2006, members will elect four governors. Assuming the Legg Mason/ Citigroup transaction referenced in footnote 2 (page 7) closes, the four persons to be elected will need to satisfy the By-Law definitions of public, non-industry representative of an issuer of investment company shares or an affiliate of such an issuer, industry, and industry representative of a regional retail or independent financial planning member firm. This is necessary for the Board to maintain compliance with the compositional requirements of the By-Laws.

      Persons submitting petitions must provide information sufficient for the Corporate Secretary to determine their status with respect to the categories described above.

      Questions/Further Information

      Questions regarding this Special Notice may be directed to:

      Barbara Z. Sweeney
      Senior Vice President and Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500
      (202) 728-8062
      or
      T. Grant Callery
      Executive Vice President and General Counsel
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500
      (202) 728-8285

      NASD Board of Governors Nominees

      The following four persons (see attached profiles) have been nominated by the NNC to serve on the NASD Board for a term of three years or until their successors are duly elected or qualified. Terms of office run from February 3, 2006 to January 2009.

      Terms of Office 2006-2009

      INDUSTRY
      David A. DeMuro Managing Director, Director of Global Compliance and Regulation, Lehman Brothers, Inc. (representative of a national retail firm)
      John S. Simmers Chief Executive Officer, ING Advisors Network (representative of an independent financial planning member firm)


      NON-INDUSTRY
      John J. Brennan Chairman and CEO, The Vanguard Group (representative of an issuer of investment company shares)


      PUBLIC
      Josh S. Weston Chairman and CEO (retired), Automatic Data Processing, Inc.


      NASD Profiles of Board Nominees for Industry Governor

      INDUSTRY
      David A. DeMuro served as Chair of the National Adjudicatory Council in 2001 and 2002. He is Managing Director, Director of Global Compliance and Regulation at Lehman Brothers. Mr. DeMuro joined Lehman Brothers in 1984. Prior to that, he held various positions with the Securities and Exchange Commission in Detroit, Chicago, Los Angeles and Washington, D.C. Mr. DeMuro is a current member of the NASD Membership Committee and the NASD Licensing and Registration Council. He is a member of the Executive Committee of the Securities Industry Association's Compliance and Legal Division and served as Chairman of the Securities Industry/ Regulatory Council on Continuing Education. He currently serves on the NYSE's content committee for the Continuing Education Regulatory Element supervisor's program. He is also a member of the Compliance Advisory panels of the NYSE and CBOE, and of the Board of Trustees of the Securities Industry Institute, a joint venture of the Securities Industry Association and the Wharton School of the University of Pennsylvania. He is on the advisory board of The Journal of Investment Compliance, a publication of Institutional Investor, Inc. Mr. DeMuro is also a member of the Board of Trustees of the Theta Xi Fraternity Foundation. He holds a B.A. from the University of Michigan and a J.D. from the University of Notre Dame.
      John S. Simmers is Chief Executive Officer of ING Advisors Network. In 1983, he co-founded Financial Network Investment Corporation, a leading independent broker-dealer firm, where he served as Chief Operating Officer and as a member of its Board of Directors. Mr. Simmers also served as Chief Operating Officer for a national independent broker-dealer firm and in a management capacity for NASD. He is a former President and Director of the California Association of Independent Broker Dealers (CAIBD); a former member of the Investment Advisor and Independent Firm Committees for the Securities Industry Association (SIA); and served on a number of committees for the Financial Planning Association (FPA). For NASD, he was vice co-chairman of the District 2 South Business Conduct Committee as well as a member of numerous regional and national committees. Currently, Mr. Simmers serves on the Board of Directors for the Financial Services Institute (FSI). He is a graduate of the Ohio State University.

      NASD Profile of Board Nominee for Non-Industry Governor

      NON-INDUSTRY
      John J. Brennan is Chairman and Chief Executive Officer, and a member of the Board of Directors of each of the mutual funds in the Vanguard Group. Mr. Brennan joined Vanguard in July 1982. He was elected President in 1989, Chief Executive Officer in 1996 and Chairman of the Board in 1998. Prior to his career at Vanguard, Mr. Brennan had been employed at S.C. Johnson & Son in Racine, Wisconsin and the New York Bank of Savings. Mr. Brennan is the past Chairman of the Investment Company Institute and is a Trustee of the United Way of America. He graduated from Dartmouth College in 1976 with an AB degree, and received an MBA from the Harvard Business School in 1980.

      NASD Profile of Board Nominee for Public Governor

      PUBLIC
      Josh Weston is the former Chairman and CEO of Automatic Data Processing, Inc. (ADP) and currently is Honorary Chairman of ADP. Mr. Weston has been with ADP in various management positions since 1970. Prior to this, he worked at J. Crew's predecessor. Mr. Weston currently serves on the Boards of Russ Berrie & Co., Inc., Gentiva Health Services, and J. Crew. He is also active on numerous pro bono and Advisory Boards. Mr. Weston is a graduate of the City College of New York and the University of New Zealand, where he received a Master's Degree in economics while on a Fulbright Scholarship. He holds five Honorary Doctorate degrees.

      Governors with Terms Expiring in January 2006

      INDUSTRY
      David A. DeMuro Managing Director, Director of Global Compliance and Regulation, Lehman Brothers, Inc. (representative of a national retail firm)
      M. LaRae Bakerink* Chief Executive Officer, WBB Securities, LLC
      Brian T. Shea1 Chief Operating Officer, Pershing LLC


      NON-INDUSTRY
      John J. Brennan Chairman and CEO, The Vanguard Group (representative of an issuer of investment company shares)
      Eugene M. Isenberg* Chairman and CEO, Nabors Industries, Inc.


      PUBLIC
      Kenneth M. Duberstein* Chairman and CEO, The Duberstein Group, Inc.

      * Not eligible for re-election

      Governors with Terms Expiring in January 2007

      INDUSTRY
      William C. Alsover, Jr.* Chairman, Centennial Securities Company, Inc. (representative of an NASD member having not more than 150 registered persons)


      PUBLIC
      Charles A. Bowsher Former Comptroller General of the United States
      Joel Seligman President, University of Rochester
      Sharon P. Smith* Visiting Fellow in the ILR School at Cornell University

      * Not eligible for re-election

      Governors with Terms Expiring in January 2008

      INDUSTRY
      John W. Bachmann* Senior Partner, Edward D. Jones & Company
      Richard F. Brueckner* Chief Executive Officer, Pershing LLC (representative of a firm that provides clearing services to other NASD members)
      Raymond A. Mason* Chairman and CEO, Legg Mason, Inc. (representative of a regional retail firm)2


      NON-INDUSTRY
      William Heyman Vice Chairman and Chief Investment Officer, The St. Paul Travelers Companies, Inc. (representative of an insurance company)


      PUBLIC
      James E. Burton* Chief Executive Officer, World Gold Council
      Sir Brian Corby* Chairman (retired), Prudential Assurance Compa
      John Rutherfurd, Jr.* Chairman and CEO (retired), Moody's Corporation

      * Not eligible for re-election


      1. The Chair of the National Adjudicatory Council serves a one-year term on the NASD Board.

      2. Upon completion of the Legg Mason/Citigroup transaction, Mr. Mason will no longer be a representative of a regional retail firm. He will, however, continue to serve as a member of the Board of Governors and retain his classification as an Industry Governor.

    • 05-75 Supervisory Controls and Annual CEO Certification

      View PDF File

      GUIDANCE

      Amendments Regarding Deadlines for Submission of Initial Annual Report under Rule 3012 and Execution of the Initial Annual Certification under Rule 3013 and IM-3013

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading
      IM-3013 (Annual Compliance
      and Supervision Certification)
      Supervision
      Supervisory Control Procedures
      Rule 3012 (Supervisory Control
      System)
      Rule 3013 (Annual Certification
      of Compliance and Supervisory
      Processes)

      Executive Summary

      NASD has filed for immediate effectiveness amendments to NASD Rule 3012 (Supervisory Control System) and Rule 3013 (Annual Certification of Compliance and Supervisory Processes) to extend until April 1, 2006, the date by which members must submit their initial annual report required by Rule 3012 and execute their first annual certification pursuant to Rule 3013 and IM-3013.1 The rule change became immediately effective on its October 14, 2005 filing date.

      The text of the amendments is set forth in Attachment A.

      Questions/Further Information

      Questions concerning this Notice may be directed to Patricia Albrecht, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8026.

      Background

      Since the approval of new Rules 3012 and 3013, NASD has received a number of inquiries from members regarding whether the reports required by Rule 3012 and IM-3013 may be combined. Although NASD has previously advised members that they may combine the two reports as long as all of the required elements of the respective reports are addressed and clearly identified, members have indicated that the initial compliance deadline of December 1, 2005 for Rule 3013 makes that option impracticable. This is because the Rule 3013 report must be prepared in advance of the certification-i.e., before December 1, 2005-while the initial Rule 3012 report is not required to be submitted until January 31, 2006.

      In addition, members of both NASD and the New York Stock Exchange (NYSE) ("dual members") have inquired whether they can combine the reports required by Rule 3012 and IM-3013 with the Annual Report required by NYSE Rule 342.30, which is due by April 1 of each year. As support for their request, dual members have noted that the NYSE Rule 342.30 Annual Report mandates similar, though not identical, requirements to the Rule 3012 report. Dual members have also noted that IM-3013 specifically provides that the IM-3013 report may be combined with any other compliance or other similar report required by another self-regulatory organization.

      Discussion

      In response to these inquiries, NASD has amended Rule 3012 and Rule 3013 to allow members to submit the initial annual report required by Rule 3012 and to execute the initial annual certification required by Rule 3013 and IM-3013 by no later than April 1, 2006. As a result, members will be able, if they so choose, to combine the Rule 3012 report with the report required by IM-3013. In addition, dual members will be able to combine either or both of these respective reports with the NYSE Rule 342.30 Annual Report. Accordingly, members will be able to avoid any undue duplication of resources when complying with these reporting requirements.

      Members should be aware, however, that due to Rule 3012's January 31, 2005 effective date, any member choosing to rely on any date after January 31, 2005 through April 1, 2006 as the submission deadline for its initial Rule 3012 report will have to encompass the period from January 31, 2004 up to that submission date (or a reasonable period of time immediately preceding the submission date). Members should also be aware that the report required by IM-3013 that evidences the member's processes must be prepared and submitted to the member's board of directors and audit committee in advance of, but reasonably close in time to, the certification. The certification may be executed anytime up until April 1, 2006 and annually thereafter by the same date the member chooses for its initial certification.


      1. Exchange Act Release No. 52727 (Nov. 3, 2005) (SR-NASD-2005-121).


      ATTACHMENT A

      New rule text is underlined; deleted rule text is bracketed.

      3012. Supervisory Control System

      (a) General Requirements
      (1) Each member shall designate and specifically identify to NASD one or more principals who shall establish, maintain, and enforce a system of supervisory control policies and procedures that (A) test and verify that the member's supervisory procedures are reasonably designed with respect to the activities of the member and its registered representatives and associated persons, to achieve compliance with applicable securities laws and regulations, and with applicable NASD rules and (B) create additional or amend supervisory procedures where the need is identified by such testing and verification. The designated principal or principals must submit to the member's senior management no less than annually, a report1 detailing each member's system of supervisory controls, the summary of the test results and significant identified exceptions, and any additional or amended supervisory procedures created in response to the test results.
      (2) No change.
      (b) Dual Member No change.
      * * * * *
      1. Rule 3012 became effective on January 31, 2005, which would require a member's first Rule 3012 report to be submitted by no later than January 31, 2006 and at least annually thereafter; however, a member may elect to submit its first Rule 3012 report by no later than April 1, 2006. Importantly, a member's first Rule 3012 report must encompass the period from January 31, 2005 (the effective date of Rule 3012) up to the submission date (or a reasonable period of time immediately preceding the submission date). Each ensuing Rule 3012 report may not be for a period greater than 12 months from the date of the preceding Rule 3012 report (but may be for a shorter time period if a member elects to prepare a report more frequently than annually).

      Rule 3013. Annual Certification of Compliance and Supervisory Processes

      (a) Designation of Chief Compliance Officer No change.
      (b) Annual Certification
      Each member shall have its chief executive officer (or equivalent officer) certify annually,1 as set forth in IM-3013, that the member has in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws and regulations, and that the chief executive officer has conducted one or more meetings with the chief compliance officer in the preceding 12 months to discuss such processes.
      1. Rule 3013 and IM-3013 became effective on December 1, 2004, which would require a member's first certification to be executed by December 1, 2005 and annually thereafter; however, a member may elect to execute its first certification by no later than April 1, 2006 and annually thereafter.

    • 05-74 NASD Announces Election Results for District Committees and District Nominating Committees

      View PDF File

      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections

      Executive Summary

      Through this Notice, NASD announces the election results for the District Committees and the District Nominating Committees. The candidates nominated to the District Committees have been duly elected in all districts with the exception of District 7, which will have a contested election to determine the members of its District Committee. The candidates nominated to the District Nominating Committees have been duly elected in all districts. The newly elected District Committee members will serve until January 2009,1 and the newly elected District Nominating Committee members will serve until January 2007.

      In District 7, an additional candidate has satisfied the requirements of Article VIII of the NASD Regulation By-Laws to contest the District Committee election. The outcome of this contested election will be announced in a Notice issued in January 2006.

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

      Questions/Further Information

      Questions concerning this Notice may be directed to the District Director noted or to 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—
      2006 Incoming Members

      District 1

      Elisabeth P. Owens, Regional 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
      Christopher D. Charles Wulff, Hansen & Company San Francisco, CA
      Kevin T. Kitchin Wachovia Securities, LLC San Francisco, CA
      Edward M. Stephens FSC Securities Corporation Santa Rosa, CA


      District 1 Nominating Committee Incoming Members
      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. Roche, 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
      (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
      Steven K. Klein Farmers Financial Solutions, LLC Simi Valley , CA
      Ismael Manzanares, Jr. WFP Securities San Diego, CA
      Gary A. Martino brokersXpress, LLC Thousand Oaks, CA


      District 2 Nominating Committee Incoming Members
      M. LaRae Bakerink WBB Securities, LLC San Diego, CA
      James E. Biddle The Securities Center, Inc. Chula Vista, CA
      Don Dalis UBS Financial Services, Inc. Newport Beach, CA
      Barbara A. Kelle Pacific Global Fund Distributors, Inc. 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
      Arizona, Colorado, New Mexico, Utah, and Wyoming

      James G. Dawson, District Director

      Two Union Square, 601 Union Street, Suite 1616, Seattle, WA 98101-2327
      (206) 624-0790
      Alaska, Idaho, Montana, Oregon, and Washington

      District 3 Committee Incoming Members
      David Director McAdams Wright Ragen, Inc. Seattle, WA
      Daniel Lind Wells Fargo Investments Tucson, AZ
      Stephen Youhn M Holdings Securities, Inc. Portland, OR


      District 3 Nominating Committee Incoming Members
      Gregory R. Anderson MCL Financial Group, Inc. Denver, CO
      L. Hoyt DeMers Wells Fargo Investments, LLC Seattle, WA
      Bridget Gaughan AIG Financial Advisors, Inc. Phoenix, AZ
      John Goodwin Goodwin Browning & Luna Securities, Inc. Albquerque, NM
      C. Fredrick Roed McAdams Wright Ragen, Inc. Bellevue, WA





      District 4

      Thomas D. Clough, District Director

      120 West 12th Street, Suite 900, Kansas City, MO 64105
      (816) 421-5700
      Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota

      District 4 Committee Incoming Members
      Steven F. McWhorter Securities America, Inc. Omaha, NE
      Arthur S. Montgomery1 Walnut Street Securities, Inc. St. Louis, MO
      Brian D. Murphy Woodbury Financial Services, Inc. Woodbury, MN
      Andrew C. Small Scottrade, Inc. St. Louis, MO


      District 4 Nominating Committee Incoming Members
      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 Corp. Minneapolis, MN



      1 Mr. Montgomery has been elected to serve the remaining year of the term of Richard M. Hurwitz, who resigned from the District Committee






      District 5

      Warren A. Butler, Jr., Regional Director

      1100 Poydras Street, Energy Centre, Suite 850, New Orleans, LA 70163-08022
      (504) 522-6527
      Alabama, Arkansas, Louisiana, Mississippi, Oklahoma, and Tennessee

      District 5 Committee Incoming Members
      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 5 Nominating Committee Incoming Members
      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, L.L.C. Jackson, MS
      David W. Wiley, III Wiley Bros., Aintree Capital, L.L.C. Nashville, TN



      2 Please be advised that due to Hurricane Katrina, NASD's District 5 Office in New Orleans is temporarily closed. NASD has established a temporary office at 1125 Highway 43 North, Suites C & D, Picayune, Mississippi 39466. The phone number at this location is (601) 799-4894.






      District 6

      Virginia F. M. Jans, District Director

      12801 N. Central Expressway, Suite 1050, Dallas, TX 75243
      (972) 701-8554
      Texas

      District 6 Committee Incoming Members
      Alan K. Goldfarb Oakbrook Financial Group, LLC Dallas, TX
      Brent T. Johnson3 Multi-Financial Securities Corporation Houston, TX
      John Christopher Melton Coastal Securities, L.P. Houston, TX
      Ralph E. Poppell Stanford Group Company Houston, TX


      District 6 Nominating Committee Incoming Members
      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 Houston, TX



      3 Mr. Johnson has been elected to serve the remaining year of the term of Darryl W. Traweek, who resigned from the District Committee.






      District 7

      Daniel J. Stefak, District Director

      One Securities Centre, Suite 500, 3490 Piedmont Road, NE, Atlanta, GA 30305
      (404) 239-6100
      Georgia, North Carolina, and South Carolina

      Mitchell C. Atkins, District Director

      2500 N. Military Trail, Suite 302, Boca Raton, FL 33431
      (561) 443-8000
      Florida, Puerto Rico, the Canal Zone, and the Virgin Islands

      District 7 Committee Incoming Members

      To be Announced

      District 7 Nominating Committee Incoming Members
      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
      Ruark A. Young Young, Stovall & Company Miami, FL





      District 8

      Carlotta 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
      Stephen F. Anderson Waterstone Financial Group Itasca, IL
      Eric A. Bederman Bernardi Securities, Inc. Chicago, IL
      Mari Buechner4 Coordinated Capital Securities Inc. Madison, WI
      Barbara A. Turner The O.N. Equity Sales Company Cincinnati, OH


      District 8 Nominating Committee Incoming Members
      George E. Bates Bates Securities, Inc. Rockford, IL
      Bernard A. Breton Carillon Investments, Inc. Cincinnati, OH
      Carol P. Foley Podesta & Company Chicago, IL
      Jill R. Powers Oberlin Financial Corporation Bryan, OH
      James J. Roth Pershing LLC Oak Brook, IL



      4 Ms. Buechner has been elected to serve the remaining year of the term of Lora Rosenbaum, who resigned from the District Committee.




      District 9

      Gary K. Liebowitz, Regional Director

      581 Main Street, 7th Floor, Woodbridge, NJ 07095
      (732) 596-2000
      New Jersey and New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City)

      John P. Nocella, District Director

      Eleven Penn Center, 1835 Market Street, 19th Floor, Philadelphia, PA 19103
      (215) 665-1180
      Delaware, the District of Columbia, Maryland, Pennsylvania, Virginia, and West Virginia

      District 9 Committee Incoming Members
      Michael T. Corrao5 Knight Equity Markets LP Jersey City, NJ
      Wayne F. Holly6 Sage Rutty & Co., Inc. Rochester, NY
      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 9 Nominating Committee Incoming Members
      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



      5 Mr. Corrao has been elected to serve the remaining two years of the term of Dorothy G. Sanders, who resigned from the District Committee.

      6 Mr. Holly has been elected to serve the remaining year of the term of Barry M. Cash, who resigned from the District Committee.





      District 10

      Hans Reich, Regional Director

      One Liberty Plaza, New York, NY 10006
      (212) 858-4000
      New York (the counties of Nassau and Suffolk, and the five boroughs of New York City)

      District 10 Committee Incoming Members
      Barry M. Cash Citigroup Global Markets, Inc. Citigroup Global Markets, Inc.
      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 10 Nominating Committee Incoming Members
      Margaret M. Caffrey Schonfeld & Company, LLC Jericho, NY
      Jennifer A. Connors Lehman Brothers Inc. New York, NY
      Raymond C. Holland, Jr. Triad Securities Corp. New York, NY
      Richard J. Paley Carey Financial Corporation New York, NY
      Mark Ronda Oppenheimer & Co., 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
      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 11 Nominating Committee Incoming Members
      Michael C. Braun Moors & Cabot, Inc. Boston, MA
      Andrew F. Detwiler Virtua Research, an Affiliate of Vandham Securities Corp. Boston, MA
      Mark R. Hansen State Street Global Markets, LLC Boston, MA
      Lee G. Kuckro Advest, Inc. Hartford, CT
      Wilson G. Saville Barrett & Company Providence, RI

    • 05-73 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative Renewals for 2006; Payment Deadline: December 14, 2005

      View PDF File

      ACTION REQUIRED

      Broker-Dealer and Investment Adviser Renewals

      Payment Deadline: December 14, 2005

      SUGGESTED ROUTING

      KEY TOPICS

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

      Executive Summary

      The 2006 NASD Broker-Dealer and Investment Adviser Registration Renewal Program will begin on November 21, 2005, 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 700,000 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. On November 1, 2005, firms may start submitting post-dated Forms ADV-W via IARD. Beginning November 7, 2005, firms may start submitting post-dated Forms U5, BDW and BR Closing/Withdrawal via Web CRD/IARD. Post-dated filings that are submitted by 11 p.m. Eastern Time (ET), November 18, 2005, will not appear on the firm's Preliminary Renewal Statement.

      Renewal statements will include the following fees: NASD Web CRD System Processing Fees, NASD Branch Office Fees, as well as New York Stock Exchange (NYSE), American Stock Exchange (Amex), Chicago Board Options Exchange (CBOE), International Securities Exchange (ISE), Pacific Exchange (PCX) and Philadelphia Stock Exchange (PHLX) Maintenance Fees. The statement will also include State Agent, State Broker-Dealer, and, if applicable, State Investment Adviser Firm and Investment Adviser Representative Renewal Fees and Broker-Dealer and/or Investment Adviser Branch Renewal Fees.

      Members should read this Notice to Members, any instructions posted on the NASD Web site at www.nasd.com/renewals, especially the 2006 Renewal Program Bulletin, the Investment Adviser Web site, (if applicable), 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, 2006. 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 21, 2005, 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; NYSE, Amex, CBOE, ISE, PCX and PHLX Maintenance Fees; State Agent Renewal Fees; State Broker-Dealer Renewal Fees; and, if applicable, Investment Adviser Firm and Representative Renewal Fees, and Broker-Dealer and/or Investment Adviser Branch Renewal Fees. NASD must receive full payment of the November Preliminary Renewal Statement no later than December 14, 2005.

      If payment is not received by the December 14, 2005, 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 Notice to Members (NTM) 02-48 for details. Firms also risk failing to renew if fees are not received on 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 2006 renewals, the North American Securities Administrators Association (NASAA) is waiving the annual RA Renewal System Processing Fee of $45 that is normally assessed for every investment adviser representative who renews through the IARD Program. Additionally, for 2006 renewals, NASAA is waiving the IARD Firm System Fee of $100 that is normally assessed for every state-registered investment adviser firm that renews through the IARD Program.

      The NASD Branch Office Assessment Fee of $75 per branch, based on the number of active NASD branches as of December 31, 2005, will be assessed.

      NASD Personnel Assessment Fees are not assessed through the NASD Annual Renewal Program. NASD will mail all NASD member firms a separate billing for this fee during the first quarter of 2006. 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 and state registrations are also assessed in the Preliminary Renewal Statement on Web CRD. NYSE, Amex, CBOE, PCX, ISE and PHLX 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 and PHLX and state-registered personnel employed by the member firm.

      Beginning this year, 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/nasaa/abtnasaa/ find_regulator.asp.

      For detailed information regarding investment adviser renewals, you may also visit the Investment Adviser Web site, www.iard.com. A matrix that includes a list of Investment Adviser Renewal Fees for states that participate in the 2006 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 2006 Renewal Fees:

      1. Web CRD/IARD E-Pay
      2. Check
      3. Wire transfer, or
      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 E-Payment 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 14, 2005, payment must be submitted electronically, no later than 8:30 p.m. ET on December 12, 2005.

      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 the word "Renewals" 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 777-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 the third week of November, or should use the full address, as noted above, 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 the word "Renewals" on the check memo line.
      •  Be sure to send your payment either in the blue pre-addressed renewal payment envelope that will be mailed to you or write the address on the envelope exactly as noted above.

      Wire Payment Instructions:

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

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

      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 the word "Renewals" 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 14, 2005 deadline could cause a member to become ineligible to do business in the jurisdictions effective January 1, 2006.

      Renewal Reports

      Beginning November 21, 2005, the Renewal Reports are available to request, print and/or download via Web CRD. There will be three reports available for reconciliation with the Preliminary Renewal Statement. All three reports will also be available as downloads:

      •  Firm Renewal Report: applicable to broker-dealer and investment adviser firms. This report lists individuals included in the 2006 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 with any other regulators who choose to 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 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 21. Note, any post-dated termination filings submitted by 11 p.m. ET on November 18, 2005, will not appear on the firm's Preliminary Renewal Statement.

      Filing Form U5

      Firms may begin submitting post-dated U5 filings on November 7, 2005. If Forms U5 (either full or partial) are filed electronically via Web CRD by 11 p.m. ET, November 18, 2005, for agents/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 2005 is 6:00 p.m. ET on December 21, 2005. Firms may file both partial and full Forms U5 with a post-dated termination date of December 31, 2005. (This is the only date that can be used for a post-dated Form U5.) The deadline for submission of all EFT (electronic file transfer) filings is 2:00 p.m. ET, December 21, 2005.

      Post-Dated Form Filings

      This functionality allows firms to file a termination form, with a termination date of December 31, 2005. If a Form U5, BDW, BR Closing/Withdrawal or ADV-W indicates a termination date of December 31, 2005, an agent, 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 2006 Renewal Fees. December 31, 2005, is the only date that can be used for a post-dated form filing.

      Firms can begin electronically filing post-dated ADV-W forms via IARD on November 1, 2005. Firms can begin electronically filing post-dated Forms U5, BDW and BR Closing/Withdrawal via Web CRD on November 7, 2005. Firms that submit post-dated termination filings by 11 p.m. ET on November 18, 2005, will not be assessed Renewal Fees for the terminated registrations on their Preliminary Renewal Statement. Firms that submit post-dated termination filings on, or after, November 21, 2005, will not be assessed Renewal Fees for the terminated jurisdictions on the Final Renewal Statement in January 2006. Those firms should see a credit balance on their Final Renewal Statement 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 6:00 p.m. ET on December 21, 2005.

      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 or ADV when Web CRD/IARD resume filing processing on January 3, 2006. 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 18, 2005, 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 2005 is 6:00 p.m. ET, December 21, 2005. This same date applies to the filing of Forms BDW with regulators that are not Phase II participants. For information regarding the post-dating of Forms BDW with the termination date of December 31, 2005, see the section titled, "Post-Dated Form Filings."

      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 18, 2005, 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 2005 is 6:00 p.m. ET, December 21, 2005. For information regarding post-dating Form ADV-W with the termination date of December 31, 2005, for state registrations, see the section below.

      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 18, 2005, 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 3, 2006, 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, 2005. 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 on Web CRD and IARD 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 notices filed at year-end than it did when the Preliminary Renewal Statement was generated, a credit/refund will be issued. Please note that as of January 3, 2006, overpayments will be systemically transferred to firms' Daily Accounts. 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 Registration Management-Research Unit at (240) 386-4849. The request should include a printout of the firm's credit balance as reflected on Web CRD.

      On or after January 3, 2006, 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 and each jurisdiction. Agents and RAs 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 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 3, 2006, 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 Statements and Renewal Reports will appear in the January 2006 Notices to Members. Firms may also refer to the 2006 Renewal Program Bulletin, available at www.nasd.com/renewals.

    • 05-72 SEC Approves Amendments to NASD Rule 3150, Regarding Reporting Requirements for Clearing Firms, and NASD Rule 3230, Regarding Requirements for Clearing Agreements

      View PDF File

      GUIDANCE

      Reporting Requirements for "Piggybacking" Arrangements

      Effective Date: February 20, 2006

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management
      Clearing Agreements
      "Piggybacking" Arrangements
      Rule 3150
      Rule 3230

      Executive Summary

      On August 26, 2005, the Securities and Exchange Commission (SEC) approved amendments to NASD Rule 3150, regarding reporting requirements for clearing firms, and NASD Rule 3230, regarding requirements for clearing agreements.1 The new rule text is contained in Attachment A and is effective on February 20, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to George Walz, Vice President and Director, National Examination Program, Department of Member Regulation, at (202) 728-8462; or Shirley H. Weiss, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8844.

      Background

      By way of background, some introducing firms choose not to contract for clearing services directly with a clearing firm. The reasons vary. For example, the firm may not do sufficient business to satisfy clearing firm financial and other requirements to support a separate clearing agreement. In such cases, the firm may contract for clearing services with an introducing, or "intermediary" firm that, in turn, contracts directly with a clearing firm for clearing services. Firms that contract for clearing services with an intermediary firm are often referred to as "piggybacking" firms, or "piggybackers."

      Under this arrangement, only the intermediary firm has a contractual arrangement with the clearing firm, which clears for both the intermediary firm and the intermediary firm's piggybacking firm(s). Under current practice, the intermediary firm may assign account numbers to the piggybacker's accounts (both proprietary and customer accounts) that do not identify them to the clearing firm as belonging to a piggybacking firm. For example, the intermediary firm may assign account numbers that identify these accounts as branch offices of the intermediary firm.

      Although these piggybacking arrangements may satisfy the business needs of the parties—the clearing firm, the intermediary firm, and the piggybacking firm—they may impede NASD regulatory programs and may cause problems for the clearing firm. For example, under Rule 3150, clearing firms are required to report certain data to NASD for purposes of the surveillance component of its National Examination Program (NEP). In fulfilling its reporting obligation under Rule 3150, a clearing firm whose clients include intermediary firms that have contracted with piggybackers may be reporting the combined data of the intermediary firm and its piggybackers as only belonging to the intermediary firm. In such cases, NASD staff is not able to distinguish between data belonging to the intermediary firm and data belonging to the piggybacking firm(s) for purposes of conducting surveillance.

      In addition, this inability to separate the piggybacking firm data can, and already has, become a serious issue if an intermediary firm goes into SIPC (Securities Investor Protection Corporation) liquidation. If the data from the intermediary and piggybacking firms are not distinguishable, the clearing firm will be unable to facilitate the orderly transfer of accounts without doing time-intensive research and creating a special program to separate accounts belonging to the intermediary firm and its piggybacker(s).

      Discussion

      To resolve these issues, NASD has adopted amendments to Rule 3150 (governing reporting requirements for clearing firms) and Rule 3230 (governing clearing agreements) that would permit regulators and clearing firms to distinguish between data belonging to an intermediary firm and data belonging to its piggybacker(s).

      NASD Rule 3150. The amendments to Rule 3150 require clearing firms to report data to NASD about each piggybacking firm separately from the intermediary firm's data. These requirements will apply to the data pertaining to the proprietary and customer accounts of piggybacking firms only if the piggybacking relationship with the intermediary firm was established on or after February 20, 2006.

      NASD Rule 3230. The amendments to Rule 3230 require intermediary firms to maintain data in such a way as to enable NASD and the clearing firm to be able to identify the data pertaining to the proprietary and customer accounts of the intermediary firm and the data pertaining to the proprietary and customer accounts of any piggybacking firm. These amendments will enable NASD staff to surveil data reported by piggybacking firms as part of NASD's NEP Surveillance program and facilitate any future SIPC liquidations. These requirements will apply to the data belonging to the proprietary and customer accounts of any piggybacking firm only if the piggybacking relationship was established on or after February 20, 2006.

      Endnote

      1 Exchange Act Rel. No. 52352 (Aug. 26, 2005), 70 FR 52460 (Sept. 2, 2005) (SR-NASD-2005-058).


      ATTACHMENT A

      * * * * *

      3150. Reporting Requirements for Clearing Firms

      (a) No change.
      (b) Each member that is a clearing firm is required to report prescribed data to NASD under this Rule in such a manner as to enable NASD to distinguish between data pertaining to all proprietary and customer accounts of an introducing member and data pertaining to all proprietary and customer accounts of any member for which the introducing member is acting as an intermediary in obtaining clearing services from a clearing firm. The reporting requirements of this paragraph (b) shall apply to the proprietary and customer accounts of members that have established an intermediary clearing arrangement with an introducing member on or after February 20, 2006.
      [(b)](c) Pursuant to the Rule 9600 Series, NASD may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member or class of members unconditionally or on specified terms from any or all of the provisions of this Rule that it deems appropriate.

      * * * * *

      3230. Clearing Agreements

      (a) through (g) No change.
      (h) All clearing agreements shall require each introducing member to maintain its proprietary and customer accounts and the proprietary and customer accounts of any member for which it is acting as an intermediary in obtaining clearing services from the clearing firm in such a manner as to enable the clearing firm and NASD to identify data belonging to the proprietary and customer accounts of each member. The requirements of this paragraph (h) shall apply to intermediary clearing arrangements between a member and an introducing member that are established on or after February 20, 2006.

      * * * * *

    • 05-71 SEC approves NASD Interpretive Material to Rule 9216 regarding NASD's MRVP

      View PDF File

      GUIDANCE

      Minor Rule Violation Plan

      Effective Date: November 14, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management
      IM-9216
      Rule 9216(b)
      Minor Rule Violation Plan (MRVP)

      Executive Summary

      On August 18, 2005, the Securities and Exchange Commission (SEC) approved amendments to NASD Interpretive Material 9216-2 (IM-9216-2), regarding NASD's MRVP.1 The new rule text is contained in Attachment A and is effective on November 14, 2005.

      Questions/Further Information

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

      Background

      In 1984, the SEC adopted amendments to Rule 19d-1(c) under the Securities Exchange Act of 1934 to allow self-regulatory organizations to adopt, with SEC approval, plans for the disposition of minor violations of rules. In 1993, pursuant to SEC Rule 19d-1(c), NASD established an MRVP. The rules governing NASD's MRVP may be found in NASD Rule 9216(b).2 Rule 9216(b) authorizes NASD to impose a fine of $2,500 or less on any member or associated person of a member for a violation of any of the rules specified in IM-9216.3 NASD staff reviews the number and seriousness of the violations, as well as the previous disciplinary history of the respondent, to determine if a matter is appropriate for disposition under the MRVP and to determine the amount of the fine.

      The purpose of the MRVP is to provide for a meaningful sanction for the minor or technical violation of a rule when the initiation of a disciplinary proceeding through the formal complaint process would be more costly and time-consuming than would be warranted. Inclusion of a rule in NASD's MRVP does not mean it is an unimportant rule; rather, a minor or technical violation of the rule may be appropriate for disposition under the MRVP. Once NASD has brought a minor violation of a rule against an individual or member firm, NASD may, at its discretion, issue progressively higher fines for all subsequent minor violations of rules within the next 24-month period or initiate more formal disciplinary proceedings.

      Discussion

      NASD has amended its MRVP as follows:

      —Rules 4632, 4642, 4652, 4632A, 5430, 6130, 6170, 6130A, 6170A, 6230, 6420, 6550, 6620, and 6720—Transaction reporting in debt and equity securities.

      NASD has combined in one entry all of the rule violations eligible for disposition under the MRVP that relate to transaction reporting and audit trail requirements in equity and debt securities. This entry includes violations of transaction reporting and audit trail requirements related to (1) the NASDAQ Market Center; (2) NASD's Trade Reporting and Comparison Service (TRACS);4 and (3) the Trade Reporting and Compliance Engine (TRACE).

      To effectuate this, NASD has eliminated the separate minor rule violation pertaining to Rules 6130 and 6170 and has added those rules to this entry. NASD has also added to the MRVP, and this entry, violations of Rules 4632A, 5430, 6130A and 6170A, which relate to TRACS requirements.5 Including violations of the ADF transaction-reporting requirements in the MRVP is consistent with the current minor rule violations for transaction reporting in equity securities.

      NASD has also eliminated the reference in the MRVP to a violation of the Fixed Income Pricing System (FIPS), and replaced it with a violation of Rule 6230, the TRACE transaction-reporting rule.6 In adopting the TRACE rules in 2001, NASD eliminated FIPS, which required members to report trades for 50 high-yield debt securities. Since the TRACE system replaced and expanded upon FIPS, NASD has amended the MRVP to replace the FIPS violation with a violation of the TRACE system transaction-reporting requirement.

      —Rules 2210, 2211, and 2220, and IM-2210-1, -2210-2, -2210-3, -2210-4, -2210-5, -2210-7, and -2210-8—Communications with the public.

      NASD's advertising rules (Rules 2210, 2211, and 2220, and related Interpretive Materials) contain general and specific standards applicable to all member communications with the public. These standards prohibit incomplete, unbalanced, or unfair communications as well as exaggerated, unwarranted, or misleading statements or claims. The rules also enumerate specific standards for certain types of communications, including recommendations, hedge clauses and projections. In addition, the rules set forth standards for the use and disclosure of the member's name.

      Prior to the adoption of these amendments, NASD could issue minor rule violations only for procedural violations of the advertising rules, such as a failure to have advertisements and sales literature approved by a principal prior to use or a failure to meet specified time limits for filing advertisements. It was NASD's experience, however, that, based on the facts and circumstances, certain content-related violations of these rules could warrant more than a Letter of Caution, yet not rise to a level requiring or meriting full disciplinary action. Accordingly, as amended, the MRVP provision concerning communications with the public allows NASD to address these minor or technical violations of content-related advertising rules, which might include, for example only, a technical violation of the provisions on the use and disclosure of members' names.

      —Failure to provide or update contact information as required by NASD Rules. NASD has expanded the MRVP to include, as a general category, a member's failure to identify to NASD and keep current information regarding any contact person that a member must provide to NASD under any current or future NASD rule. For example, a member's failure to provide or update emergency contact information under Rule 3520 or failure to provide or update its executive representative designation and contact information as required by Rule 1150 would be eligible for disposition as a minor rule violation under this category.7


      1 Exchange Act Rel. No. 52294 (Aug. 18, 2005), 70 FR 49700 (Aug. 24, 2005) (SR-NASD-2004-025).

      2 See Exchange Act Rel. No. 32383 (May 28, 1993), 58 FR 31768 (June 4, 1993) (SR-NASD-93-6); see also Notice to Members 93-42 (July 1993).

      3 In 2001, the SEC approved significant amendments to NASD's MRVP. In addition, in 2004, the SEC approved an amendment to NASD's MRVP to include failure to timely submit amendments to the Form U5 (Uniform Termination Notice for Securities Industry Registration).

      4 TRACS is the trade reporting system for NASD's Alternative Display Facility (ADF).

      5 NASD notes that Rule 5430 governs both TRACS and the NASDAQ Market Center transaction reporting requirements.

      6 Prior to July 1, 2002, the Rule 6200 Series pertained to FIPS, and Rule 6240 governed transaction reporting in high yield fixed income securities.

      7 See also Rule 1120(a)(7) (requirement to provide continuing education regulatory element contact person). NASD notes that it generally has sought to achieve consistency regarding the frequency in which members must review and update contact information (namely, within 17 business days after the end of each calendar quarter, which is consistent with the schedule for filing the quarterly FOCUS report).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      * * * * *

      9200. DISCIPLINARY PROCEEDINGS

      * * * * *

      IM-9216. Violations Appropriate for Disposition Under Plan Pursuant to SEC Rule 19d-1(c)(2)

      [—Rule 2210(b) and (c) and Rule 2220(b) and (c)—Failure to have advertisements and sales literature approved by a principal prior to use; failure to maintain separate files of advertisements and sales literature containing required information; and failure to file communications with NASD within the required time limits.]
      —Rules 2210, 2211, and 2220, and IM-2210-1, -2210-2, -2210-3, -2210-4, -2210-5, -2210-7, and -2210-8—Communications with the public.
      —Rule 3360—Failure to timely file reports of short positions on Form NS-1.
      —Rule 3110—Failure to keep and preserve books, accounts, records, memoranda, and correspondence in conformance with all applicable laws, rules, regulations and statements of policy promulgated thereunder, and with [the] NASD Rules [of the Association].
      —Rule 8211, Rule 8212, and Rule 8213—Failure to submit trading data as requested.
      —Article IV of the NASD By-Laws—Failure to timely submit amendments to Form BD.
      —Article V of the NASD By-Laws—Failure to timely submit amendments to Form U4.
      —Article V of the NASD By-Laws—Failure to timely submit amendments to Form U5.
      —Rule 1120—Failure to comply with the Firm Element of the continuing education requirements.
      —Rule 3010(b)—Failure to timely file reports pursuant to the Taping Rule.
      —Rule 3070—Failure to timely file reports.
      —Rule 4619(d)—Failure to timely file notifications pursuant to SEC Regulation M.
      —Rules 4632, 4642, 4652, 4632A, 5430, 6130, 6170, 6130A, 6170A, 6230[6240], 6420, 6550, 6620, and 6720—Transaction reporting in debt and equity[, convertible debt, and high yield] securities.
      [—Rules 6130 and 6170—Transaction reporting to the Automatic Confirmation Transaction Service ("ACT").]
      —Rules 6954 and 6955—Failure to submit data in accordance with the Order Audit Trail System ("OATS").
      —Rule 11870—Failure to abide by Customer Account Transfer Contracts.
      —Failure to provide or update contact information as required by NASD Rules.
      —SEC Exchange Act Rule 11Ac1-4—Failure to properly display limit orders.
      —SEC Exchange Act Rule 11Ac1-1(c)(5)—Failure to properly update published quotations in certain Electronic Communication Networks ("ECN[']s").
      —SEC Exchange Act Rule 17a-5—Failure to timely file FOCUS reports and annual audit reports.
      —SEC Exchange Act Rule 17a-10—Failure to timely file Schedule I.
      —MSRB Rule A-14—Failure to timely pay annual fee.
      —MSRB Rule G-12—Failure to abide by uniform practice rules.
      —MSRB Rule G-14—Failure to submit reports.
      —MSRB Rule G-36—Failure to timely submit reports.
      —MSRB Rule G-37—Failure to timely submit reports for political contributions.
      —MSRB Rule G-38—Failure to timely submit reports detailing consultant activities.

      * * * * *

    • 05-70 Revisions to the Series 4, 6 and 9/10 Examination Programs

      View PDF File

      GUIDANCE

      Qualification Examinations

      Implementation Date: November 30, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Training
      Limited Principal—General Securities Sales Supervisor (Series 9/10)
      Limited Principal—Registered Options (Series 4)
      Limited Representative—Investment Company and Variable Contracts Products (Series 6)
      Rule 1022(f)
      Rule 1022(g)
      Rule 1032(b)

      Executive Summary

      NASD has revised the examination programs for the Limited Principal—Registered Options (Series 4), Limited Representative—Investment Company and Variable Contracts Products (Series 6), and Limited Principal—General Securities Sales Supervisor (Series 9/10).1 The changes are reflected in study outlines that are available on the NASD Web site (www.nasd.com). The changes will appear in examinations administered starting on November 30, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Joe McDonald, Associate Director, NASD Testing and Continuing Education Department (TCE), at (240) 386-5065; Elaine Warren, Lead Analyst, TCE, at (240) 386-4679; or Eva Cichy, Qualifications Specialist, TCE, at (240) 386-4680.

      Background and Discussion

      The Series 4, 6 and 9/10 examination programs were recently reviewed by NASD staff, committees of industry representatives and, in the case of the Series 4 and 9/10 examination programs, the staff of other self-regulatory organizations (SROs) that share those examination programs. As a result of these reviews and as discussed in greater detail below, NASD has revised the examination programs generally to reflect changes in relevant laws, rules and regulations covered by the examinations, and to reflect more accurately the duties and responsibilities of the individuals who are taking these examinations. The Series 4 and 9/10 examinations also have been modified to reflect the Securities and Exchange Commission (SEC) short sale requirements.2

      Series 4

      NASD Rule 1022(f) states that firms engaged in, or intending to engage in, transactions in security futures or put or call options with the public must have at least one registered options and security futures principal. In addition, every individual engaged in the management of the day-to-day options or security futures activities of a firm must be registered as an options and security futures principal. The Series 4 examination, an industry-wide examination, qualifies an individual to function as a registered options and security futures principal, but only for purposes of supervising a firm's options activities.3 The Series 4 examination tests a candidate's general knowledge of options trading, the industry rules applicable to trading of option contracts, and the rules of registered clearing agencies for options. The Series 4 examination covers, among other things, equity options, foreign currency options, index options and options on government and mortgage-backed securities.

      NASD has revised the Series 4 study outline to reflect changes to the laws, rules and regulations covered by the examination. NASD has further revised the study outline to reflect the SEC short sale requirements, and to align the examination more closely to the supervisory duties of a Series 4 limited principal. In addition, NASD has revised the main section headings and the number of questions on each section of the Series 4 study outline as follows: Options Investment Strategies, decreased from 35 to 34 questions; Supervision of Sales Activities and Trading Practices, increased from 71 to 75 questions; and Supervision of Employees, Business Conduct, and Recordkeeping and Reporting Requirements, decreased from 19 to 16 questions. The revised examination continues to cover the areas of knowledge required to supervise options activities.

      NASD has made these changes to the entire content of the Series 4 examination, including the selection specifications and question bank. The number of questions on the Series 4 examination remains at 125, and candidates continue to have three hours 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.

      The Series 4 examination program is shared by NASD and the following SROs: the American Stock Exchange LLC (AMEX), the Chicago Board Options Exchange, Incorporated (CBOE), the New York Stock Exchange, Inc. (NYSE), the Pacific Exchange, Inc. (PCX), and the Philadelphia Stock Exchange, Inc. (PHLX). The revised Series 4 examination program reflects revisions made by all the SROs that share the examination, and not just NASD. Moreover, the revised Series 4 examination program supersedes all prior revisions to the examination.4

      Series 6

      The Series 6 examination qualifies persons seeking registration with NASD as a limited representative of an investment company and variable contracts products. In accordance with NASD Rule 1032(b), registered representatives in this limited category are permitted solely to engage in transactions involving redeemable securities of companies registered under the Investment Company Act of 1940 (Investment Company Act), securities of closed-end companies registered under the Investment Company Act during the period of original distribution only, and variable contracts and insurance premium funding programs and other contracts issued by an insurance company except contracts that are exempt securities pursuant to Section 3(a)(8) of the Securities Act of 1933.

      NASD has revised the Series 6 study outline to cover Regulation S-P, anti-money laundering rules, municipal fund securities (e.g., 529 college savings plans), and Regulation D. NASD also has revised the study outline to align the examination more closely to the functions of a Series 6 limited representative. In addition, NASD has increased the number of sections covered by the Series 6 outline from four to six. Further, NASD has modified the section headings and the number of questions on each section of the outline as follows: Section 1, Securities Markets, Investment Securities, and Economic Factors, 8 questions; Section 2, Securities and Tax Regulations, 23 questions; Section 3, Marketing, Prospecting, and Sales Presentations, 18 questions; Section 4, Evaluation of Customers, 13 questions; Section 5, Product Information: Investment Company Securities and Variable Contracts, 26 questions; and Section 6, Opening and Servicing Customer Accounts, 12 questions.

      NASD has made these changes to the entire content of the Series 6 examination, including the selection specifications and question bank. The number of questions on the Series 6 examination remains at 100, and candidates continue to have 2 hours and 15 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 9/10

      NASD Rule 1022(g) states that firms may register with NASD an individual as a general securities sales supervisor if the individual's supervisory responsibilities in the investment banking and securities business are limited to the securities sales activities of a firm, including the training of sales and sales supervisory personnel and the maintenance of records of original entry and/or ledger accounts of the firm required to be maintained in branch offices by SEC recordkeeping rules. A general securities sales supervisor is precluded from performing any of the following activities: supervision of the origination and structuring of underwritings; supervision of market-making commitments; final approval of advertisements as these are defined in NASD Rule 2210; supervision of the custody of firm or customer funds and/or securities for purposes of SEC Rule 15c3-3; or supervision of overall compliance with financial responsibility rules for broker-dealers promulgated pursuant to the provisions of the Securities Exchange Act of 1934. The Series 9/10 examination, an industry-wide examination, qualifies an individual to function as a general securities sales supervisor. The Series 9/10 examination tests a candidate's knowledge of securities industry rules and regulations and certain statutory provisions pertinent to the supervision of sales activities.

      NASD has revised the Series 9/10 study outline to cover Regulation S-P, Municipal Securities Rule Making Board (MSRB) Rules G-37 and G-38, SRO research analyst and anti-money laundering rules, municipal fund securities (e.g., 529 college savings plans), and exchange traded funds. NASD has further revised the study outline to reflect the SEC short sale requirements, and to align the examination more closely to the supervisory duties of a Series 9/10 limited principal.

      In addition, NASD has modified the main section headings and the number of questions on each section of the Series 9/10 study outline as follows: Section 1—Hiring, Qualifications, and Continuing Education, 9 questions; Section 2—Supervision of Accounts and Sales Activities, 94 questions; Section 3—Conduct of Associated Persons, 14 questions; Section 4—Recordkeeping Requirements, 8 questions; Section 5—Municipal Securities Regulation, 20 questions; and Section 6—Options Regulation, 55 questions. Sections 1 through 5 constitute the Series 10 portion of the examination. Section 6 constitutes the Series 9 portion of the examination. Series 10 covers general securities and municipal securities, and Series 9 covers options. The revised examination continues to cover the areas of knowledge required for the supervision of sales activities.

      NASD has made these changes to the entire content of the Series 9/10 examination, including the selection specifications and question bank. The number of questions on the Series 9/10 examination remains at 200, and candidates continue to have four hours to complete the Series 10 portion and one and one-half hours to complete the Series 9 portion. Also, each question continues to count one point, and each candidate must correctly answer 70 percent of the questions on each series, 9 and 10, to receive a passing grade.

      The Series 9/10 examination program is shared by NASD and the following SROs: the AMEX, CBOE, MSRB, NYSE, PCX and PHLX. The revised Series 9/10 examination program reflects revisions made by all the SROs that share the examination, and not just NASD.

      Availability of Study Outlines.

      The study outlines for the revised examination programs are available on the NASD Qualifications Web page at www.nasd.com.


      Endnotes

      1 See Securities Exchange Act Release No. 52546 (September 30, 2005) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Revisions to the Series 4 Examination Program; File No. SR-NASD-2005-109); Securities Exchange Act Release No. 52547 (September 30, 2005) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Revisions to the Series 6 Examination Program; File No. SR-NASD-2005-110); and Securities Exchange Act Release No. 52548 (September 30, 2005) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Revisions to the Series 9/10 Examination Program; File No. SR-NASD-2005-111). The three rule filings were filed with the SEC for immediate effectiveness on September 13, 2005.

      2 NASD has repealed Rules 3110(b)(1), 3210, 3370(b), and 11830 in light of the requirements of SEC Regulation SHO. See Notice to Members 04-93 (December 2004) (Issues Relating to the SEC's Adoption of Regulation SHO). Accordingly, NASD has deleted references to these rules from the Series 4 and 9/10 examination programs.

      3 A registered options and security futures principal also 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.

      4 More specifically, the current revisions to the Series 4 examination program supersede, among other things, the revisions filed with the SEC for immediate effectiveness on February 9, 2005. See Securities Exchange Act Release No. 51216 (February 16, 2005), 70 FR 8866 (February 23, 2005) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Revisions to the Series 4 Examination Program; File No. SR-NASD-2005-025).

    • 05-69 SEC Approves New Rule 2111 Prohibiting Members from Trading Ahead of Customer Market Orders Under Certain Circumstances

      View PDF File

      GUIDANCE

      Market Order Protection

      Effective Date: January 9, 2006

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Systems
      Trading
      IM-2110-2
      Manning Rule
      Market Orders
      Rule 2111

      Executive Summary

      On August 9, 2005, the Securities and Exchange Commission (SEC) approved new Rule 2111, Trading Ahead of Customer Market Orders, which prohibits a firm that accepts and holds a customer market order from trading for its own account at prices that would satisfy the customer market order, unless the firm immediately thereafter executes the customer market order.1 Rule 2111, as adopted, is set forth in Attachment A of this Notice. NASD will be publishing shortly, in a separate Notice, questions and answers regarding the application of the new rule. The rule becomes effective on January 9, 2006.

      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.

      Background and Discussion

      Interpretive Material 2110-2, Trading Ahead of Customer Limit Order (commonly referred to as the "Manning Rule") generally prohibits members from trading for their own account at prices that would satisfy a customer's limit order, unless the member immediately thereafter executes the customer limit order. The legal underpinnings for the Manning Rule are a member's basic fiduciary obligations and the requirement that it must, in the conduct of its business, "observe high standards of commercial honor and just and equitable principles of trade."2 NASD believes that the same principles on which the Manning Rule is based should apply to the treatment of customer market orders. As such, NASD proposed, and the SEC approved, new Rule 2111, which prohibits members from trading ahead of market orders under certain circumstances.

      Specifically, Rule 2111 prohibits a member that accepts and holds a customer market order from trading for its own account on the same side of the market as the customer market order at prices that would satisfy the customer's order, unless it immediately thereafter executes the customer market order up to the size and at the same price or better at which it traded for its own account. Similar to the application of the Manning Rule, customer market orders would include orders received from the member's own customers or customer orders received from another broker-dealer.

      In addition, if a member is holding a customer market order that has not been immediately executed, Rule 2111 requires that the member make every effort to match the pending market order against any market orders, marketable limit orders or non-marketable limit orders priced better than the best bid or offer, received by the member on the other side of the market. Such orders must be executed at a price that is no less than the best bid, no greater than the best offer at the time the subsequent order is received by the member, and consistent with the terms of the pending market order.

      In the event that a member is holding multiple orders on both sides of the market that have not been executed, the member must make every effort to cross or otherwise execute such orders in a manner that is reasonable and is consistent with the objectives of the rule and with the terms of the orders.3 Members must have a written methodology in place governing the execution priority of all such pending orders, whether the member is holding one order or multiple orders on both sides of the market, and must ensure that such methodology is consistently applied.

      Rule 2111 also applies to limit orders that are marketable at the time they are received by the member or that become marketable at a later time. Once marketable, such limit orders are treated as market orders for purposes Rule 2111; however, these orders must continue to be executed at their limit price or better. If a customer limit order is not marketable when received, the limit order must be provided the full protections of the Manning Rule, as applicable. In addition, if the limit order was marketable when received and then becomes non-marketable, once the limit order becomes non-marketable, it must be provided the full protections of Manning Rule.

      Rule 2111 applies to NASD members irrespective of the market or market center upon which they trade. As such, if a member were to execute a proprietary trade on an exchange while holding a customer market order on the same side of the market, the member will be deemed to have violated Rule 2111 unless (1) the member immediately provides an execution to that market order at a price equal to or better than the proprietary trade; or (2) the member's proprietary trade was in accordance with a functional role, recognized within the rules of that exchange, of acting as a liquidity provider, such as acting in the role of a specialist or some other substantially similar capacity.

      Rule 2111 also incorporates several of the same types of exclusions that apply to the Manning Rule. First, Rule 2111 permits members to negotiate specific terms and conditions applicable to the acceptance of a market order with respect to a market order for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4)4 or a market order that is for 10,000 shares or more, unless such order is less than $100,000 in value.

      Second, Rule 2111 provides an exception for member proprietary trades that are part of an execution, on a riskless principal basis, of another order from a customer (whether its own customer or the customer of another member) (the "facilitated order"). This exclusion applies only if the following requirements are met: (1) the handling and execution of the facilitated order must satisfy the definition of a "riskless" principal transaction, as that term is defined in NASD rules; (2) the member must give the facilitated order the same per-share price at which the member accumulated or sold shares to satisfy the facilitated order, exclusive of any markup or markdown, commission equivalent or other fee; (3) a member must submit, contemporaneously with the execution of the facilitated order, a report as defined in NASD Rules 4632(d)(3)(B)(ii), 4642(d)(3)(B)(ii), 4652(d)(3)(B)(ii), 6420(d)(3)(B)(ii) or 4632A(e)(1)(C)(ii), or a substantially similar report; and (4) members must have written policies and procedures to assure that riskless principal transactions relied upon for this exclusion comply with applicable NASD rules.5

      NASD is emphasizing that nothing in Rule 2111 modifies the application of Rule 2320 with respect to a member's obligations to customer orders. For example, to the extent a member does not execute a market order fully and promptly, compliance with Rule 2111 would not safeguard the member from potential liability due to non-compliance with its best execution responsibilities.

      In recognition that the new rule may alter the way that many members handle customer orders, NASD is providing 90 days from this Notice for implementation to provide members with adequate time to develop and implement systems to comply with the new rule. As such, Rule 2111 becomes effective January 9, 2006.


      Endnotes

      1 See Securities Exchange Act Release No. 52226 (August 9, 2005), 70 FR 48219 (August 16, 2005) (File No. SR-NASD-2004-045).

      2 See NASD Rule 2110.

      3 A member holding a customer market order that has not been immediately executed or a member holding multiple orders on both sides of the market may satisfy the crossing requirements under the rule by contemporaneously buying from the seller and selling to the buyer at the same price.

      4 Rule 3110(c)(4) defines "institutional account" to mean the account of a bank, savings and loan, insurance company, registered investment company, registered investment adviser or the account of any other entity with total assets of at least $50 million.

      5 With respect to requirement (4), the member's policies and procedures, at a minimum, must require that the customer order was received prior to the offsetting transactions, and that the offsetting transactions are allocated to a riskless principal or customer account in a consistent manner and within 60 seconds of execution. Members must have supervisory systems in place that produce records that enable the member and NASD to reconstruct accurately, readily and in a time-sequenced manner, all orders which a member relies in claiming this exemption.


      ATTACHMENT A

      New language is underlined.

      2111.Trading Ahead of Customer Market Orders

      (a) A member must make every effort to execute a customer market order that it receives fully and promptly.
      (b) A member that accepts and holds a market order of its own customer or a customer of another broker-dealer in a Nasdaq or exchange-listed security without immediately executing the order is prohibited from trading that security on the same side of the market for its own account, unless it immediately thereafter executes the customer market order up to the size and at the same price at which it traded for its own account or at a better price.
      (c) (1) A member that is holding a customer market order that has not been immediately executed must make every effort to cross such order with any market order, marketable limit order, or non-marketable limit order priced better than the best bid or offer, received by the member on the other side of the market up to the size of such order at a price that is no less than the best bid and no greater than the best offer at the time that the subsequent market order, marketable limit order or non-marketable limit order is received by the member and that is consistent with the terms of the orders.
      (2) In the event that a member is holding multiple orders on both sides of the market that have not been executed, the member must make every effort to cross or otherwise execute such orders in a manner that is reasonable, and is consistent with the objectives of this rule and with the terms of the orders.
      (3) For purposes of this paragraph (c), a member can satisfy the crossing requirement by contemporaneously buying from the seller and selling to the buyer at the same price.
      (4) A member must have a written methodology in place governing the execution and priority of all pending orders that is consistent with the requirements of this rule. A member also must ensure that this methodology is consistently applied.
      (d) A member may negotiate specific terms and conditions applicable to the acceptance of a market order only with respect to market orders that are: (1) for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4), or (2) 10,000 shares or more, unless such orders are less than $100,000 in value.
      (e) This rule applies to limit orders that are marketable at the time they are received by the member or become marketable at a later time. Such limit orders shall be treated as market orders for purposes of this rule, however, these orders must continue to be executed at their limit price or better. If a customer limit order is not marketable when received, the limit order must be provided the full protections of IM-2110-2 or Rule 6440(f)(2), as applicable. In addition, if the limit order was marketable when received and then becomes non-marketable, once the limit order becomes non-marketable, it must be provided the full protections of IM-2110-2 or Rule 6440(f)(2), as applicable.
      (f) The obligations under this rule shall not apply to a member's proprietary trade if such proprietary trade is for the purposes of facilitating the execution, on a riskless principal basis, of another order from a customer (whether its own customer or the customer of another broker-dealer) (the "facilitated order"), provided that all of the following requirements are satisfied:
      (1) The handling and execution of the facilitated order must satisfy the definition of a "riskless" principal transaction, as that term is defined in NASD Rules 4632(d)(3)(B), 4642(d)(3)(B), 4652(d)(3)(B), 4632A(e)(1)(C) or 6420(d)(3)(B);
      (2) A member that relies on this exclusion to the rule must give the facilitated order the same per-share price at which the member accumulated or sold shares to satisfy the facilitated order, exclusive of any markup or markdown, commission equivalent or other fee;
      (3) A member must submit, contemporaneously with the execution of the facilitated order, a report as defined in NASD Rules 4632(d)(3)(B)(ii), 4642(d)(3)(B)(ii), 4652(d)(3)(B)(ii), 6420(d)(3)(B)(ii) and 4632A(e)(1)(C)(ii), or a substantially similar report to another trade reporting system; and
      (4) Members must have written policies and procedures to assure that riskless principal transactions relied upon for this exclusion comply with applicable NASD rules. At a minimum these policies and procedures must require that the customer order was received prior to the offsetting transactions, and that the offsetting transactions are allocated to a riskless principal or customer account in a consistent manner and within 60 seconds of execution. Members must have supervisory systems in place that produce records that enable the member and NASD to reconstruct accurately, readily, and in a time-sequenced manner all orders on which a member relies in claiming this exception.
      (g) Nothing in this rule changes the application of Rule 2320 with respect to a member's obligations to customer orders.

    • 05-68 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory

      View PDF File

      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. Such topics may include ethics and training for supervisors. Among the subjects you should consider for inclusion in Firm Element training are new rules and regulations, such as supervisory control amendments, major regulatory examination findings, ethics and professional conduct, and any new products or services the firm plans to offer.

      All of the training resources found in the Firm Element Advisory may be found on the CE Council Web site at www.securitiescep.com, where there are also two additional Firm Element resources. The first is the Firm Element Organizer, an easy-to-use software application that enables a search of an extensive database of training resources related to specific investment products or services. The second resource comprises CDs with scenarios taken from the Regulatory Element Supervisor (S201) and General (S101) programs. Log on to the Council Web site for descriptions of the available scenarios.

      Questions/Further Information

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

      Securities Industry Continuing Education Program

      Firm Element Advisory

      Each year the Securities Industry/Regulatory Council on Continuing Education (the Council) publishes the Firm Element Advisory to identify current regulatory and sales practice issues for possible inclusion in Firm Element training plans. This year's topics have been taken from a review of industry regulatory and self-regulatory organizations (SRO) publications and announcements of significant events issued since the last Firm Element Advisory of October 2004. Also included among the topics are several rule proposals that have been filed with but not approved by the Securities and Exchange Commission.

      The Council suggests that firms use the Firm Element Advisory as an aid in developing their Firm Element Needs Analysis to identify training topics that are relevant to the firm. Such topics may include ethics and training for supervisors. Among the subjects that you should consider for inclusion in Firm Element training are new rules or regulations, such as supervisory control amendments, major regulatory examination findings, such as those relating to mutual fund sales practices; ethics and professional conduct; and any new products or services the firm plans to offer. The need to address these topics may vary, depending upon your firm's line(s) of business and SRO membership.

      The Council provides a convenient way for firms to access the training resources listed next to each topic in the Firm Element Advisory via its website, www.securitiescep.com. By using the Search function on the site and entering the referenced document, it is possible to review the content on the Continuing Education website.

      In addition to the Firm Element Advisory material, there are two additional resources that can assist with developing Firm Element training plans. The first is the Firm Element Organizer, available at www.securitiescep.com/TOC/Firm_Element. This 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. A tutorial on the website demonstrates how to use the Firm Element Organizer. The second Firm Element resource is the Regulatory Element Scenario Library, available at www.securitiescep.com>CEP Training Material. The Scenario Library is composed of materials that were taken from the Regulatory Element Supervisor (S201) and General (S101) programs that have fulfilled their three-year life cycle in those programs. These materials are available on CDs and may be suitable for Firm Element training.

      The Council is currently undertaking a new initiative using the materials from the Scenario Library called netCEP. NetCEP will leverage the value of the existing Scenario Library materials with the technological advantage of Webbased learning and delivery. The materials, which are currently available on CDs, will be offered as Internet-based training, providing on-demand access to content for both individuals and firms of all sizes.

      Using netCEP, registered persons seeking general Regulatory Element training or preparatory materials may select and view as many scenarios from the General (S101), Investment Company Products/Variable Contracts Representatives (S106), and Supervisor (S201) Programs as desired. Firms will have access to the materials for training, to use as Firm Element Continuing Education content, or as compliance resources. Firms may allow registered persons to choose the materials they wish to view, or administrators may use the Learning and Content Management System to assign specific materials to individuals or groups, track completion of assignments, and generate reports as needed. Customization can be arranged to have firm-specific content added at the beginning of, or following, the materials. NetCEP is expected to be available in the fourth quarter of 2005.

      For more information, log on to www.securitiescep.com, or call Joe McDonald, Associate Director, NASD Testing & Continuing Education, at (240) 386-5065; or Roni Meikle, Director, Continuing Education, New York Stock Exchange, (212) 656-2156.

      Alternative Investments

      New Products

      An increasing number of complex products are being introduced to the market in response to the demand for higher returns or yield. Some of these products have unique features that may not be understood by investors or registered persons. Others raise concerns about suitability and potential conflicts of interest. In promoting and selling such products, firms should take a proactive approach to reviewing and improving their procedures for developing and vetting new products. At a minimum, those procedures should include clear, specific and practical guidelines for determining what constitutes a new product, ensure that the right questions are asked and answered before a new product is offered for sale, and, when appropriate, provide for post-approval follow-up and review, particularly for products that are complex or are approved only for limited distribution. See NASD NTM (NTM) 05-26: NASD Recommends Best Practices for Reviewing New Products (April 2005). See NYSE Rule 401(Business Conduct); Rule 405 (Diligence as to Accounts) and NYSE Information Memo 05-11, Customer Account Sweeps into Bank. See also NYSE regulatory information bulletin "Hedge Fund Investing: Is It a Suitable Investment for You" at www.nyse.com>information for>individual investors. See also NASD NTM 03-71: NASD Reminds Members of Obligations When Selling Non-Conventional Investments (November 2003); NASD NTM 03-07: NASD Reminds Members of Obligations When Selling Hedge Funds (February 2003); NASD NTM 05-50: Member Responsibilities for Supervising Sales of Unregistered Equity Indexed Annuities (August 2005).

      Non-Managed Fee-Based Account Programs (NMFBA Programs)

      On June 22, 2005, the SEC approved new NYSE Rule 405A (Non-Managed Fee-Based Account Programs—Disclosure and Monitoring). Rule 405A is effective immediately, however, the Exchange will allow 90 days from the approval date (September 22, 2005) for the membership to fully adopt and establish the procedural and systems changes required by the Rule. Note, however, that during this period, the membership is in no way relieved of its existing and ongoing obligations to monitor, review, and supervise NMFBA Programs pursuant to all other applicable NYSE rules including Rules 342 (Offices-Approval, Supervision and Control) and 405 (Diligence as to Accounts).

      Rule 405A(1) requires that each customer, prior to the opening of an account in a NMFBA Program, be provided with a disclosure document describing the types of NMFBA Programs available to such client. The document shall disclose, for each such Program type, sufficient information for the customer to make a reasonably informed determination as to whether the program is appropriate to suit his or her anticipated needs. Specifically, such disclosures must include, at a minimum: a description of the services provided, eligible assets, fees charged, an explanation of how costs will be computed and/or the provision of cost estimates based on hypothetical portfolios, any conditions or restrictions imposed, and a summary of the program's advantages and disadvantages.

      In addition to compliance with the prescribed requirements of Rule 405A, NMFBA Programs are subject to all applicable NYSE Rules including those relating to the supervision of registered representatives. Members and member organizations are advised to take note of registered representatives who seem to have a disproportionate number of customers in NMFBA Programs, as this may increase the likelihood that such Programs may be inappropriate for a number of such customers. Registered representatives should also be monitored for improper behavior in connection with NMFBA Programs, such as temporarily transferring assets into a fee-based account on, or shortly before, the day a percentage-based fee is assessed. See NYSE Information Memo 05-51, Non-Managed Fee-Based Account Programs (Rule 405A).

      NASD previously set forth in an NTM similar member obligations regarding feebased accounts. Before opening a fee-based account for a customer, members must have reasonable grounds to believe that such an account is appropriate for that particular customer. To that end, members must make reasonable efforts to obtain information about the customer's financial status, investment objectives, trading history, size of portfolio, nature of securities held and account diversification. With that and any other relevant information in hand, members should then consider whether the type of account is appropriate in light of the services provided, the projected cost to the customer, alternative fee structures that are available, and the customer's fee structure preferences. In addition, members must disclose to the customer all material components of the fee-based program, including the fee schedule, services provided and the fact that the program may cost more than paying for the services separately.

      Members must also implement supervisory procedures to require a periodic review of fee-based accounts to determine whether they remain appropriate for their respective customers. As part of that review, members should consider whether reasonable assumptions about market conditions upon which the member based its initial determination of appropriateness have changed, as well as any changes in customer objectives or financial circumstances. Finally, members should review their sales literature, marketing material and other correspondence related to fee-based programs to ensure the information is balanced and not misleading and should include in training materials guidelines regarding the establishment of fee-based accounts. See NASD NTM 03-68: NASD Reminds Members That Fee-Based Compensation Programs Must Be Appropriate (November 2003).

      Investments of Liquefied Home Equity

      The rapid increase in home prices over the past several years, in combination with refinancing activity by homeowners, has lead to increasing investment activity by homeowners with equity from their homes. Members and their associated persons should be aware that recommending liquefying home equity to purchase securities may not be suitable for many investors and should perform a careful analysis to determine whether liquefying home equity is a suitable strategy for an investor. In addition, members should ensure that all communications with the public addressing a strategy of liquefying home equity are fair and balanced, and accurately depict the risks of investing with liquefied home equity. Finally, members should consider whether to employ heightened scrutiny of accounts that they know, or have reason to know, are funded with liquefied home equity. See NASD NTM 04-89: NASD Alerts Members to Concerns When Recommending or Facilitating Investments of Liquefied Home Equity (December 2004).

      Tenants-In-Common/Rule 1031 Exchanges

      In general, sales of tenants-in-common (TIC) interests in real property in connection with an exchange of real property pursuant to Section 1031 of Internal Revenue Code constitute securities for purposes of the federal securities laws and NASD and NYSE rules. Members and their associated persons are reminded that when offering to customers TIC interests, they must comply with all applicable NASD and NYSE rules, including those addressing suitability, due diligence, splitting commissions with unregistered individuals or firms, supervision and recordkeeping.

      In addition, members relying on private offering exemptions from the registration requirements of the Securities Act of 1933 (Securities Act) must ensure that their manner of offering TIC interests complies with all applicable requirements, including the prohibition on general solicitation. See NASD NTM 05-18: NASD Issues Guidance on Section 1031 Tax-Deferred Exchanges of Real Property for Certain Tenants-in-Common Interests in Real Property Offerings (March 2005).

      Anti-Money Laundering

      Independent Testing

      Anti-money laundering (AML) continues to be an evolving topic, as regulators adopt new rules and regulations to carry out the mandates of the USA PATRIOT Act. NASD Rule 3011 and NYSE Rule 445 require that NASD and NYSE members establish and implement anti-money laundering compliance programs designed to ensure ongoing compliance with the requirements of the Bank Secrecy Act and the regulations promulgated thereunder. In particular, the rules require, among other things, that members' AML programs provide for independent testing.

      NASD and the NYSE filed with the Securities and Exchange Commission (SEC or Commission) proposed rule changes to amend NASD Rule 3011 and NYSE Rule 445, and to adopt interpretive and supplementary material to these Rules. The proposed amendments would require each member to conduct independent testing of its anti-money laundering program on an annual (calendar-year) basis, with the exception of certain types of firms, which would be allowed to test every two years (on a calendar-year basis). The proposed interpretive and supplementary material includes requirements for the persons who may conduct such tests. NASD's proposal also requires members to review and update, if necessary, the accuracy of the member's anti-money laundering compliance person information on a quarterly basis. See SEC Release No. 34- 51935; Notice of Filing of Proposed Rule Change Relating to Amendments to NASD Rule 3011 and the Adoption of New Related Interpretive Material (June 29, 2005); SEC Release No. 34-51934; Notice of Filing of Proposed Rule Change to Amend NYSE Rule 445 (June 29, 2005).

      Broker-Dealer Customer Identification Program Rule

      On April 29, 2003, the SEC and the Department of the Treasury jointly adopted the broker-dealer customer identification program (CIP) Rule. The CIP Rule requires broker-dealers to implement customer identification programs that include procedures for: (1) verifying the identities of customers; (2) maintaining records of the verification process; (3) comparing customers with lists of known or suspected terrorists or terrorist organizations; and (4) providing customers with notice that information is being collected to verify their identities. See 31 C.F.R. 103.122.

      The CIP Rule permits broker-dealers to rely on certain other financial institutions to undertake the required elements with respect to shared customers. On February 10, 2005, in a letter to the Securities Industry Association (SIA), the SEC Division of Market Regulation (Division) extended the no-action relief granted in its February 12, 2004 letter (2004 No-Action Letter) regarding the ability of broker-dealers to rely on investment advisers to perform customer identification procedures, consistent with the CIP Rule. In its letter, the Division staff states that it will not recommend enforcement action to the Commission under Rule 17a-8 under the Exchange Act if a broker-dealer relies on an investment adviser to perform customer identification procedures, prior to such investment adviser becoming subject to an AML program rule, provided the other requirements in paragraph (b)(6) of the CIP Rule are met, namely that (1) such reliance is reasonable under the circumstances; (2) the investment adviser is regulated by a Federal functional regulator; and (3) the investment adviser enters into a contract requiring it to certify annually to the brokerdealer that it has implemented an anti-money laundering program, and that it will perform (or its agent will perform) specified requirements of the broker-dealer's customer identification program. The 2004 No-Action Letter would have expired on February 12, 2005. The relief provided in the 2004 No-Action Letter and extended by the February 10, 2005 letter will be withdrawn on the earlier of (1) the date upon which an AML program rule for investment advisers becomes effective, or (2) July 12, 2006. See SEC Division of Market Regulation: No-Action Letter to the Securities Industry Association, Feb.10, 2005. See also NASD's AML Web page at www.nasd.com/aml; and the SEC's Spotlight On: Anti-Money Laundering Rules at www.sec.gov/spotlight/moneylaundering.htm. See also NYSE Information Memo 03-32, Customer Identification Programs for Broker-Dealers (July 14, 2003) (www.nyse.com>regulation>information memos).

      Bond Sales

      Mark-Ups

      NASD is proposing to adopt a second interpretation to Rule 2440, to provide additional mark-up guidance for transactions in debt securities except municipal securities.

      Under NASD Rule 2440, (Fair Prices and Commissions) a member is required to sell securities to a customer at a fair price. When a member acts in a principal capacity, the dealer marks up or marks down a security. IM-2440 (Mark-Up Policy) provides guidance on mark-ups and fair pricing of securities transactions with customers. Both Rule 2440 and IM-2440 apply to transactions in debt securities, and IM-2440 provides that mark-ups for transactions in common stock are customarily higher than those for bond transactions of the same size.

      A key step in determining whether a mark-up (mark-down) is fair and reasonable is correctly identifying the prevailing market price of the security, which is the basis from which the mark-up (mark-down) is calculated. The proposed interpretation addresses two fundamental issues in debt securities transactions: (1) how does a dealer correctly identify the prevailing market price of a debt security; and (2) what is a "similar" security and when may it be considered in determining the prevailing market price. See SEC Release No. 34-51338, Notice of Filing of Proposed Rule Change to Adopt an Additional Mark-up Policy for Transactions in Debt Securities Except Municipal Securities (March 9, 2005).

      Communications

      Email Communications

      SROs have taken seriously failures by members to maintain and preserve all required internal communications, and have recently settled actions against members for, among other things, failure to maintain email communications. Members are required to comply with record keeping requirements regarding external and internal communications to ensure that communications will be available and accessible to regulators during the course of examinations and investigations. Firms must maintain, preserve and produce on a timely basis all communications upon request of regulators, including SRO staff. In particular, when implementing new technology, firms must address maintenance, retrieval and production issues, especially in light of the increasing volume of data. See NYSE Disciplinary Actions 05-62 dated May 19, 2005, 05-23 dated January 23, 2005; 05-01 dated January 5, 2005; and 04-190 dated December 15, 2004. See also NYSE Disciplinary Actions 04-128, dated August 2, 2004 and 02-227, 02-226, 02-225, 02-224 and 02-223, all dated November 15, 2002, regarding email retention. See also NYSE-SR-2005-17 Exemptions from pre-use review and requirements for institutional sales material. See also NASD's "Guide to the Internet for Registered Representatives" Web page at www.nasd.com/internetguide; (NASD Disciplinary Action No. CE2050012 (in August 2005 Report); NASD Disciplinary Action No. C11050015) (in July 2005 Report); NASD Disciplinary Action No. CE4050005) (in July 2005 Report); and NASD Disciplinary Action No. C11050004 (in April 2005 Report).

      The NYSE has formed an electronic communications task force, which includes NASD and industry representatives to analyze and address evolving technology and applications for firms in light of current SRO/SEC rule requirements.

      Correspondence

      NASD currently defines correspondence to include any written letter or electronic mail message distributed by a member to (1) one or more of its existing retail customers, and (2) fewer than 25 prospective retail customers within any 30-calendar-day period. The definition of correspondence is significant because firms generally are not required to have a registered principal approve correspondence prior to use or file correspondence with the NASD Advertising Regulation Department, and because some of the specific content standards applicable to other types of communications with the public do not apply to correspondence. NASD is proposing to amend Rule 2211 to require that a registered principal approve, prior to use, any correspondence that is sent to 25 or more existing retail customers within a 30-calendar-day period. See NASD NTM 05-27: NASD Requests Comment on Proposal to Require Principal Pre-Use Approval of Member Correspondence to 25 or More Existing Retail Customers within a 30-Calendar-Day Period (April 2005). See NYSE Rule 342.17 (Review of Communications with the Public) and NYSE Rule 472 (Communications with the Public).

      Continuing Education

      Elimination of Exemptions

      In 2004, the SEC approved amendments to SRO rules on continuing education eliminating all exemptions from the Regulatory Element Program. Registered persons who had been eligible for "grandfathered" and/or "graduated" exemptions are now required to participate in the Regulatory Element Continuing Education Program. The rule changes became effective April 4, 2005. The re-entry phase for formerly exempted registered persons will occur over a three-year period. Each registered person's re-entry into the Program will be determined by using the registered person's "base date," which is usually the person's initial registration date. See NASD NTM 04-78: SEC Approves Amendments to Rule 1120 to Eliminate Exemptions from the Continuing Education Regulatory Element Requirements (October 2004); NASD NTM 05-20: NASD Announces Effective Date of April 4, 2005 for Amendments to Rule 1120 to Eliminate Exemptions from the Continuing Education Regulatory Element Requirements (March 2005). See also NYSE Information Memo 04-55, Amendments to Rule 345A That Rescind All Exemptions from Participation in Continuing Education Regulatory Element Programs and Information Memo 05-20, Reminder—Amendments to Rule 345A Rescinding all Exemptions from Participation in Continuing Education Regulatory Element Programs Become effective on April 4, 2005. See also MSRB Notice 2004-34, Amendment Approved to Remove Exemptions from Regulatory Element of Continuing Education Program.

      Ethics

      The CE Council introduced an ethics module as part of the Regulatory Element of the Continuing Education Program in early 2005. Firms should consider addressing ethical issues in their own Firm Element training. Such individual programs can tailor general concepts to the values, policies, culture, organization and business model of the particular firm, and allow senior management to participate in the ethics program, thereby modeling and articulating the firm's commitment to high ethical standards in daily business conduct.

      Ethics programs should do more than explain industry rules and firm policies. They should provide a context for regulatory requirements by addressing the importance of upholding the firm's values (e.g., integrity, trustworthiness), what constitutes the "right" thing, and the spirit—not only the letter—of the law. They should also help employees develop a greater awareness of ethics issues and a stronger ability to make ethical decisions, including dealing with organizational influences on such decision-making. Such programs should be based on the firm's code of ethics (if any), its supervisory procedures, mechanisms for reporting observed misconduct, and other policies that bear on the conduct of its employees—and they should be realistic.

      An effective ethics curriculum could include cases illustrating ethical situations, approaches to resolving such dilemmas and strategies and resources for dealing with organizational influences, such as focusing on long-term success instead of short-term expediency, using confidential help lines. Rather than providing ethical content in isolation, firms may have employees apply ethical principles to realistic fact patterns, demonstrated in stories of people who have made the wrong ethical decisions and those who have had the courage to make the right choices, and consider the consequences of ethical decisions for customers, employees, the firm and the industry (especially with regard to investor confidence and integrity of the firm). Firms should bear in mind that experience often varies dramatically among employees of the same firm, or between supervisors and staff, and that the training needs may differ across the firm.

      There are a variety of methods to deliver engaging ethics training, including the provision of instruction in person, such as utilizing outside experts, train-the-trainer methodologies, in-house personnel and electronic means. Group interaction is particularly useful in ethics training. Instead of merely providing reading material or lectures, firms should attempt to engage employees by providing an opportunity (whether online, in small discussion groups or both) by which employees can express their views and hear the views of their colleagues.

      Fingerprinting

      Members should review and, as necessary, update their fingerprinting procedures to help ensure that fingerprints submitted to the Federal Bureau of Investigation (FBI) as part of the hiring process belong to the employee being hired by the member. Members' internal procedures addressing the fingerprinting of prospective employees as required under Section 17(f)(2) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17f-2 thereunder should attempt to ensure that the person being fingerprinted is the same as the person who is seeking employment with the member. NASD suggests a number of best practices to members that elect to fingerprint prospective employees inhouse and those that rely on third parties in an off-site location to collect fingerprints and to verify the identity of the person being fingerprinted. See NASD NTM 05-39: NASD Suggests Best Practices for Fingerprinting Procedures (May 2005). See NYSE Rule 345.11 (Investigation Records), NYSE Information Memo 03-11 (Fingerprint Processing and FBI Identification Records) and NYSE Information Memo 04-53 (Termination of Fingerprinting Processing Services).

      Hedge Funds

      Hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss. Neither hedge funds nor advisers to hedge funds are currently required to register with the SEC. However, in December 2004, the SEC adopted a new rule and rule amendments under the Investment Advisers Act of 1940 (Advisers Act) that require advisers to certain hedge funds to register with the SEC. The rule and rule amendments are designed to provide the protections afforded by the Advisers Act to investors in hedge funds, and to enhance the SEC's ability to protect the securities markets. The rule became effective February 10, 2005. Advisers that will be required to register under the new rule and rule amendments must do so by February 1, 2006. See SEC Release No. IA-2333; Registration Under the Advisers Act of Certain Hedge Fund Advisers (December 2, 2004).

      Investment Adviser Registration Requirements for Broker-Dealers

      The SEC adopted Rule 202(a)(11)-1 under the Advisers Act addressing the application of the Act to broker-dealers offering certain types of brokerage programs. Under the rule, a broker-dealer providing advice that is solely incidental to its brokerage services is excepted from the Advisers Act if it charges an asset-based or fixed fee, rather than a commission, mark-up or mark-down, for its services, provided it makes certain disclosures about the nature of its services. The rule states that exercising investment discretion is not "solely incidental to" (1) the business of a broker or dealer within the meaning of the Advisers Act, or (2) brokerage services within the meaning of the rule. The rule also states that a broker or dealer provides investment advice that is not solely incidental to the conduct of its business as a broker or dealer or to its brokerage services if the broker or dealer charges a separate fee or separately contracts for advisory services.

      In addition, the rule states that when a broker-dealer provides advice as part of a financial plan or in connection with providing planning services, a brokerdealer provides advice that is not solely incidental if it (1) holds itself out to the public as a financial planner or as providing financial planning services, (2) delivers to its customer a financial plan, or (3) represents to the customer that the advice is provided as part of a financial plan or financial planning services. Finally, under the rule, broker-dealers are not subject to the Advisers Act solely because they offer full-service brokerage and discount brokerage services (including electronic brokerage) for reduced commission rates. The rule became effective April 15, 2005. See SEC Release No. 34-51523; Certain Brokers Deemed not to be Investment Advisers (April 12, 2005).

      Internal/Supervisory Controls and CEO Certification

      On June 17, 2004, the SEC approved amendments to NYSE Rules 342, 401, 408 and 410 to strengthen the supervisory procedures and internal controls of members and member organizations. The SEC also approved rule changes (Supervisory Control Amendments) by NASD that both create and amend certain rules and interpretive materials to address a member's supervisory and supervisory control procedures. The NYSE and NASD rule changes became effective January 31, 2005. The amendments prescribe general standards with respect to internal and supervisory controls including the regulatory systems and procedures and their purpose regarding supervision and control, business conduct, discretionary accounts and records of orders. See NYSE Information Memo 04-38, Amendments to Rules 342, 401, 408 and 410 Relating to Supervision and Internal Controls (July 26, 2004). See NASD NTM 04-71: SEC Approves New Rules and Rule Amendments Concerning Supervision and Supervisory Controls (October 2004).

      NASD and NYSE issued guidance in January 2005 to assist firms in their compliance with the new rules. NASD issued additional guidelines in April 2005 for complying with NASD Rule 3012(a)(1), which requires a member to designate one or more principals who will establish, maintain, and enforce a system of supervisory control policies and procedures that tests and verifies that a member's supervisory procedures are reasonably designed to comply with applicable securities laws and regulations, and with applicable NASD rules, and to amend those supervisory procedures when the testing and verification demonstrate a need to do so. See NASD NTM 05-08: Guidance Regarding the Application of the Supervisory Control Amendments to Members' Securities Activities, Including Members' Institutional Securities Activities (January 2005); NASD NTM 05-29: Guidance Regarding Rule 3012(a)(1) Requirement to Test and Verify a Member's Supervisory Policies and Procedures (April 2005); Transcript of December 16, 2004, 2004 Supervisory Control Telephone Workshop; see generally NASD Web page at www.nasd.com/SupervisoryControl. See NYSE Information Memo 05-07, Joint NYSE/NASD Memo regarding "Internal Controls" Amendments.

      The SEC also approved new NASD Rule 3013 and accompanying interpretive material that requires members to (1) designate a chief compliance officer (CCO) and (2) have the chief executive officer (CEO) or equivalent officer certify annually that the member has in place processes to establish, maintain, review, test, and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable NASD rules, MSRB rules, and federal securities laws and regulations. Members had to designate and identify to NASD on Schedule A of Form BD a principal to serve as CCO by December 1, 2004. The CEO certification must be executed within one year of December 1, 2004 and annually thereafter. The NYSE has proposed similar requirements to be filed as part of the annual report. See NASD NTM 04-7: SEC Approves New Chief Executive Officer Compliance Certification and Chief Compliance Officer Designation Requirements (November 2004). See NYSE File No. SR-NYSE-2004-64.

      Municipal Securities

      Municipal Fund Securities

      Municipal fund securities, including 529 College Savings Plans, are municipal securities regulated by the MSRB. Municipal fund securities also represent investments in pools of securities, such as securities issued by registered investment companies. Therefore, sales materials for municipal fund securities must comply with the advertising rules of the MSRB, and if the sales material also refers to the underlying investment companies, the material must comply with the advertising rules of the SEC and NASD, including NASD Rule 2210. Principals supervising the sale of municipal fund securities must be appropriately registered and hold either a Series 51 (Municipal Fund Securities Limited Principal) (and either the Series 24 or Series 26) or Series 53 (Municipal Securities Principal) registration. For more information, see the section on Municipal Fund Securities on the MSRB Web site at www.msrb.org/msrb1/mfs/default.asp. See also NASD NTM 03-17: Sales Material for Municipal Fund Securities (March 2003); and NASD Issues Investor Alert on 529 College Savings Plans, September 13, 2004 at www.nasd.com/pr/091305 regarding expenses and tax incentives associated with investments in 529 College Savings Plans.

      On May 24, 2005, the SEC approved amendments to Rule G-21, on advertising, establishing specific requirements with respect to advertisements by brokers, dealers and municipal securities dealers relating to municipal fund securities. The amendments include specific requirements regarding the calculation and display of performance data for municipal fund securities in a manner consistent with Rule 482 under the Securities Act that regulates mutual fund performance advertisements. The amendments also include general disclosure requirements regarding municipal fund securities that are similar in most respects to the disclosures required for mutual fund advertisements under Rule 482. Finally, the amendments incorporate certain prior interpretations relating to municipal fund securities. See MSRB Notice 2005-31; SEC Approves Amendments to Rule G-21 Relating to Advertisements of Municipal Fund Securities (May 27, 2005).

      All advertisements of municipal fund securities submitted or caused to be submitted for publication by a dealer on or after September 1, 2005 must comply with these new provisions of Rule G-21, except for the provisions relating to calculation and presentation of performance data, which must be complied with on and after December 1, 2005. In addition, the SEC recently approved amendments to Rule G-21 that will require municipal fund securities performance advertisements either to disclose performance that is current as of the most recent month-end, or to indicate where such performance may be found.

      Disclosure of Original Issue Discount Bonds

      The MSRB published an interpretive notice reminding brokers, dealers and municipal securities dealers of their affirmative disclosure obligations when effecting transactions with customers in original issue discount bonds. An original issue discount bond, or O.I.D. bond, is a bond that was sold at the time of issue at a price that was below the par value of the bond.

      The original issue discount is the amount by which the par value of the bond exceeded its public offering price at the time of its original issuance. The original issue discount is amortized over the life of the security and, on a municipal security, is generally treated as tax-exempt interest. When the investor sells the security before maturity, any profit realized on such sale is calculated (for tax purposes) on the adjusted book value, which is calculated for each year the security is outstanding by adding the accretion value to the original offering price. The amount of the accretion value (and the existence and total amount of original issue discount) is determined in accordance with the provisions of the Internal Revenue Code and the rules and regulations of the Internal Revenue Service.

      The MSRB believes that the fact that a security bears an original issue discount is material information (since it may affect the tax treatment of the security); therefore, this fact should be disclosed to a customer prior to or at the time of trade. Absent adequate disclosure of a security's original issue discount status, an investor might not be aware that all or a portion of the component of his or her investment return represented by accretion of the discount is tax-exempt, and therefore might sell the securities at an inappropriately low price (i.e., at a price not reflecting the tax-exempt portion of the discount) or pay capital gains tax on the accreted discount amount. Without appropriate disclosure, an investor also might not be aware of how his or her transaction price compares to the initial public offering price of the security. Appropriate disclosure of a security's original issue discount feature should assist customers in computing the market discount or premium on their transaction. See MSRB Notice 2005-01, Interpretive Reminder Notice Regarding Rule G-17, on Disclosure of Material Facts—Disclosure of Original Issue Discount Bonds.

      Broker-Dealer Payments to Non-Affiliated Persons Soliciting Municipal Securities

      On August 17, 2005, the SEC approved substantial amendments to MSRB Rule G-38 relating to the solicitation of municipal securities business under Rule G-38. As amended, Rule G-38 prohibits a broker-dealer or a municipal securities dealer (dealer) from paying persons who are not affiliated with the dealer for soliciting municipal securities business on its behalf. In addition, new MSRB Form G-38t has been created and certain related amendments have been made to MSRB Rule G-37, on political contributions and prohibitions on municipal securities business, and MSRB Rule G-8 on recordkeeping. The amendments became effective August 29, 2005.

      Former Rule G-38, which permitted outside consultants to solicit municipal securities business on behalf of dealers, was replaced in its entirety by new Rule G-38. New Rule G-38 prohibits a dealer from making any direct or indirect payment to any person who is not an affiliated person of the dealer for a solicitation of municipal securities business on behalf of the dealer. An "affiliated person" of a dealer is defined as any partner, director, officer, employee or registered person of the dealer or of an affiliated company. An affiliated company of a dealer is an entity that controls, is controlled by, or is under common control with the dealer and whose activities on behalf of the dealer are not limited solely to the solicitation of municipal securities business. Solicitation is defined as a direct or indirect communication with an issuer of municipal securities for the purpose of obtaining or retaining municipal securities business. Rule G-37 was amended to reflect that those associated persons who solicit municipal securities business and thereby are municipal finance professionals include affiliated persons under Rule G-38.

      The MSRB has incorporated a transitional period permitting certain payments to consultants. A dealer is permitted to make payments to non-affiliated persons (consultants) for solicitations of municipal securities business if such payments were made with respect solely to solicitation activities undertaken by such persons on or prior to August 29, 2005, provided certain conditions are met. In particular, the dealer must disclose each item of municipal securities business for which a transitional payment remains pending and the amount of such pending payment on Form G-38t submitted to the MSRB for the third quarter of 2005 and on each subsequent quarterly Form G-38t submission until such payment is finally made.

      Rule G-8 regarding recordkeeping was amended to require the retention of certain records, and Rule G-37 and related forms were amended to delete references to Rule G-38 and the reporting of consultant information. See SEC Rel. No. 34-52278 (August 17, 2005); MSRB Notice 2005-044, SEC Approves Amendments to Rule G-38 Relating to Solicitation of Municipal Securities Business.

      Mutual Funds

      The following types of mutual fund transactions are under increased scrutiny from all regulators.

      Sales of Class B and C Mutual Fund Shares

      NASD settled three actions against members and fined them more than $21 million for improper sales of Class B and Class C shares of mutual funds. These cases are part of a larger, ongoing investigation into mutual fund sales practices.

      These cases involve recommendations and sales of Class B and Class C shares of mutual funds. In all three cases, the firms made recommendations and sales of mutual funds to their customers without considering or adequately disclosing, on a consistent basis, that an equal investment in Class A shares would generally have been more economically advantageous for their customers by providing a higher overall rate of return. The firms also had inadequate supervisory and compliance policies and procedures relating to these mutual fund sales.

      In particular, NASD found that the firms did not consistently consider that large investments in Class A shares of mutual funds entitle customers to breakpoint discounts on sales charges, generally beginning at the $50,000 investment level, which are not available for investments in other share classes. Investors may be entitled to breakpoints based on the amount of a single mutual fund purchase; the total amount of multiple purchases in the same family of funds; and/or the total amount of mutual fund investments held, at the time of the new purchase, by members of the customer's "household"—typically, accounts of close family members.

      Unlike Class A shares, Class B shares are not subject to a front-end sales charge, but are subject to contingent deferred sales charges (CDSCs) if the shareholder redeems his or her shares within a defined period of time, generally six years. Class B and Class C shares are also subject to higher ongoing fees than Class A shares for as long as they are held. Even though investors do not pay a frontend sales charge for Class B or Class C shares, the potential CDSCs and the higher ongoing fees significantly affect the return on mutual fund investments, particularly at higher dollar levels. See NASD News Release, "NASD Fines Citigroup Global markets, American Express and Chase Investment Services More than $21 Million for Improper Sales of Class B and C Shares of Mutual Funds" (March 23, 2005).

      Regulation National Market System (NMS)

      The SEC adopted rules under Regulation NMS and two amendments to the joint industry plans for disseminating market information. In addition to redesignating the national market system rules previously adopted under Section 11A of the Exchange Act, Regulation NMS includes new substantive rules that are designed to modernize and strengthen the regulatory structure of the U.S. equity markets.

      First, the "Order Protection Rule" 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 other trading centers, subject to an applicable exception. To be protected, a quotation must be immediately and automatically accessible.

      Second, the "Access Rule" 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 each national securities exchange and national securities association to adopt, maintain and enforce written rules that prohibit their members from engaging in a pattern or practice of displaying quotations that lock or cross automated quotations.

      Third, the "Sub-Penny Rule" 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 per share.

      Finally, the "Market Data Rules" and related Plan amendments update the requirements for consolidating, distributing, and displaying market information, as well as amend the joint industry plans for disseminating market information that modify the formulas for allocating plan revenues (Allocation Amendment) and broaden participation in plan governance (Governance Amendment). Regulation NMS became effective August 29, 2005. The compliance dates for the rules under Regulation NMS vary as follows. The Order Protection Rule and Access Rule will be phased-in; the first phase-in date is June 29, 2006 and the second phase-in date is August 31, 2006. The compliance date for the Sub-Penny Rule is January 31, 2006. The compliance date for the Allocation Amendment is September 1, 2006. All other compliance dates coincide with the effective date of Regulation NMS. See SEC Release No. 34-51808, Regulation NMS (June 9, 2005).

      The NYSE has proposed to establish a Hybrid Market, which is pending review by the SEC. Assuming regulatory approvals, the NYSE will introduce the Hybrid Market in phases beginning in fourth quarter 2005, continuing into full rollout in third quarter 2006.

      Research Analyst

      New Qualification Requirements for Research Analysts

      NASD Rule 1050 and NYSE Rule 344 have been amended to provide an exemption from the research analyst qualification requirements for certain research analysts employed by member foreign affiliates in jurisdictions that NASD and the NYSE have determined to have acceptable qualification standards and research analyst conflict of interest rules. Currently, the exemption is available to research analysts in the following jurisdictions: the United Kingdom, China, Hong Kong, Singapore, Thailand, Malaysia and Japan. Eligibility for the exemption is conditioned on several factors, including imposition of NASD Rule 2711 and NYSE Rule 472 on foreign affiliates and their research analysts in those instances where the research analyst contributes to the preparation of a member's research report. The amendment became effective on April 1, 2005. See NASD NTM 05-24: NASD Announces Exemption from the Research Analyst Qualification Requirements for Certain Employees Who Contribute to Member Research Reports (April 2005). See NYSE Information Memo 05-23 Foreign Research Analyst Exemption.

      The NASD and NYSE have amended NASD Rule 1050 and NYSE Rule 344 to provide an exemption from the analysis portion of the Research Analyst Qualification Examination (Series 86) for certain applicants who prepare only "technical research reports" and have passed Levels I and II of the Chartered Market Technician (CMT) Certification Examination administered by the Market Technicians Association (MTA). See NASD NTM 05-14: NASD Announces Exemption from the Analyst Portion of the Research Analyst Qualification Examination for Certain Applicants Who Prepare Only "Technical Research Reports" (February 2005). See NYSE Information Memo 05-09, Rule 344- Research Analyst Qualification Examination ("Series 86/87") for Technical Research Analysts and Information Memo 05-16, Rule 344-Research Analyst Qualification Examination (Series 86/87) for Technical Research Analysts. See SEC Release No. 34-51240 (February 23, 2005).

      The SEC has approved a new NASD rule that requires supervisors of equity research analysts to pass either the Series 87 or the NYSE Series 16 Supervisory Analyst qualification examination. This new rule augments the existing requirement that supervisors of research analysts must be registered as a General Securities Principal. Qualification requirements for supervisors must have been satisfied by August 2, 2005. See NASD NTM 04-81: SEC Approves New NASD Qualification Requirements for Supervisors of Research Analysts (November 2004).

      Road Shows

      The SEC has approved amendments to NASD Rule 2711 (Research Analysts and Research Reports) and NYSE Rule 472 (Communications to the Public) to further insulate research analysts from the potential influences of the investment banking department. The amendments prohibit (1) a research analyst from participating in a road show related to an investment banking services transaction and from engaging in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction and (2) investment banking department personnel from directing a research analyst to engage in sales and marketing efforts and other communications with a customer about an investment banking services transaction. The rule change expressly permits analysts to educate investors and internal personnel about an investment banking services transaction, provided such communications are "fair, balanced and not misleading."

      The new rule became effective June 6, 2005. See NASD NTM 05-34: SEC Approves Amendments to Rule 2711 to Prohibit Research Analysts from Participating in a Road Show and from Communicating with Customers in the Presence of Investment Banking Personnel or Company Management About an Investment Banking Services Transaction (May 2005). See NYSE Information Memo 05-34, Prohibition on Research Analyst Participation in Road Shows.

      Sales Practices

      Penny Stocks

      The SEC amended the definition of "penny stock" as well as the requirements for providing certain information to penny stock customers. The amendments are designed to address market changes, evolving communications technology and legislative developments. The amendments became effective on September 12, 2005. See SEC Release No. 34-51983, Amendments to the Penny Stock Rules (July 7, 2005).

      Directed Brokerage Practices

      On December 20, 2004, the SEC approved amendments to NASD Rule 2830(k), which governs NASD members' execution of investment company portfolio transactions. The amended rule augments existing proscriptions on directed brokerage practices by prohibiting a member from selling the shares of, or acting as an underwriter for, any investment company if the member knows or has reason to know that the investment company or its investment adviser or underwriter have directed brokerage arrangements in place that are intended to promote the sale of investment company securities. The amendments also eliminated an existing provision in the rule that permitted a member, subject to certain conditions, to sell or underwrite the shares of an investment company that follows a policy of considering fund sales in determining whether to send portfolio transactions to a broker-dealer. The rule change became effective February 14, 2005. See NASD NTM 05-04: SEC Approves Amendments to NASD Rule 2830(k) to Strengthen Prohibitions on Investment Company Directed Brokerage Arrangements (January 2005).

      Sales Contests

      NASD currently restricts the payment and acceptance of non-cash compensation in connection with the sale of direct participation programs (DPPs), variable insurance contracts, investment company securities, and public offerings of real estate investment trusts (REITs) and other securities. NASD also prohibits internal non-cash sales contests in connection with the sale of variable insurance contracts or investment company securities unless they meet certain criteria, including that such contests are based on principles of total production and equal weighting. NASD has proposed to expand the prohibitions of noncash compensation to the sale and distribution of any security or type of security, rather than just those enumerated above. NASD also has proposed to prohibit all product-specific cash and non-cash sales contests as defined by the proposed rule. See NASD NTM 05-40: NASD Requests Comment on Proposal to Prohibit All Product-Specific Sales Contests and to Apply Non-Cash Compensation Rules to Sales of All Securities (May 2005).

      Structured Products

      NASD staff is concerned that members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers. NASD provides guidance to members concerning their obligations when selling structured products, including the requirements to: (1) provide balanced disclosure in promotional efforts; (2) ascertain accounts eligible to purchase structured products; (3) deal fairly with customers with regard to derivative products; (4) perform a reasonable-basis suitability determination; (5) perform a customer-specific suitability determination; (6) supervise and maintain a supervisory control system; and (7) train associated persons. See NASD NTM 05-59: NASD Provides Guidance Concerning the Sale of Structured Products (September 2005).

      Short Sales: Reg SHO

      In July 2004, the SEC adopted new Regulation SHO under the Exchange Act to provide a new regulatory framework governing short selling of securities. Among other things, Regulation SHO (1) requires broker-dealers to mark sales in all equity securities "long," "short," or "short exempt"; (2) includes a temporary rule that establishes procedures for the SEC to suspend temporarily the operation of the current "tick" test and any short sale price test of any exchange or national securities association, for specified securities; (3) requires short sellers in all equity securities to locate securities to borrow before selling; and (4) imposes additional delivery requirements on broker-dealers for securities in which a substantial number of failures to deliver have occurred. Together with the Regulation SHO adopting release, the SEC issued an order (Pilot Order) establishing a one-year pilot suspending the provisions of Rule 10a-1(a) under the Exchange Act and any short sale price test of any exchange or national securities association for short sales of certain securities for specified periods of time. The SEC also adopted amendments to remove the shelf offering exception, and issued interpretive guidance concerning sham transactions designed to evade Regulation M. For additional information, see the Short Sales section of the SEC's Web site at www.sec.gov/spotlight/shortsales.htm, and in particular, the Q&A developed by the Division of Market Regulation at www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm. See also CBOE Regulatory Circulars RG05-020 and RG05-046.

      The SEC Division of Market Regulation also issued two No-Action Letters granting relief from the order-marking requirements under the Regulation SHO Pilot in certain circumstances. In this regard, the NYSE and NASDAQ have established a "masking" process, as described in the SEC's No-Action Letter (Division of Market Regulation: No-Action Letter to the Securities Industry Association, April 15, 2005). See also NASD NTM 05-33; Short Sales in Pilot Securities and Order-Marking Requirements under SEC Regulation SHO (April 2004). In addition, members and member organizations using their own proprietary or vendor order management systems are responsible for making appropriate system changes to ensure proper handling of pilot securities.

      To aid members and member organizations in complying with Regulation SHO and the Pilot Order, the NYSE and NASDAQ have posted on their Web sites their respective lists of pilot securities, as established by the Pilot Order. The NYSE has worked with the SEC in obtaining a procedure to grant specialist organizations no-action relief from the close out requirements of Rule 203(b)(3) of Regulation SHO. Also, the NYSE has enhanced its Exchange Filing Platform (EFP) system to add a new EFP contact in the membership profile information for Regulation SHO.

      Finally, with respect to NASD Order Audit Trail System (OATS) requirements and NYSE books and records requirements, members and member organizations also may mark their OATS report consistent with the SEC's order-marking relief. See NASD NTM 04-93: Issues Relating to the SEC's Adoption of Regulation SHO (December 2004). See also NYSE Information Memo 04-54, Adoption of New Provisions Affecting the Regulation of Short Sales, Information Memo 04-64, SEC Postpones Short Sale Pilot Program, the Exchange Proposes to Amend its Short Sale Rules (440B & 440C) and Other Regulation SHO Implementation Issues, Information Memo 05-27, Amendments to NYSE 440F and 440G to Include Short-Exempt Sales on Reports of Short Interest (i.e., Form SS20 & 121), Information Memo 05-30, The Exchange Publishes List of Pilot Securities Pursuant to Regulation SHO and Provides Guidance on the Regulation, Information Memo 05-33, Reg SHO Pilot – Considerations Relating to Selling Securities Short on the Floor of the Exchange and Member Education Bulletin 2005-07 Procedures for Entry and Transmission of Short Exempt CAP-DI Orders.

      Supervision

      Annual Compliance Meetings

      On April 25, 2005, the SEC approved amendments to NASD Rule 3010(a)(7) to require that registered principals, in addition to registered representatives, attend an annual compliance meeting. The SEC also approved amendments to NASD Rules 3010(a), 3010(a)(3), and 3010(b)(1) to clarify that the scope of these rules specifically extends to registered representatives, registered principals, and other associated persons. The amendments became effective July 25, 2005. See NASD NTM 05-44: SEC Approves Amendments Relating to Annual Compliance Meetings (June 2005).

      Mutual Fund/Variable Annuity Sales Practice and Supervision

      Disclosures made in connection with retail sales of investment company shares (mutual funds) and variable annuities have raised ongoing regulatory concerns, particularly with respect to the recently prohibited practice of directed brokerage, as well as issues involving revenue sharing and suitability. The NYSE has released an information memo clarifying requirements for disclosures and sales practices and remind my members and member organizations and associated persons of their disclosure obligations under existing NYSE and/or SEC rules. See NYSE Information Memo 05-54, Disclosures and Sales Practices Concerning Mutual Funds and Variable Annuities.

      Customer Complaints

      On April 13, 2005, the SEC approved new NYSE Rule 401(A) (Customer Complaints) regarding acknowledgements and responses to customer complaints, as well as corresponding amendment to NYSE Rule 476A (Imposition of Fines for Minor Violations(s) of Rules) to allow the Exchange to sanction members' and member organizations' less serious violations of Rule 401A. NYSE Rule 351 (Reporting Requirements) specifies certain occurrences, incidents, and period information that the Member must report to the Exchange. Rule 351(d) requires members and member organizations to report to the Exchange statistical information regarding specified verbal and written customer complaints. Exchange examiners reviewing compliance with Rule 351(d) discovered instances in which member organizations failed to acknowledge or respond to customer complaints. New Rule 401A makes acknowledging and responding to customer complaints mandatory.

      Taping Rule

      On May 5, 2005, the SEC approved amendments to NASD Rule 3010(b)(2) (Taping Rule). The amendments require firms that are seeking an exemption from the Rule to submit their exemption requests to NASD within 30 days of receiving notice from NASD or obtaining actual knowledge that they are subject to the provisions of the Rule. The amendments also clarify that firms that trigger application of the Taping Rule for the first time can elect to either avail themselves of the one-time "opt out provision" or seek an exemption from the Rule, but they may not seek both options. The amendments became effective August 1, 2005. See NASD NTM 05-46: SEC Approves Amendments Relating to Taping Rule "Opt Out" and Exemption Provisions (July 2005).

      Trade Reporting

      Trade Reporting and Compliance Engine (TRACE)

      NASD implemented amendments to Rule 6250 requiring the immediate or delayed dissemination of information on TRACE transactions in two stages (hereinafter, Stage One and Stage Two). The amendments were approved by the SEC on September 3, 2004 and are described in detail in SR-NASD-2004-094, NASD NTM 04-65 (September 2004), and NASD NTM 05-02 (January 2005). The implementation dates of Stage One and Stage Two were October 1, 2004 and February 7, 2005, respectively. With the implementation of Stage Two, all transactions in TRACE-eligible securities are publicly disseminated on an immediate or a delayed basis, except transactions in TRACE-eligible securities that are issued pursuant to Section 4(2) of the Securities Act and are purchased or sold pursuant to Rule 144A under the Securities Act. On July 1, 2005, the period to report a transaction in a TRACE-eligible security was reduced to 15 minutes. TRACE data is available free of charge to investors at www.nasdbondinfo.com.

      Municipal Securities Real-Time Transaction Reporting

      On January 31, 2005, the MSRB began requiring brokers, dealers and municipal securities dealers to report transactions in municipal securities within 15 minutes of execution. The MSRB then makes this "real-time" pricing information available to the marketplace. The Bond Market Association, which represents fixed-income brokers and dealers, posts the MSRB data free of charge on www.investinginbonds.com. Through a searchable database at this website, investors can view municipal bonds by state, credit rating or maturity.

      The MSRB published a notice to brokers, dealers and municipal securities dealers reminding them of the need to report municipal securities transactions accurately and to minimize the submission of modifications and cancellations to the Real-Time Transaction Reporting System (RTRS). Each transaction initially should be reported correctly to RTRS. Thereafter, only changes necessary to achieve accurate and complete transaction reporting should be submitted to RTRS. Changes should be rare since properly reported transactions should not need to be corrected. See MSRB Notice 2005-13, Reminder Regarding Modification and Cancellation of Transaction Reports: Rule G-14. The MSRB also published a notice reminding dealers of trade reporting procedures with respect to "step outs" and other inter-dealer deliveries that are not the result of interdealer transactions. See MSRB Notice 2005-22, Notice of Comparison of Inter- Dealer Deliveries that Do Not Represent Inter-Dealer Transactions—"Step Out" Deliveries: Rules G-12(f) and G-14. In addition, the MSRB amended Rule G-34, on CUSIP numbers and new issue requirements, to facilitate real-time transaction reporting of new issue municipal securities. See MSRB Notice 2005-03, Amendments Approved to Rule G-34 to Facilitate Real-Time Transaction Reporting.

      The MSRB has devoted a section of its Web site (www.msrb.org) to information pertaining to transaction reporting.

      To Obtain More Information

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

      Self-Regulatory Organization Address and Phone Number Online Address
      American Stock Exchange American Stock Exchange
      Marketing Department
      86 Trinity Place
      New York, NY 10006

      (800) THE-AMEX
      www.amex.com
      www.amextrader.com
      Chicago Board Options Exchange Chicago Board Options Exchange
      400 S. LaSalle Street
      Chicago, IL 60605

      (877) THE-CBOE
      Email: help@cboe.com
      www.cboe.com
      Municipal Securities Rulemaking Board MSRB Publications Department
      1900 Duke Street, Suite 600
      Alexandria, VA 22314

      (703) 797-6600
      www.msrb.org
      NASD NASD MediaSource
      P.O. Box 9403
      Gaithersburg, MD 20898-9403

      (240) 386-4200
      www.nasd.com
      New York Stock Exchange New York Stock Exchange
      Publications Department
      11 Wall Street, 18th Floor
      New York, NY 10005

      (212) 656-5273 or (212) 656-2089
      www.nyse.com
      Philadelphia Stock Exchange Philadelphia Stock Exchange
      Marketing Department
      1900 Market Street
      Philadelphia, PA 19103

      (800) THE PHLX or (215) 496-5158
      www.phlx.com

    • 05-67 SEC Approves Uniform Branch Office Definition and Related Interpretive Material

      View PDF File

      GUIDANCE

      Branch Office Definition

      Effective Date: May 1, 2006

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Legal & Compliance
      Operations
      Registered Representatives
      Registration
      Senior Management
      Training
      Branch Office Definition
      Branch Office Registration
      Central Registration Depository
      (CRD® or Web CRD)
      Form BR (Uniform Branch Office
      Registration Form)
      IM-3010-1
      Internal Inspections
      Rule 3010
      Supervision

      Executive Summary

      On September 9, 2005, the Securities and Exchange Commission (SEC) approved (1) amendments to Rule 3010(g)(2) to revise the definition of "branch office" (Uniform Definition); and (2) adoption of IM-3010-1 to provide guidelines on factors to be considered by a member in conducting internal inspections of offices.1 The SEC simultaneously approved amendments to the New York Stock Exchange, Inc.'s (NYSE) Rule 342 (Offices—Approval, Supervision and Control) to provide a new, uniform industry definition of the term "branch office."2

      In addition, there has been a coordinated effort by regulators to develop a new centralized branch office registration system through the Central Registration Depository (CRD) to provide a more efficient, standardized method for members to register branch office locations as required by the rules and regulations of states and self-regulatory organizations (SROs), including NASD. To facilitate the development of this system, NASD filed a rule proposal with the SEC to adopt new Form BR, which will replace Schedule E of the Form BD, the current NYSE Branch Office Application Form, and certain state branch office forms.3 The SEC approved such rule filing on September 30, 2005.4 Form BR will enable firms to register or report5 branch offices electronically with NASD, the NYSE and states that require branch registration or reporting, via a single filing through the CRD system.6

      The amendments are part of NASD's rule modernization initiative to streamline and update NASD rules while preserving investor protections. The amendments establish a broader national standard and are the product of a coordinated effort among regulators to reduce inconsistencies in the definitions used by the SEC, NASD, the NYSE, the North American Securities Administrators Association (NASAA) and state securities regulators to identify locations where broker-dealers conduct securities or investment banking business.

      A copy of the amended rule text is attached hereto as Exhibit A.

      Effective Date

      The amendments will become effective on May 1, 2006. The current definition of "branch office" as set forth in Rule 3010(g)(2) will remain in effect until April 30, 2006.

      Questions/Further Information

      Questions concerning this Notice may be directed to Chip Jones, Vice President, Registration and Disclosure (RAD), at (240) 386-4797; Richard E. Pullano, Associate Vice President/Chief Counsel, RAD, at (240) 386-4821; or Kosha K. Dalal, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-6903.

      Background and Discussion

      Background of Amendments

      Historically, various regulatory bodies have defined the term "branch office" differently. The conflicting requirements that resulted from such disparate definitions created regulatory burdens on members, such as the need to file different application forms with multiple regulatory organizations in order to register or renew the registration of branch office locations, as well as having to coordinate differing registration and notification filing deadlines. The amendments are intended to alleviate these burdens by standardizing the criteria to be applied when determining whether or not a business location requires registration as a branch office.

      In addition to the amendments discussed in this Notice, there has similarly been a coordinated effort by NASD, the NYSE and NASAA to standardize the branch office application process. Specifically, the securities industry will shortly be making the transition to a centralized, CRD-based branch office application system that will allow members, via new Form BR, to submit a single filing in order to simultaneously fulfill the branch office reporting and/or registration requirements of NASD, the NYSE and most states.7 In this regard, firms will also benefit from online work queues, electronic notifications and other features available through the CRD system.8

      Current Definition of "Branch Office" (in effect until April 30, 2006)

      Prior to the effective date of the amendments, NASD's current definition of "branch office" continues in effect. As of May 1, 2006, the Uniform Definition becomes effective, and members must have a completed Form BR filed for each location that meets the amended definition.

      NASD designates locations from which associated persons work as either branch offices or unregistered offices/locations. As currently defined, a "branch office" is any location identified by any means to the public or customers as a location at which the member conducts an investment banking or securities business. The definition provides that the following activities will not be deemed "holding out" and, therefore, will not trigger registration of the location as a branch office: (1) a location identified in a telephone directory, business card or letterhead; (2) a location referred to in a member advertisement; (3) a location identified in a member's sales literature; and (4) any location where a person conducts business on behalf of the member only occasionally; provided, in each case, the phone number and address of the branch office or Office of Supervisory Jurisdiction (OSJ) that supervises the location is also identified.

      A branch office is further classified under Rule 3010(g)(1) as an OSJ if any one of the following enumerated activities occurs at the location: (1) order execution and/or market making; (2) structuring of public offerings or private placements; (3) maintaining custody of customers' funds and/or securities; (4) final acceptance (approval) of new accounts on behalf of the member; (5) review and endorsement of customer orders; (6) final approval of advertising or sales literature for use by associated persons; or (7) responsibility for supervising associated persons at other branch offices.9 An office that is designated an OSJ must have a registered principal on-site and be inspected on an annual basis.10

      Uniform Definition (to become effective May 1, 2006)

      The language of the Uniform Definition substantially mirrors the SEC's definition of "office" in its "Books and Records" rules (see Rules 17a-3 and 17a-4)11 under the Securities Exchange Act of 1934.12 The Uniform Definition does not alter or affect the obligations of a member to comply with the minimum requirements of the Books and Records Rules which specify the records broker-dealers must make, and how long those records and other documents relating to a broker-dealer's business must be kept.

      The Uniform Definition defines a "branch office" as any location where one or more associated persons of a member regularly conducts the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security, or that is held out as such.

      Exemptions from Branch Office Registration

      In developing the Uniform Definition, regulators understood the need to provide reasonable exceptions from branch office registration that take into account technological innovations and current business practices without compromising the need for investor protection. NASD believes the exceptions from branch office registration are practically based while still containing important safeguards and limitations to protect investors.

      Accordingly, as further detailed below, the Uniform Definition excludes from registration as a branch office: (1) a location that operates as a non-sales location/back office; (2) a representative's primary residence provided it is not held out to the public and certain other conditions are satisfied; (3) a location, other than the primary residence, that is used for less than 30 business days annually for securities business, is not held out to the public as an office, and which satisfies certain of the conditions set forth in the primary residence exception; (4) a location of convenience used occasionally and by appointment; (5) a location used primarily for non-securities business and from which less than 25 securities transactions are effected annually; (6) the floor of an exchange; and (7) a temporary location used as part of a business continuity plan.

      Non-Sales Locations/Back Offices

      Rule 3010(g)(2)(A)(i) exempts non-sales locations from branch office registration. Such locations must be established solely for customer service and/or back office functions and may not be held out to the public as a branch office. No sales activities may be conducted from a non-sales location, which is to say that associated persons conducting business on behalf of a member from such locations may not recommend the purchase or sale of securities, otherwise communicate with the public, accept orders for the purchase or sale of securities or execute such orders.

      Primary Residences

      Rule 3010(g)(2)(A)(ii) exempts from the definition of branch office any location that is the associated person's primary residence. Only one associated person, or multiple associated persons who reside at the location and are members of the same immediate family, may conduct business from the location. Each member must maintain a current list of any such locations, which are subject to the following specific safeguards and limitations:

      • The location may not be held out as an office.
      • The associated person(s) may not meet with customers at the location.
      • Neither customer funds nor securities may be handled at the location.
      • The associated person or persons are assigned to a designated branch office, which is reflected on all business cards, stationery, advertisements and other communications to the public.
      • All communications with the public must be subject to supervisory provisions pursuant to all applicable NASD rules (including, but not limited to, Rule 3010).
      • Electronic communications must be transmitted through the member's electronic system.
      • All orders must be entered through the designated branch office or through an electronic system established by the member that is reviewable at such branch office.
      • Written procedures relating to the supervision of sales activities conducted at the location must be maintained by the member.

      Locations Other than Primary Residences

      Rule 3010(b)(2)(A)(iii) exempts from branch office registration any location, other than primary residences, provided it is used for securities-related activities less than 30-business days in any calendar year. These would generally include vacation or second homes and other non-primary residences. Such locations are subject to the same criteria imposed upon exempted primary residences (enumerated above).

      In the context of this exemption, the term "business day" is defined to exclude any partial day, provided the associated person spends at least four hours of such business day at his or her designated branch office during the time period such office is normally open for business. This is intended to prevent associated persons from regularly conducting business from locations other than their primary residence for the majority of a business day, without such activity being counted towards the 30-business-day limit.

      Where the 30-business-day exemption is utilized, members are expected to maintain records adequate to demonstrate compliance with the business day limitations. Once the 30-business day limit has been reached, members will have a 30-calendar-day window to register such locations as branch offices.

      Offices of Convenience

      Rule 3010(g)(2)(A)(iv) exempts from branch office registration "offices of convenience." An office of convenience is defined as a location where an associated person occasionally and exclusively by appointment meets with customers, provided such location is not held out to the public as an office. An associated person may not establish regular business hours at such location or hold out the location in any way (except for signage required at banks as discussed below). Final approval and execution of transactions must be done through the branch office.

      Where such office of convenience is located on bank premises, signage necessary to comply with applicable federal and state laws, rules and regulations, and applicable rules and regulations of the NYSE, other self-regulatory organizations, and securities and banking regulators may be displayed and will not be deemed "holding out" for purposes of this section. This restriction is intended to prevent confusion on the part of customers who might otherwise believe that only traditional, insured bank-related investments are being offered by associated persons through such offices.

      Location Used Primarily to Engage in Non-Securities Transactions

      Rule 3010(g)(2)(A)(v) exempts from branch office registration locations where associated persons are primarily engaged in non-securities activities (e.g., insurance sales) and from which an associated person effects no more than 25 securities transactions in a calendar year; provided that advertisements or sales literature, including business cards, identifying such location also set forth the locations from which the associated person or persons are directly supervised. All securities transactions originating from such locations must be entered through, and supervised by, the associated person's designated branch office. Once the 25 securities transaction threshold is exceeded, members will be given a 30-calendar-day window to register such locations as branch offices.

      Floor of a Registered National Securities Exchange

      Rule 3010(g)(2)(A)(vi) exempts from branch office registration any location on the floor of a registered national securities exchange from which a member conducts a direct access business with public customers.

      Temporary Location Used as Part of a Business Continuity Plan

      Rule 3010(g)(2)(A)(vii) exempts from branch office registration any temporary location established in response to the implementation of a business continuity plan.13

      Main Offices

      A member's main office will be required to register as a branch office if it falls within the definition of "branch office."14

      Offices That Supervise Other Offices

      Current Rule 3010(g)(2)(B) provides that notwithstanding the exclusions provided in paragraph (2)(A), any location that is responsible for supervising the activities of persons associated with the member at one or more non-branch locations of the member is considered to be a branch office. This provision is currently effective and will remain so after the effective date of the Uniform Definition. Further, as noted above, members are reminded that pursuant to Rule 3010(g)(1), any location that is responsible for supervising the activities of persons associated with the member at one or more branch offices of the member is an OSJ.

      IM-3010-1 (effective May 1, 2006)

      NASD staff believes the adoption of the Supervisory Controls Amendments in 2004 established an industry benchmark, imposing high standards regarding member's supervision and supervisory control procedures.15 However, to further emphasize the requirement that members already have to establish reasonable supervisory procedures and conduct reviews, NASD is adopting new interpretive material, IM-3010-1 (Standards for Reasonable Review). IM-3010-1 provides that each member must conduct a review, at least annually, of the businesses in which it engages, which must be reasonably designed to assist in detecting and preventing violations of and achieving compliance with applicable securities laws and regulations and with NASD rules. Each member shall establish and maintain supervisory procedures that must take into consideration, among other things, the member's:

      • size,
      • organizational structure,
      • scope of business activities,
      • number and location of offices,
      • the nature and complexity of products and services offered,
      • the volume of business done,
      • the number of associated persons assigned to a location,
      • whether a location has a principal on-site,
      • whether the office is a non-branch location, and
      • the disciplinary history of the registered representatives or associated persons.

      The IM notes that members must be especially diligent in establishing procedures and conducting reasonable reviews with respect to non-branch locations.

      Interpretive Guidance

      NASD expects to publish a Notice shortly addressing certain interpretive issues relating to the Uniform Definition.

      Timeline and Branch Registration and Reporting

      The following is intended to be a brief summary of the transition process to the Form BR and the new branch office registration system. Members are encouraged to refer to Notice to Members (NTM) 05-66 for more detailed information on how to register offices using the Form BR and the new branch office registration system.

      Important Dates to Remember

      October 14, 2005: Last day on which NASD member firms may file a new or amended Schedule E to Form BD through the CRD system.
      October 15, 2005 to October 30, 2005: "Lock-out" Period—There will be a two week lock-out period beginning October 15, 2005 through October 30, 2005, so that NASD can begin the transition process to the Form BR for branch office sin existence as of the close of business on October 14, 2005. During the lock-out period, NASD will create a "conversion" Form BR on the CRD system for all branch offices in existence as of the close of business on October 14, 2005. NASD will assign a unique branch CRD number to each of these branches and pre-populate the conversion Forms BR with limited information for each of these branches. 16 During this lock-out period, the CRD system will not accept any branch office forms or amendments via any of the current branch office forms or Form BR.
      October 31, 2005: Starting on this date, the new branch office functionality will be available in the CRD system, and firms will be able to file Forms BR for each of their branch offices. Beginning on this date, firms with branch offices in existence prior to the close of business on October 14, 2005 may (1) complete the data fields for each conversion Form BR created by NASD during the lock-out period and (2) file the completed Forms BR through CRD. Also starting on this date, firms may register via the new Form BR any new branch offices opened during the lock-out period or thereafter (i.e., branch offices established on or after October 15, 2005).
      May 1, 2006: Effective Date of Uniform Definition and IM-3010-1 —Members must have a complete Form BR for any office that is a "branch office" under the Uniform Definition.

      Endnotes

      1 See Exchange Act Release No. 52403 (September 9, 2005); 70 FR 54782 (September 16, 2005); File No. SR-NASD-2003-104 (Order Granting Approval of Proposed Rule Change Relating to Proposed Uniform Branch Office Definition) (SEC Approval Order).

      2 See Exchange Act Release No. 52402 (September 9, 2005); 70 FR 54788 (September 16, 2005); File No. SR-NYSE-2002-34 (Order Granting Approval of Proposed Rule Change Relating to Proposed Uniform Branch Office Definition) (SEC NYSE Approval Order).

      3 See Exchange Act Release No. 51742 (May 25, 2005); 70 FR 32386 (June 2, 2005); File No. SR NASD-2005-030 (Proposed Form BR (Uniform Branch Office form) and Conforming Changes and Technical Revisions to the Uniform Application for Securities Industry Registration or Transfer (Form U4) and the Uniform Termination Notice for Securities Industry Registration (Form U5)) (March 11, 2005).

      4 See Exchange Act Release No. 1153 (September 30, 2005).

      5 Although these terms may be used interchangeably by SROs and/or states, "registration" typically refers to a process that requires an approval by the SRO or state before a branch may begin doing business, whereas "reporting" typically refers to a process by which firms "notice file" or notify an SRO or state of the existence of a branch office, but an approval is not required.

      6 For information on which states will accept Form BR for branch office registration, see the North American Securities Administrators Association (NASAA) Web site at www.nasaa.org.

      7 The Form BR replaces Schedule E of the 1160, the current NYSE Branch Office Application Form (which is currently submitted through the NYSE's Electronic Filing Platform (EFP) System), and certain state branch office forms. Consistent with the uniform form concept, the Form BR will enable firms to register or report branch offices electronically with NASD, the NYSE and states that require branch registration or reporting, via a single filing through the CRD system. For additional information, see Exchange Act Release No. 1153 (May 25, 2005); 70 FR 32386 (June 2, 2005); File No. SR-NASD-2005-030 (Proposed Form BR and Conforming Changes and Technical Revisions to the Form U4 and Form U5) (March 11, 2005). See also SR-NYSE-2005-13 and NYSE 1175, dated August 9, 2004.

      8 See Notice to Members 05-66 for more detailed information regarding the new Form BR and the branch office registration system.

      9 See Rule 3010(g)(2).

      10 See Rules 3010(a) and (c). Rule 3010(c) further provides that each member shall inspect at least annually any branch office that supervises one or more non-branch locations, and at least every three years any branch office that does not supervise one or more non-branch locations.

      11 See 17 CFR 240.1160 and 1160.

      12 15 U.S.C. 78a et seq.

      13 For additional information, see Rules 3510 (Business Continuity Plans) and 3520 (Emergency Contact Information). See also NTM 04-37, SEC Approves Rules Requiring Members to Create Business Continuity Plans and Provide Emergency Contact Information (May 2004).

      14 This rule change supercedes any earlier statements made concerning the registration requirements applicable to members' main offices under NASD rules. NASD notes that IM-1000-4 addresses the need for members to keep their membership applications current, as well as to properly designate and register OSJs and branch offices. NASD intends to propose future amendments to IM-1000-4 to reflect the SEC's approval of the Uniform Definition and new Form BR.

      15 See Exchange Act Release No. 1153 (June 17, 2004), 69 FR 35092 (June 23, 2004); SR-NASD-2002-162. See also Exchange Act Release No. 1153 (September 30, 2004), 69 FR 59972 (October 6, 2004); SR-NASD-2004-116. See also NTM 04-71, Supervisory Controls, SEC Approves New Rules and Rule Amendments Concerning Supervision and Supervisory Controls (October 2004).

      16 The conversion process will download the following fields from existing data in CRD or the Investment Advisor Registration Advisory© (IARD), as well as the following data provided by the NYSE and participating states: Branch Address, NASD Branch Number, NYSE Branch Code Number, NYSE Branch Type, NASD/NYSE Supervisor/Person-In-Charge Name and CRD Number, Operational Status and NYSE/Jurisdiction Registration Status.


      EXHIBIT A

      3010 Supervision

      (g) Definitions
      (2) (A) A "branch office" is any location where one or more associated persons of a member regularly conducts the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of any security, or is held out as such, excluding:
      (i) Any location that is established solely for customer service and/or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office;
      (ii) Any location that is the associated person's primary residence; provided that:
      a. Only one associated person, or multiple associated persons, who reside at that location and are members of the same immediate family, conduct business at the location;
      b. The location is not held out to the public as an office and the associated person does not meet with customers at the location;
      c. Neither customer funds nor securities are handled at that location;
      d. The associated person is assigned to a designated branch office, and such designated branch office is reflected on all business cards, stationery, advertisements and other communications to the public by such associated person;
      e. The associated person's correspondence and communications with the public are subject to the firm's supervision in accordance with Rule 3010;
      f. Electronic communications (e.g., e-mail) are made through the member's electronic system;
      g. All orders are entered through the designated branch office or an electronic system established by the member that is reviewable at the branch office;
      h. Written supervisory procedures pertaining to supervision of sales activities conducted at the residence are maintained by the member; and
      i. A list of the residence locations is maintained by the member;
      (iii) Any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided the member complies with the provisions of paragraph (A)(2)(ii)a. through h. above;
      (iv) Any office of convenience, where associated persons occasionally and exclusively by appointment meet with customers, which is not held out to the public as an office;*
      (v) Any location that is used primarily to engage in non-securities activities and from which the associated person(s) effects no more than 25 securities transactions in any one calendar year; provided that any advertisement or sales literature identifying such location also sets forth the address and telephone number of the location from which the associated person(s) conducting business at the non-branch locations are directly supervised;
      (vi) The Floor of a registered national securities exchange where a member conducts a direct access business with public customers; or
      (vii) A temporary location established in response to the implementation of a business continuity plan.
      (B) Notwithstanding the exclusions provided in paragraph (2)(A), any location that is responsible for supervising the activities of persons associated with the member at one or more non-branch locations of the member is considered to be a branch office.
      (C) The term "business day" as used in Rule 3010(g)(2)(A) shall not include any partial business day provided that the associated person spends at least four hours on such business day at his or her designated branch office during the hours that such office is normally open for business.

      * Where such office of convenience is located on bank premises, signage necessary to comply with applicable federal and state laws, rules and regulations and applicable rules and regulations of the NYSE, other self-regulatory organizations, and securities and banking regulators may be displayed and shall not be deemed "holding out" for purposes of this section.

      * * * * *

      IM-3010-1. Standards for Reasonable Review

      In fulfilling its obligations pursuant to Rule 3010(c), each member must conduct a review, at least annually, of the businesses in which it engages, which review must be reasonably designed to assist in detecting and preventing violations of and achieving compliance with applicable securities laws and regulations and with NASD Rules. Each member shall establish and maintain supervisory procedures that must take into consideration, among other things, the firm's size, organizational structure, scope of business activities, number and location of offices, the nature and complexity of products and services offered, the volume of business done, the number of associated persons assigned to a location, whether a location has a principal on-site, whether the office is a non-branch location, the disciplinary history of registered representatives or associated persons, etc. The procedures established and the reviews conducted must provide that the quality of supervision at remote offices is sufficient to assure compliance with applicable securities laws and regulations and with NASD Rules. With respect to a non-branch location where a registered representative engages in securities activities, a member must be especially diligent in establishing procedures and conducting reasonable reviews. Based on the factors outlined above, members may need to impose reasonably designed supervisory procedures for certain locations and/or may need to provide for more frequent reviews of certain locations.

      * * * * *

    • 05-66 SEC Approves Uniform Branch Office Registration Form (Form BR) and Conforming and Technical Changes to Forms U4 and U5

      View PDF File

      GUIDANCE

      Branch Office Registration

      Effective Date: October 31, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Legal & Compliance
      Operations
      Registered Representatives
      Registration
      Senior Management
      Training
      Branch Office Registration
      Central Registration Depository
      (CRD® or Web CRD)
      Form ADV
      Form BR (Uniform Branch Office
      Registration Form)
      Form U4 (Uniform Application for
      Securities Industry and Transfer)
      Form U5 (Uniform Termination
      Notice for Securities Industry
      Registration)
      Investment Adviser Registration
      Depository (IARD®)
      NYSE Branch Office Application
      Form

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved the Form BR and technical changes to the Form U4 and Form U5.1 The Form BR replaces Schedule E of the Form BD, the current New York Stock Exchange, Inc. (NYSE) Branch Office Application Form and certain state branch office forms, and will enable firms to register branch offices electronically with NASD, the NYSE and states that require branch registration or reporting via a single filing through the CRD system.

      This Notice gives an overview of the new Form BR and revisions to the Forms U4 and U5. The Notice also provides members with a timetable and guidance to assist them in the transition from existing branch forms to the Form BR. Copies of the new forms are available on NASD's Web site at www.nasd.com/crdbranchoffice.

      The new Form BR and the revised Forms U4 and U5 become effective on October 31, 2005. However, as described below, NASD will begin the transition process to the Form BR for branch offices in existence as of the close of business on October 14, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Chip Jones, Vice President, Registration and Disclosure (RAD), at (240) 386-4797; Richard E. Pullano, Associate Vice President/Chief Counsel, RAD, at (240) 386-4821; or Stefanie M. Watkins, Senior Counsel, RAD, at (240) 386-4824.

      Background and Discussion

      Branch Registration and Reporting

      The Form BR replaces Schedule E of the Form BD, the current NYSE Branch Office Application Form, and certain state branch office forms. Consistent with the uniform form concept, the Form BR will enable firms to register or report2 branch offices electronically with NASD, the NYSE, and states that require branch registration or reporting, via a single filing through the CRD system.3 Branch office registration through the CRD system will create 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. For example, in addition to being able to submit a single filing to fulfill the branch office registration requirements of NASD, the NYSE and states, firms will benefit from the centralized fee collection, online work queues, electronic notifications and other features available through the CRD system.

      In preparation for the transition to the Form BR, NASD has been working with participating regulators and firms to identify existing branch offices for participating SROs and jurisdictions. As further detailed below, to assist firms in making the transition to the Form BR, NASD will use data previously filed on Schedule E, the NYSE Branch Office Application Form, and/or state branch office forms to create a "conversion" Form BR on the CRD system for all branch offices in existence as of the close of business on October 14, 2005.

      Timetable for the Transition to the Form BR

      October 14, 2005 is the last day NASD member firms may file a new or amended Schedule E through the CRD system. The CRD system will invalidate any new Schedule E filings or amendments to Schedule E that are in a "pending" status on October 15, 2005.4 For information regarding the NYSE's filing protocols during the Form BR transition, see www.nyse.com. For information on state filing protocols for transitioning to Form BR, see www.nasaa.org.

      "Lock-out" Period (October 15, 2005 through October 30, 2005). There will be a two week lock-out period beginning October 15, 2005 through October 30, 2005, so that NASD can begin the transition process to the Form BR for branch offices in existence as of the close of business on October 14, 2005. During the lock-out period, NASD will create a conversion Form BR on the CRD system for all branch offices in existence as of the close of business on October 14, 2005. NASD will assign a unique branch CRD number to each of these branches and pre-populate the conversion Forms BR with limited information for each of these branches .5 During this lock-out period, the CRD system will not accept any branch office forms or amendments via any of the current forms or Form BR.

      Form BR Availability (starting on October 31, 2005). Starting on October 31, 2005, the new branch office functionality will be available in the CRD system, and firms will be able to file Forms BR for each of their branch offices. Beginning on that date, firms with branch offices in existence prior to the close of business on October 14, 2005 may: (1) complete the data fields for each conversion Form BR created by NASD during the lock-out period, and (2) file the completed Forms BR through CRD.

      Also, starting on October 31, 2005, firms may register any new branch offices opened during the lock-out period or thereafter (i.e., branch offices established on or after October 15, 2005).

      In addition, firms will be able to amend Forms U4 to assign each registered person to a registered branch office. Firms may assign registered persons to branches by means of either individual Form U4 filings or an electronic file transfer (i.e., a "batch" filing) established exclusively for this purpose. See www.nasd.com/crd branchoffice for more details on the available filing alternatives.

      Compliance with Form BR and Form U4 Filing Requirements for Branch Offices in Existence as of the Close of Business on October 14, 2005 (May 1, 2006 deadline). Firms with branch offices in existence prior to the close of business on October 14, 2005 will have until May 1, 2006 to comply with the Form BR and Form U4 filing requirements for those branch offices. Therefore, by May 1, 2006, these firms must have: (1) completed and filed the conversion Form BR for each such branch; and (2) with respect to the registered persons employed by such branches, amended all applicable Forms U4 to assign these registered persons to the branch office(s) (or other locations) from which they work (either through individual Form U4 filings or via batch filing described above).

      Compliance with Form BR and Form U4 Filing Requirements for Branch Offices Established On Or After October 15, 2005. Starting on October 31, 2005, firms must file a Form BR to register any new branch office opened on or after October 15, 2005.6 Once a firm has filed a Form BR, the new branch will be established on the CRD system, and CRD will automatically populate the "Office of Employment Address" of the Form U4 for each person identified in Section 5 (Associated Individuals) of the Form BR. Individuals identified in this section will populate a dynamic "branch roster" of registered persons in CRD. After filing the initial Form BR, firms will be required to submit amended or new Forms U4, as appropriate, to assign additional registered persons to the branch, and the CRD system will automatically update the "branch roster" of registered persons in Web CRD.7

      The Form BR

      Types of Filings

      There are three types of Form BR filings. Firms may make (1) an "initial" filing (to apply for approval of or report a branch office), (2) an "amendment" filing (to amend information previously filed), and (3) a "closing/withdrawal" filing (to terminate a branch office registration and/or to withdraw an initial filing prior to approval by a state or SRO). The Form BR General Instructions include electronic filing and paper filing instructions. Paper filings are permitted in certain state jurisdictions only.8 The Specific Instructions describe how firms should complete each section of the Form BR. Words that are defined in the Explanation of Terms section are italicized throughout the Form BR for easy reference. The Form BR adopts, to the extent possible, the "explained terms" used on the existing uniform registration forms. The Form BR also includes definitions of additional terms used in the context of branch office registration and reporting, including the terms "closing," "person-in-charge," "regular branch," "small branch," "supervisor" and "withdrawal."9

      Description of the Form BR

      As described below, the Form BR consists of the following nine sections:

      Section 1 (General Information):
      Section 1 reports the applicant's CRD Number, name, address, billing code, branch address and telephone number. Using information provided to the CRD system on Form BD, or to IARD on Form ADV, NASD will pre-populate the applicant/firm's CRD Number and main office address. The CRD system will assign a unique CRD Branch Number. Firms must provide the physical location (i.e., address), and telephone number of the branch. If the firm is an NYSE member firm, it must also provide an NYSE Branch Code Number, and may provide an internal billing code (the billing code field is optional).

      Section 2 (Registration/Notice Filing/Type of Office):

      Section 2 asks the applicant to state where the branch will be registered (or notice filed), the type of branch office registration and whether it is an NASD office of supervisory jurisdiction (OSJ). If it is not an OSJ, the applicant is required to provide the CRD Branch Number of the OSJ that has supervisory responsibility over the branch and the CRD Number of the supervisor in charge of that OSJ.

      Based upon the applicant's current registrations as provided to CRD on Form BD or as provided to IARD on Form ADV, the CRD system will pre-populate the checkbox(es) for the applicable SRO(s) and/or jurisdiction(s) with which the applicant may be required to register or report the branch office. If the applicant is not required to register or report the branch office with an SRO and/or jurisdiction, it may remove the registration request. If a firm unchecks the NYSE registration box, the firm must attest "that it is not required under NYSE rules to register this branch information location with the NYSE." If the applicant is registering the branch with a jurisdiction, it must indicate whether it is a broker-dealer and/or investment adviser. Firms must also provide the names of all supervisors and/or persons-in-charge.

      Section 3 (Types of Activities/Other Business Names/Web Sites):

      Firms must name the financial industry activities conducted by the applicant and any investment-related activities conducted by associated persons at the branch location. Firms must also provide the names being used by any associated person to conduct financial industry business at the branch office other than those names disclosed on the member firm's Form BD or Form ADV. In addition, firms must provide Web site addresses used by the branch office other than the applicant's primary Web site address.

      Section 4 (Branch Office Arrangements):

      Firms must provide information relating to branch office arrangements, including space-sharing arrangements and liability for expenses. Section 4 does not require member firms to report insurance agency agreements with the main office pursuant to which the branch operates.

      Section 5 (Associated Individuals):

      Firms are required to complete this section only when making an initial Form BR filing. In such cases, firms must provide the CRD numbers of all registered individuals who will be associated with the branch. "Associated individuals" who are supervisors or persons-in-charge should be reported in Section 2 (Registration/Notice Filing/Type of Office). Individuals identified by a firm in this section will populate a dynamic branch roster of registered persons in Web CRD, which will be made available to that firm. Once the branch has been established, changes to the branch roster will be automatically made through Web CRD when (1) the "Office of Employment Address" question on a registered person's Form U4 is amended when an individual leaves a branch for another branch,10 or (2) a Form U5 is filed to terminate the registration of that individual.

      Section 6 (NYSE Branch Information):

      With respect to NYSE member firms, the Form BR incorporates the information previously elicited on both the NYSE's Branch Office Application and office space-sharing forms. The CRD system will interact with the NYSE's internal branch office system when firms submit NYSE branch office registration filings and provide NYSE staff with the opportunity to review such filings. The NYSE's current protocol for requesting approval for new branch offices will not change; NYSE member firms will be required to use the Form BR to request such approvals, and the information provided by NYSE member firms will be transmitted to the NYSE, which, in turn, will communicate its determinations (e.g., approvals) back through the CRD system.11 Only NYSE member firms will be able to access (i.e., view/file/complete) questions in Section 6 (NYSE Branch Information).

      Section 7 (Branch Closing):

      To close a branch office, firms must provide the date operations ceased (or will cease), the location of the branch's books and records and contact information. Prior to closing a branch, the CRD system will require firms to reassign the individuals associated with that branch to another branch or to terminate their registrations.

      Section 8 (Branch Withdrawal/Pending Application):

      To withdraw a pending request for branch office registration, firms must provide the date of withdrawal, the reason for the withdrawal, and name and telephone number of the contact person.

      Section 9 (Signature):

      The appropriate signatory of the firm must attest to the completeness and accuracy of the Form BR filing by executing the signature section.

      Forms U4 and U5 Conforming and Technical Changes

      Effective October 31, 2005, NASD also is implementing CRD system enhancements and Forms U4 and U5 changes to parallel the information reported on Form BR, and to ensure the accuracy and integrity of the link between registered representatives and their branches.12 These changes will enable member firms to more effectively designate, and users to more easily identify, the branch office(s) to which a particular registered representative is assigned by ensuring that a registered person's Office of Employment Address in the "General Information" section of the Form U4 is a branch office established on the CRD system via Form BR. If a registered person is physically located at an office that is not required to be registered as a branch, the individual must provide the address of the non-registered location, and the branch office that supervises the non-registered location. Firms may file an amended Form U4 to reflect a change to an individual registered person's branch office assignment by noting the new branch in that person's Office of Employment Address (provided the new branch office has been previously established on the CRD system through the filing of Form BR).

      NASD plans to assist firms in completing the process of linking registered persons to branch offices in the CRD system by May 1, 2006, by enabling firms to submit electronic data files (i.e., batch files) through a process established by NASD exclusively for this purpose. Firms making such submissions will be asked to provide the CRD numbers of a firm's registered persons, along with the CRD branch number that corresponds to the registered person's Office of Employment Address. Because the Form U4 is being amended to include a new question eliciting whether a registered person is an independent contractor, member firms may also indicate whether the registered person is an independent contractor in this data file. For more information about these procedures, please see www.nasd.com/crdbranchoffice.

      During the conversion (lock-out) period, individuals registered with firms that have not registered or reported any branch offices as of the close of business on October 14, 2005, will be assigned by the CRD system to the firm's main office as reported on the Form BD or Form ADV. Firms will be able to report a new Office of Employment Address for multiple registered persons assigned to a branch office that has moved to a new location by filing an amended Form BR (rather than filing Form U4 amendments for each of the registered persons affected).

      The registration positions of Research Analyst (RS) and Research Principal (RP) have been added to Forms U4 and U5. In addition, the following Pacific Stock Exchange positions were added: Market Maker (44); Floor Broker (45); and Market Maker acting as a Floor Broker (46). The Forms also include reference to the National Stock Exchange (NSX) (formerly Cincinnati Stock Exchange (CSE)). Finally, Section 6 (Regulatory Requests with Affiliated Firms) on Form U4 has been revised to reorder in a more logical format the electronic filing representations for submitting a fingerprint for registration with an affiliated firm.


      Endnotes

      1 See Exchange Act Release No. 52544 (September 30, 2005) (Order Granting Approval of Proposed Rule Change Relating to Proposed Form BR (Uniform Branch Office Registration form) and Conforming Changes and Technical Revisions to the Form U4 and Form U5); File No.SR-NASD-2005-030) (SEC Approval Order).

      2 Although these terms may be used interchangeably by self-regulatory organizations (SROs) and/or states, "registration" typically refers to a process that requires an approval by the SRO or state before a branch may begin doing business, whereas "reporting" typically refers to a process by which firms "notice file" or notify an SRO or state of the existence of branch office, but an approval is not required.

      3 For information on which states will accept Form BR for branch office registration, see the North American Securities Administrators Association (NASAA) Web site at www.nasaa.org.

      4 CRD will invalidate any Schedule E filing that has been started, but not filed, through CRD by the close of business on October 14, 2005.

      5 The conversion process will download the following fields from existing data in CRD or IARD, as well as data provided from the NYSE and participating states: Branch Address, NASD Branch Number, NYSE Branch Code Number, NYSE Branch Type, NASD/NYSE Supervisor/Person-In-Charge Name and CRD Number, Operational Status and NYSE/Jurisdiction Registration Status.

      6 Article IV, Section 8 of the NASD By-Laws requires firms to report the opening of branch office not later than 30 days after the branch is opened.

      7 Article V, Section 2 of the NASD By-Laws requires amendments to the Form U4 to be filed within 30 days after learning of the facts or circumstances giving rise to the amendment. The Specific Instructions for completing the Form U4, as amended, address procedures for updating the Form U4 to include all branch office addresses at which the individual is employed.

      8 For information on which states require or permit paper filings of Form BR, see NASAA's Web site at www.nasaa.org.

      9 Certain of these terms were included in the NYSE Branch Office Application Form.

      10 The new branch office must be one that has been established on the CRD system through the filing of a Form BR.

      11 Questions concerning the NYSE's branch office procedures should be addressed to Evelyn Kriegel, Director, NYSE, at (212) 656-6444.

      12 The Form U5 Specific Instructions have been amended under Section 1 (General Information) and Section 6 (Registration Requests with Affiliated Firms) to clarify that the Office of Employment address will pre-populate based on information provided on a Form U4.

    • 05-65 SEC Approves Amendments Relating to Rule 2790

      View PDF File

      GUIDANCE

      "New Issue" Rule

      Effective Date: November 2, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Financing
      Executive Representatives
      Institutional
      Legal & Compliance
      Operations
      Senior Management
      Syndicate
      Trading & Market Making
      Training
      Business Development Company
      Direct Participation Program
      Foreign Investment Company
      IPO Distribution Manager
      IPOs
      New Issue Definition
      New Issue Rule
      Real Estate Investment Trust
      Rule 2790

      Executive Summary

      On August 4, 2005, the Securities and Exchange Commission (SEC) approved amendments to subparagraph (i)(9) of Rule 2790 to exclude from the definition of "new issue" securities offerings of a business development company (BDC), a direct participation program (DPP) and a real estate investment trust (REIT).1 The SEC also approved a technical change to the exemption for foreign investment companies in subparagraph (c)(6) of Rule 2790 to clarify the scope of the exemption as reflected in an NASD staff memorandum dated August 6, 2004 (Staff Memorandum). In addition, the SEC approved amendments to Rule 2790 to codify the filing requirement for distribution information.

      The rule, as amended, is set forth in Attachment A. The amendments become effective on November 2, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Gary L. Goldsholle, Associate Vice President and Associate General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-8104; or Afshin Atabaki, Counsel, OGC, RPO, at (202) 728-8902.

      Background and Discussion

      Rule 2790 (Restrictions on the Purchase and Sale of IPOs of Equity Securities), which has been in effect on a mandatory basis since March 23, 2004 and replaces the Free-Riding and Withholding Interpretation (IM-2110-1), is designed to protect the integrity of the public offering process by ensuring that: (1) NASD members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including NASD members and their associated persons, do not take advantage of their insider position to purchase "new issues" for their own benefit at the expense of public customers. The rule plays an important part in maintaining investor confidence in the capital raising and public offering process.

      Securities Offerings of BDCs, DPPs and REITs

      Since its adoption, the definition of "new issue" in subparagraph (i)(9) of Rule 2790 has excluded, among other things, securities offerings of closed-end investment companies registered under the Investment Company Act of 1940 (the Investment Company Act). This exclusion is based on the fact that securities of closed-end investment companies typically commence trading at the public offering price with little potential for trading at a premium because the fund's assets at the time the initial public offering trades consist of the capital the fund has raised through the offering process. Moreover, if there is a premium, it is generally small. Including such offerings within the scope of Rule 2790 would do little to further the purposes of the rule and, moreover, may impair the ability of such companies to obtain capital. For similar reasons, as discussed below, NASD has amended subparagraph (i)(9) of Rule 2790 to exclude from the definition of "new issue" securities offerings of BDCs as defined in Section 2(a)(48) of the Investment Company Act,2 DPPs as defined in NASD Rule 2810(a)(4), and REITs as defined in Section 856 of the Internal Revenue Code (the Code).3

      BDCs

      Through the passage of the Small Business Investment Incentive Act of 1980 and the corresponding amendments to the Investment Company Act, Congress enacted a regulatory structure for BDCs in an effort to encourage capital investment in small, developing businesses and financially troubled businesses.4 A BDC is defined as a domestic, closed-end investment company that is operated for the purpose of making investments in small and developing businesses and financially troubled businesses; that must make available significant managerial assistance to certain of its portfolio companies; and that has notified the SEC of its election to be subject to the provisions of Sections 55 through 65 of the Investment Company Act.5 While a BDC technically is not registered under the Investment Company Act, it is subject to many of the same requirements that are applicable to registered investment companies.6 Section 55 of the Investment Company Act,7 in part, describes the securities in which a BDC can invest. These securities generally must comprise at least 70 percent of the value of the BDC's investment assets and include securities of certain companies, cash, cash items, U.S. government securities and high-quality debt instruments. The companies in which a BDC can invest are primarily "eligible portfolio companies" as defined in Section 2(a)(46) of the Investment Company Act,8 which generally include small, developing businesses and financially troubled businesses. Further, BDCs are similar to registered closed-end investment companies in that a BDC's primary asset at the time its initial public offering trades is the capital it has raised through the offering process. Thus, like registered closed-end investment companies, BDCs generally commence trading at their public offering price and premiums, if any, tend to be very small.

      DPPs and REITs

      A DPP, as defined in Rule 2810(a)(4), is a program that provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution, including, but not limited to, oil and gas programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof.

      Rule 2810 excludes REITs from the definition of a DPP. A REIT is a recognized investment vehicle for income-generating real estate, and it is allowed to benefit from the tax advantages of a trust as long as certain asset, income and distribution criteria have been satisfied as set forth in the Code.9 For instance, pursuant to the Code, at least 75 percent of a REIT's gross income must be derived from real estate, and at least 75 percent of the value of its total assets must be represented by real estate assets, cash and cash items, and government securities.10

      Nearly all DPPs and a few REITs, at the time of their initial public offering, have no invested assets. Like registered closed-end funds, the primary asset of these DPPs and REITs immediately following the public offering is the capital raised in the offering. As such, the initial public offerings of these DPPs and REITs typically do not open at a premium. By contrast, most REITs making an initial public offering have invested assets upon consummation of the offering. Nevertheless, because these assets (e.g., rental properties or mortgage portfolio) generally have a reasonably determinable market value, it is rare that REITs, even those with invested assets, will commence trading at a significant premium. Moreover, investors typically invest in REITs for income rather than capital appreciation, which may further limit premiums in the immediate aftermarket.

      For these reasons, NASD has amended the definition of "new issue" under subparagraph (i)(9) of Rule 2790 to exclude securities offerings of all BDCs, DPPs and REITs. As noted above, NASD staff has found that historically most of these offerings have not traded at a substantial premium. If warranted by future developments in the trading pattern of such securities in the immediate secondary market, however, NASD would reconsider the appropriateness of a blanket exclusion for these types of offerings.

      Foreign Investment Company Exemption

      NASD also has amended the exemption for foreign investment companies in subparagraph (c)(6) of Rule 2790 to clarify the scope of the exemption as reflected in the Staff Memorandum. The Staff Memorandum was prepared in response to inquiries about whether the foreign investment company exemption would apply to various hedge funds and other funds exempt from registration under the Investment Company Act that were listed on a foreign exchange (such as the Irish Stock Exchange). In the Staff Memorandum, NASD staff explained that the foreign investment company exemption is intended to extend to foreign investment companies that are similar to U.S. registered investment companies.11 NASD staff further explained that the exemption for foreign investment companies extends only to an investment company organized under the laws of a foreign jurisdiction that is either "listed on a foreign exchange for sale to the public" or "authorized for sale to the public," and that does not have any restricted person that beneficially owns more than 5 percent of the company's shares.

      The Staff Memorandum also reiterated the position in Notice to Members (NTM) 03-79 that a foreign investment company that is limited to select investors would not be considered as "for sale to the public." NASD staff has explained that foreign investment companies that are limited to high net worth individuals are not eligible for the foreign investment company exception. Inasmuch as U.S. registered investment companies are not limited to sale to high net worth individuals, it would be inconsistent to permit foreign investment companies to impose such requirements and still avail themselves of the exemption provided for foreign investment companies under Rule 2790. None of the reasons underlying the exemption for U.S. registered investment companies, such as broad public ownership, the difficulty in identifying beneficial owners, the ability of any public investor to purchase an interest in the investment company and the generally negligible interest of any single restricted person, are likely to be present with a foreign investment company offered only to high net worth individuals. Moreover, the purposes of Rule 2790 could easily be frustrated by purchases of large quantities of a new issue by a foreign investment company listed on a foreign exchange that is owned entirely or principally by broker-dealer personnel (or other restricted persons). A foreign investment company that is limited to select investors would, however, be eligible to purchase new issues in accordance with the de minimis exemption set forth in subparagraph (c)(4) of Rule 2790. While the text of Rule 2790, NTM 03-79 and the rulemaking history of the foreign investment company provision support the interpretation provided in the Staff Memorandum, NASD has amended subparagraph (c)(6) of Rule 2790 to expressly state that the foreign investment company exemption is available to an investment company organized under the laws of a foreign jurisdiction, provided that the investment company is listed on a foreign exchange for sale to the public or authorized for sale to the public by a foreign regulatory authority, and that no person owning more than five percent of the shares of the investment company is a restricted person.

      Filing Requirement for Distribution Information

      In 1996, NASD initiated a regulatory service, "NASDesk," for members to transmit underwriting commitment and retention information to NASD's Free-Riding Regulatory Database. NASD communicated with members regarding the "hot issue" status of initial public offerings using a companion system, "Compliance Desk."12 To coincide with the implementation of Rule 2790, NASD replaced NASDesk/Compliance Desk with a new system for members to submit new issue distribution information named "IPO Distribution Manager."13 IPO Distribution Manager is a Web-based application that permits the book-running managing underwriter to transmit distribution information to NASD through Web COBRA, the Web-based filing system that members are required to use when filing information about initial public offerings under the Corporate Financing Rule (Rule 2710). NASD has amended Rule 2790 to codify the requirement for the book-running managing underwriter to file distribution information as announced in NTM 04-20.


      Endnotes

      1 See Securities Exchange Act Release No. 52209 (August 4, 2005), 70 FR 46557 (August 10, 2005) (Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to NASD Rule 2790; File No. SR-NASD-2004-165).

      2 15 U.S.C. 80a-2(a)(48).

      3 26 U.S.C. 856.

      4 See Investment Company Act Release No. 11493 (December 16, 1980), 45 FR 83479 (December 19, 1980).

      5 See Section 2(a)(48) of the Investment Company Act; 15 U.S.C. 80a-2(a)(48).

      6 For example, in December 2003, the SEC adopted a new rule under the Investment Company Act that requires each registered investment company as well as each BDC to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review those policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures. See Investment Company Act Release No. 26299 (December 17, 2003), 68 FR 74714 (December 24, 2003) (Final Rule Relating to Compliance Programs of Investment Companies and Investment Advisers).

      7 15 U.S.C. 80a-54.

      8 15 U.S.C. 80a-2(a)(46).

      9 See Section 856 of the Code; 26 U.S.C. 856.

      10 Id.

      11 In NTM 97-30 (May 1997), which proposed the foreign investment company exception in the Free-Riding and Withholding Interpretation, IM-2110-1 (the predecessor to Rule 2790), NASD stated that:

      Purchases of shares of investment companies registered under the Investment Company Act of 1940 (1940 Act) are exempt from the restrictions of the Interpretation. The rationale for this existing provision is that the interest of any one restricted person in an investment company ordinarily is de minimis and that, because the ownership of investment company shares generally is subject to frequent turnover, determining compliance with the Interpretation would be extremely difficult in this context. NASD Regulation is proposing to extend this rationale to the purchase of shares of foreign entities that are similar to U.S. investment companies. (Emphasis added.)
      Likewise, in NTM 03-79 (December 2003), which announced the SEC's approval of Rule 2790, NASD explained that "the foreign investment company exception is intended to extend benefits to foreign investment entities that are similar to U.S. mutual funds."

      12 See NTM 96-18 (March 1996).

      13 See NTM 04-20 (March 2004).


      ATTACHMENT A

      New language is underlined; deleted language is in brackets.

      2790. Restrictions on the Purchase and Sale of Initial Equity Public Offerings

      (a) through (b) No Change.
      (c) General Exemptions
      The general prohibitions in paragraph (a) of this rule shall not apply to sales to and purchases by the following accounts or persons, whether directly or through accounts in which such persons have a beneficial interest:
      (1) through (5) No Change.
      (6) An investment company organized under the laws of a foreign jurisdiction, provided that:
      (A) the investment company is listed on a foreign exchange for sale to the public or authorized for sale to the public by a foreign regulatory authority; and
      (B) no person owning more than 5% of the shares of the investment company is a restricted person;
      (7) through (10) No Change.
      (d) through (h) No Change.
      (i) Definitions
      (1) through (8) No Change.
      (9) "New issue" means any initial public offering of an equity security as defined in Section 3(a)(11) of the Act, made pursuant to a registration statement or offering circular. New issue shall not include:
      (A) offerings made pursuant to an exemption under Section 4(1), 4(2) or 4(6) of the Securities Act of 1933, or SEC Rule 504 if the securities are "restricted securities" under SEC Rule 144(a)(3), or Rule 144A or Rule 505 or Rule 506 adopted thereunder;
      (B) offerings of exempted securities as defined in Section 3(a)(12) of the Act, and rules promulgated thereunder;
      (C) offerings of securities of a commodity pool operated by a commodity pool operator as defined under Section 1a(5) of the Commodity Exchange Act;
      (D) rights offerings, exchange offers, or offerings made pursuant to a merger or acquisition;
      (E) offerings of investment grade asset-backed securities;
      (F) offerings of convertible securities;
      (G) offerings of preferred securities;
      (H) offerings of an investment company registered under the Investment Company Act of 1940; [and]
      (I) offerings of securities (in ordinary share form or ADRs registered on Form F-6) that have a pre-existing market outside of the United States[.]; and
      (J) offerings of a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940, a direct participation program as defined in NASD Rule 2810(a)(4), or a real estate investment trust as defined in Section 856 of the Internal Revenue Code.
      (10) No Change.
      (j) Information Required to be Filed
      (1) The book-running managing underwriter of a new issue shall be required to file the following information in the time and manner specified by NASD with respect to new issues:
      (A) the initial list of distribution participants and their underwriting commitment and retention amounts on or before the offering date; and
      (B) the final list of distribution participants and their underwriting commitment and retention amounts no later than three business days after the offering date.

    • 05-64 SEC Approves Amendments to IM-2110-2 to Require Members to Provide Price Improvement to Customer Limit Orders in Certain Circumstances and to Expand IM-2110-2 to Exchange-Listed Securities

      View PDF File

      GUIDANCE

      Manning Obligations

      Effective Date: January 2, 2006

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Systems
      Trading
      IM-2110-2
      Limit Orders
      Manning Rule

      Executive Summary

      On August 4, 2005, the Securities and Exchange Commission (SEC) approved amendments to Interpretive Material (IM)-2110-2, Trading Ahead of Customer Limit Order (commonly referred to as the "Manning Rule"), to require members to provide price improvement to customer limit orders in certain circumstances and expand the application of IM-2110-2 to exchange-listed securities.1 IM-2110-2, as amended, is set forth in Attachment A of this Notice. The amendments become effective on January 2, 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.

      Background and Discussion

      IM-2110-2 generally prohibits a member from trading for its own account at prices that would satisfy a customer's limit order, unless the member immediately thereafter executes the customer limit order.2 The legal underpinnings for IM-2110-2 are a member's basic fiduciary obligations and the requirement that it must, in the conduct of its business, "observe high standards of commercial honor and just and equitable principles of trade."3

      On August 4, 2005, the SEC approved amendments to IM-2110-2 that require members to provide price improvement to customer limit orders in certain circumstances. Specifically, the amendments require a member that has traded for its own account ahead of a customer limit order that is protected under IM-2110-2 to pass along any price improvement that the member received in the execution of its order. In other words, if the member trades ahead of a customer limit order and receives a better price than the unexecuted customer limit order price, the member must fill the customer limit order at the price at which it traded for its own account or better. For example, if a member buys 100 shares of a security at $10 per share when holding a customer limit order in the same security to buy 100 shares at $10.01 per share, the member is required to fill the customer limit order at $10 per share.

      In addition, the amendments expand the application of IM-2110-2 to exchange-listed securities. Rule 6440(f)(2), which generally prohibits members from trading ahead of limit orders in exchange-listed securities, is substantially similar, but not identical to IM-2110-2. To ensure consistency in the application of limit order protection to NASDAQ and exchange-listed securities, the amendments apply IM-2110-2 to exchange-listed securities.4

      In recognition that the amendments may alter the way that many members handle customer orders, NASD is providing 90 days from this Notice for implementation to provide members with adequate time to develop and implement systems to comply with the amendments. As such, the new amendments become effective January 2, 2006.


      1 See Securities Exchange Act Release No. 52210 (August 4, 2005), 70 FR 46897 (August 11, 2005) (File No. SR-NASD-2004-089).

      2 For example, if a member buys 100 shares of a security at $10 per share when holding customer limit orders in the same security to buy at $10 per share equaling, in aggregate, 1,000 shares, the member is required to fill 100 shares of the customer limit orders.

      3 See NASD Rule 2110. See also NASD Rule 2320(a).

      4 NASD intends to file a proposed rule change deleting Rule 6440(f)(2), in light of the application of IM-2110-2 to exchange-listed securities.


      ATTACHMENT A

      Proposed new language is underlined; proposed deletions are in brackets.

      IM-2110-2. Trading Ahead of Customer Limit Order

      (a) General Applications
      To continue to ensure investor protection and enhance market quality, NASD's [the Association's] Board of Governors is issuing an interpretation to NASD [the] Rules [of the Association] dealing with member firms' treatment of their customer limit orders in Nasdaq and exchange-listed securities. This interpretation, which is applicable from 9:30 a.m. to 6:30 p.m. Eastern Time, will require members acting as market makers to handle their customer limit orders with all due care so that market makers do not "trade ahead" of those limit orders. Thus, members acting as market makers that handle customer limit orders, whether received from their own customers or from another member, are prohibited from trading at prices equal or superior to that of the limit order without executing the limit order. [Such orders shall be protected from executions at prices that are superior but not equal to that of the limit order.] In the interests of investor protection, NASD [the Association] is eliminating the so-called disclosure "safe harbor" previously established for members that fully disclosed to their customers the practice of trading ahead of a customer limit order by a market-making firm.1
      Rule 2110 [of the Association Rules] states that:
      A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.
      Rule 2320, the Best Execution Rule, states that:
      In any transaction for or with a customer, 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 a market so that the resultant price to the customer is as favorable as possible to the customer under prevailing market conditions.

      Interpretation

      The following interpretation of Rule 2110 has been approved by the Board:
      A member firm that accepts and holds an unexecuted limit order from its customer (whether its own customer or a customer of another member) in a Nasdaq or exchange-listed security and that continues to trade the subject security for its own market-making account at prices that would satisfy the customer's limit order, without executing that limit order, shall be deemed to have acted in a manner inconsistent with just and equitable principles of trade, in violation of Rule 2110, provided that[, until September 1, 1995, customer limit orders in excess of 1,000 shares received from another member firm shall be protected from the market maker's executions at prices that are superior but not equal to that of the limit order, and provided further, that] a member firm may negotiate specific terms and conditions applicable to the acceptance of limit orders only with respect to limit orders that are: (a) for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4); or (b) 10,000 shares or more, unless such orders are less than $100,000 in value. In the event that a member acting as market maker trades ahead of an unexecuted customer limit order at a price that is better than the unexecuted limit order, such member is required to execute the limit order at the price received by the member or better. Nothing in this interpretation, however, requires members to accept limit orders from any customer.
      By rescinding the safe harbor position and adopting this interpretation, NASD [the Association] wishes to emphasize that members may not trade ahead of their customer limit orders in their marketmaking capacity even if the member had in the past fully disclosed the practice to its customers prior to accepting limit orders. NASD [The Association] believes that, pursuant to Rule 2110, members accepting and holding unexecuted customer limit orders owe certain duties to their customers and the customers of other member firms that may not be overcome or cured with disclosure of trading practices that include trading ahead of the customer's order. The terms and conditions under which institutional account or appropriately sized customer limit orders are accepted must be made clear to customers at the time the order is accepted by the firm so that trading ahead in the firm's market-making capacity does not occur. [For purposes of this interpretation, a member that controls or is controlled by another member shall be considered a single entity so that if a customer's limit order is accepted by one affiliate and forwarded to another affiliate for execution, the firms are considered a single entity and the market-making unit may not trade ahead of that customer's limit order.]
      As outlined in NASD Notice to Members 97-57, the minimum amount of price improvement necessary in order for a market maker to execute an incoming order on a proprietary basis when holding an unexecuted limit order for a Nasdaq security trading in fractions, and not be required to execute the held limit order, is as follows:
      • If actual spread is greater than 1/16 of a point, a firm must price improve an incoming order by at least a 1/16. For stocks priced under $10[,] (which are quoted in 1/32 increments), the firm must price improve by at least 1/64.
      • If actual spread is the minimum quotation increment, a firm must price improve an incoming order by one-half the minimum quotation increment.
      For Nasdaq securities authorized for trading in decimals pursuant to the Decimals Implementation Plan For the Equities and Options Markets, the minimum amount of price improvement necessary in order for a market maker to execute an incoming order on a proprietary basis in a security trading in decimals when holding an unexecuted limit order in that same security, and not be required to execute the held limit order, is as follows:
      1) For customer limit orders priced at or inside the best inside market displayed in Nasdaq, the minimum amount of price improvement required is $0.01; and
      2) For customer limit orders priced outside the best inside market displayed in Nasdaq, the market maker must price improve the incoming order by executing the incoming order at a price at least equal to the next superior minimum quotation increment in Nasdaq (currently $0.01).
      NASD [The Association] also wishes to emphasize that all members accepting customer limit orders owe those customers duties of "best execution" regardless of whether the orders are executed through the member's market-making capacity or sent to another member for execution. As set out above, the Best Execution Rule requires members to use reasonable diligence to ascertain the best inter-dealer market for the security and buy or sell in such a market so that the price to the customer is as favorable as possible under prevailing market conditions. NASD[The Association] emphasizes that order entry firms should continue to routinely monitor the handling of their customers' limit orders regarding the quality of the execution received.

      (b) and (c) No change.

      1 For purposes of [the pilot program expanding ]the operation of certain Nasdaq transaction and quotation reporting systems and facilities [in SR-NASD-99-57 ]during the period from 4 p.m. to 6:30 p.m. Eastern Time, members may generally limit the life of a customer limit order to the period of 9:30 a.m. to 4 p.m. Eastern Time. If a customer does not formally assent ("opt-in") to processing of [their]the customer's limit order(s) during the extended hours period commencing after the normal close of the Nasdaq market, limit order protection will not apply to that customer's order(s).

    • 05-63 NASD Seeks Comment on Increasing the Frequency of Short Interest Reporting; Comment Period Expired November 29, 2005

      View PDF File

      REQUEST FOR COMMENT

      Short Interest Reporting

      Comment Period Expires November 29, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Rule 3360
      Short Interest Reporting
      Short Sales

      Executive Summary

      NASD is issuing this Notice to Members to solicit comments from members and other interested parties on proposed changes to Rule 3360, Short Interest Reporting. Currently, Rule 3360(a) requires members to maintain a record of total short positions in all customer and proprietary firm accounts in NASDAQ securities—and listed securities if not reported to another self-regulatory organization (SRO)—and requires members to report such information to NASD on a monthly basis. NASD is seeking comment on a proposed change to Rule 3360 that would require members to record and report total short position information to NASD twice per month. NASD believes that increasing the frequency of short interest reporting requirements will provide additional and more timely information related to short selling to investors and other interested parties.

      Action Requested

      NASD encourages all interested parties to comment on this proposal. Comments must be received by November 29, 2005. Members and interested persons can submit their comments using the following methods:

      Mail Attachment A (Request for Comment Form) along with written comments;
      Mail comments in hard copy to the address on the following page; 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; however, if a person wishes to submit comments using both Attachment A and one of the other methods listed above, he or she should indicate that in the submissions. Attachment A and/or 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 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 the Legal Section, Market Regulation at (240) 386-5126; or Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.

      Background and Discussion

      Currently, Rule 3360(a) requires members to maintain a record of total short positions in all customer3 and proprietary firm accounts in NASDAQ securities (and listed securities if not reported to another SRO) and requires members to report such information to NASD on a monthly basis.4 Rule 3360(b) provides that short positions required to be reported under the rule are those resulting from short sales as the term is defined in SEC Rule 200 of Regulation SHO,5 with limited exceptions. The aggregate short interest data is, in turn, made publicly available. Investors and other interested parties can obtain short interest information from NASDAQ's Web site, other commercial Web sites, and certain newspapers.

      NASD is soliciting comment on a proposed change to Rule 3360 to require members to record and report such short position information to NASD twice per month. NASD would then make the short interest information publicly available twice per month. NASD is analyzing whether increasing the frequency of the current monthly short interest reporting requirements may provide additional pertinent information to investors and other interested parties. In particular, NASD is soliciting comment on whether disseminating short interest information on a more frequent basis would be of value to investors and other interested parties. NASD also is soliciting comment on what technology and system changes would be required to implement this proposal, as well as the burdens and costs associated with increasing the frequency of short interest reporting.


      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 rules thereunder.

      3 Short sale positions held for other broker-dealers that fall within the definition of short position provided in Rule 3360(b) must be reported under Rule 3360(a), unless these positions already are reported to an SRO. See Notice to Members 03-08 (January 2003).

      4 Non-self-clearing broker-dealers generally are considered to have satisfied their reporting requirement by making appropriate arrangements with their respective clearing organizations. See Notice to Members 03-08.

      5 SEC Rule 200 of Regulation SHO provides, in part, the following: "The term ‘short sale' shall mean any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller."


      ATTACHMENT A

      Request for Comment Form

      We have provided below a form that members and other interested parties may use in addition to or in lieu of written comments. This form is intended to offer a convenient way to participate in the comment process, but does not cover all aspects of the proposal described in the Notice. We therefore encourage members and other interested parties to review the entire Notice and provide written comments, as necessary.

      Instructions

      Comments must be received by November 29, 2005. Members and interested persons can submit their comments using the following methods:

      Mail Attachment A (Request for Comment Form) along with written comments;
      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; however, if a person wishes to submit comments using both Attachment A and one of the other methods listed above, he or she should indicate that in the submissions. Attachment A and/or comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, N.W.
      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 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

      Proposed Change to Short Interest Reporting

      NASD requests input from members and other interested parties on the proposed changes to the short interest reporting requirements described in this Notice.

      Increasing the Frequency of Short Interest Reporting

      1. Do you support the proposal that would require members to record and report short position information to NASD twice per month?

      Yes No      See my attached written comments

      2. For what purposes do you use the publicly disseminated short interest information?
      What are the benefits of more frequent short interest reporting?

      _________________________________________________________________

      _________________________________________________________________

      _________________________________________________________________

      3. What technology and systems changes would be required by increasing the frequency of short interest reporting?

      _________________________________________________________________

      _________________________________________________________________

      _________________________________________________________________

      4. What are the estimated burdens and costs associated with implementation of this proposal?

      _________________________________________________________________

      _________________________________________________________________

      _________________________________________________________________

      5. What amount of time do you believe would be adequate for implementation of the proposal?

      _________________________________________________________________

      _________________________________________________________________

      _________________________________________________________________

      Contact Information

      Name:________________________________________________

      Firm:________________________________________________

      Address:________________________________________________

      City/State/Zip:________________________________________________

      Phone:________________________________________________

      Email:________________________________________________

      Are you:   An NASD Member   An Investor   A Registered Representative

      Other:________________________________________________


      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 rules thereunder.

    • 05-62 Nominees for District Committee and District Nominating Committee

      View PDF File

      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 or for one-year terms on the District Nominating Committees starting in January 2006. These nominees will be considered duly elected on October 12, 2005, unless an election is contested in accordance with the procedures summarized below.

      We appreciate the interest shown by many of you in participating in the District Committees and thank everyone for their continuing support of the self-regulatory process. We look forward to your participation in the matters of the Districts during the coming year, as well as hope that those who were not selected this year may wish to revisit this process next year.

      Contested Election Procedures

      If an officer 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 within 14 calendar days of the date of this Special Notice, or by October 11, 2005.

      Please be advised that due to Hurricane Katrina, NASD's District 5 office in New Orleans is temporarily closed. Any individuals wishing to be considered for election to the District Committee or the District Nominating Committee for District 5 must deliver written notice by October 11, 2005 to:

      Virginia F. M. Jans
      District Director, District 6
      12801 N. Central Expressway, Suite 1050
      Dallas, TX 75243
      (972) 701-8554

      If an additional candidate or candidates come forward by October 11, 2005, 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 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 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 recent amendments to 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
      Elisabeth P. Owens, Regional 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
      2005 District Nominating Committee Chair
      L. Robert McKulla Wachovia Securities, LLC Walnut Creek, CA
      District 1 Nominees
      Christopher D. Charles Wulff, Hansen & Company San Francisco, CA
      Kevin T. Kitchin Wachovia Securities, LLC San Francisco, CA
      Edward M. Stephens FSC Securities Corporation Santa Rosa, CA
      Alternate Candidate
      James H. Williams Financial Telesis San Rafael, CA
      District 1 Nominating Committee Nominees
      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. Roche, II RBC Dain Rauscher, Inc. San Francisco, CA
      Alternate Candidate
      Warren Gordon Charles Schwab & Co., Inc. San Francisco, CA


      District Committee and District Nominating Committee Nominees
      District 2
      Lani M. Sen Woltmann, District Director
      300 South Grand Avenue, Suite 1600, Los Angeles, CA 90071 (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
      2005 District Nominating Committee Chair
      Richard B. Gunter Wedbush Morgan Securities Los Angeles, CA
      District 2 Nominees
      Steven K. Klein Farmers Financial Solutions, LLC Simi Valley, CA
      Ismael Manzanares, Jr. WFP Securities San Diego, CA
      Gary A. Martino brokersXpress, LLC Thousand Oaks, CA
      Alternate Candidate
      Daniel A. Murphy PlanMember Securities, Corp. Carpinteria, CA
      District 2 Nominating Committee Nominees
      M. LaRae Bakerink WBB Securities, LLC San Diego, CA
      James E. Biddle The Securities Center, Inc. Chula Vista, CA
      Don Dalis UBS Financial Services, Inc. Newport Beach, CA
      Barbara A. Kelley Pacific Global Fund Distributors, Inc. Glendale, CA
      Joel H. Ravitz Quincy Cass Associates Los Angeles, CA
      Alternate Candidate
      A. William Cohen Integrated Trading and Investments Las Vegas, NV


      District Committee and District Nominating Committee Nominees
      District 3
      Joseph M. McCarthy, District Director James G. Dawson, District Director
      Two Union Square, 601 Union Street
      Suite 1616, Seattle, WA 98101-2327
      (206) 624-0790

      Alaska, Idaho, Montana, Oregon and
      Washington
      370 17th Street, Suite 2900
      Denver, CO 80202-5629
      (303) 446-3100

      Arizona, Colorado, New Mexico, Utah
      and Wyoming
      2005 District Nominating Committee Chair
      Kathryn A. Supko Northwestern Mutual
      Investment Services, LLC
      Boise, ID
      District 3 Nominees
      David Director McAdams Wright Ragen, Inc. Seattle, WA
      Daniel Lind Wells Fargo Investments Tucson, AZ
      Stephen Youhn M Holdings Securities, Inc. Portland, OR
      Alternate Candidate
      Patrick Elliott RBC Dain Rauscher, Inc. Bainbridge Island, WA
      District 3 Nominating Committee Nominees
      Gregory R. Anderson MCL Financial Group, Inc. Denver, CO
      L. Hoyt DeMers Wells Fargo Investments, LLC Seattle, WA
      Bridget Gaughan AIG Financial Advisors, Inc. Phoenix, AZ
      John Goodwin Goodwin Browning & Luna Securities, Inc. Albuquerque, NM
      C. Fredrick Roed McAdams Wright Ragen, Inc. Bellevue, WA
      Alternate Candidate
      Gene Branson Partner's Investment Network, Inc. Spokane, WA


      District Committee and District Nominating Committee Nominees
      District 4
      Thomas D. Clough, District Director (816) 421-5700
      Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota
      2005 District Nominating Committee Chair
      Pamela R. Ziermann Dougherty & Company LLC Minneapolis, MN
      District 4 Nominees
      Steven F. McWhorter Securities America, Inc. Omaha, NE
      Arthur S. Montgomery1
      (One-Year Term)
      Walnut Street Securities, Inc. St. Louis, MO
      Brian D. Murphy Woodbury Financial Services, Inc. Woodbury, MN
      Andrew C. Small Scottrade, Inc. St. Louis, MO
      Alternate Candidate
      Daniel J. May Financial Network Investment Corporation Minneapolis, MN
      District 4 Nominating Committee Nominees
      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 Corp. Minneapolis, MN

      1 Mr. Montgomery has been appointed to serve the remaining year of the term of Richard M. Hurwitz, who has resigned from the District Committee.



      District Committee and District Nominating Committee Nominees
      District 5
      Warren A. Butler, Jr., Regional Director
      Alabama, Arkansas, Louisiana, Mississippi, Oklahoma and Tennessee
      Note: Please be advised that due to Hurricane Katrina, NASD's District 5 office in
      New Orleans is temporarily closed. Any individuals wishing to be considered
      for election to the District Committee or the District Nominating Committee
      for District 5 must deliver written notice by October 11, 2005 to:


      Virginia F. M. Jans, District Director, District 6 (972) 701-8554
      12801 N. Central Expressway, Suite 1050
      Dallas, TX 75243
      2005 District Nominating Committee Chair
      David A. Knight Stephens Inc. Little Rock, AR
      District 5 Nominees
      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
      Alternate Candidate
      Charles C. Hollinger, Jr. Johnson Rice & Company, L.L.C. New Orleans, LA
      District 5 Nominating Committee Nominees
      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, L.L.C. Jackson, MS
      David W. Wiley, III Wiley Bros., Aintree Capital, L.L.C. Nashville, TN
      Alternate Candidate
      Joseph C. Weller Morgan Keegan & Company, Inc. Memphis, TN


      District Committee and District Nominating Committee Nominees
      District 6
      Virginia F. M. Jans, District Director  
      12801 N. Central Expressway, Suite 1050, Dallas, TX 75243 (972) 701-8554
      Texas
      2005 District Nominating Committee Chair
      William B. Madden Madden Securities Corporation Dallas, TX
      District 6 Nominees
      Alan K. Goldfarb Oakbrook Financial Group, LLC Dallas, TX
      Brent T. Johnson2
      (One-Year Term)
      Multi-Financial Securities Corporation Houston, TX
      John Christopher Melton Coastal Securities, L.P. Houston, TX
      Ralph E. Poppell Stanford Group Company Houston, TX
      Alternate Candidate
      Kennard R. George VSR Financial Services, Inc. Richardson, TX
      District 6 Nominating Committee Nominees
      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 Houston, TX
      Alternate Candidate
      Fredrick W. McGinnis RBC Dain Rauscher, Inc. Dallas, TX

      2 Mr. Johnson has been nominated to serve the remaining year of the term of Darryl W. Traweek, who has resigned from the District Committee. The District Committee appointed Sennett Kirk, III to fill this vacancy until Mr. Johnson's term commences in January 2006.



      District Committee and District Nominating Committee Nominees
      District 7
      Daniel J. Stefek, District Director Mitchell C. Atkins, District Director
      One Securities Centre, Suite 500
      3490 Piedmont Road, NE, Atlanta, GA 30305
      (404) 239-6100

      Georgia, North Carolina and
      South Carolina
      2500 N. Military Trail, Suite 302
      Boca Raton, FL 33431
      (561) 443-8000

      Florida, Puerto Rico, the Canal Zone and
      the Virgin Islands
      2005 District Nominating Committee Chair
      Kenneth W. McGrath Popular Securities, Inc. Hato Rey, Puerto Rico
      District 7 Nominees
      Douglas R. Aldridge H & R Block Financial Advisors, Inc. Dunwoody, GA
      Valerie G. Brown ING Advisors Network Atlanta, GA
      Dennis W. Zank Raymond James & Associates St. Petersburg, FL
      Alternate Candidate
      Carlos Gonzalez-Stawinski Popular Securities, Inc. San Juan, PR
      District 7 Nominating Committee Nominees
      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 & Company Miami, FL
      Alternate Candidate
      C. John O'Bryant Stifel, Nicolaus & Company, Inc. Raleigh, NC


      District Committee and District Nominating Committee Nominees
      District 8
      Carlotta A. Romano, District Director  
      55 West Monroe Street, Suite 2700, Chicago, IL 60603-5052 (312) 899-4400
      Illinois, Indiana, Kentucky, Michigan, Ohio and Wisconsin
      2005 District Nominating Committee Chair
      Bruce J. Young Mesirow Financial, Inc. Chicago, IL
      District 8 Nominees
      Stephen F. Anderson Waterstone Financial Group Itasca, IL
      Eric A. Bederman Bernardi Securities, Inc. Chicago, IL
      Mari Buechner3
      (One-Year Term)
      Coordinated Capital Securities Inc. Madison, WI
      Barbara A. Turner The O.N. Equity Sales Company Cincinnati, OH
      Alternate Candidate
      Matthew H. Turnbull Morgan Stanley DW Inc. Detroit, MI
      District 8 Nominating Committee Nominees
      George E. Bates Bates Securities, Inc. Rockford, IL
      Bernard A. Breton Carillon Investments, Inc. Cincinnati, OH
      Carol P. Foley Podesta & Company Chicago, IL
      Jill R. Powers Oberlin Financial Corporation Bryan, OH
      James J. Roth Pershing LLC Oak Brook, IL
      Alternate Candidate
      Ruth C. Hannenberg Mesirow Financial, Inc. Chicago, IL

      3 Ms. Buechner has been nominated to serve the remaining year of the term of Lora Rosenbaum, who has resigned from the District Committee.



      District Committee and District Nominating Committee Nominees
      District 9
      Gary K. Liebowitz, District Director John P. Nocella, District Director
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095
      (732) 596-2000

      New Jersey and New York (except for the
      counties of Nassau and Suffolk, and the five
      boroughs of New York City)
      Eleven Penn Center, 1835 Market Street
      19th Floor, Philadelphia, PA 19103
      (215) 665-1180

      Delaware, the District of Columbia, Maryland,
      Pennsylvania, Virginia and West Virginia
      2005 District Nominating Committee Chair
      J. Lee Keiger, III Davenport & Company, LLC Richmond, VA
      District 9 Nominees
      Michael T. Corrao4
      (Two-Year Term)
      Knight Equity Markets LP Jersey City, NJ
      Wayne F. Holly5
      (One-Year Term)
      Sage, Rutty & Co., Inc. Rochester, NY
      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, DCA
      Alternate Candidate
      G. Mark Hamby Anderson & Strudwick, Inc. Richmond, VA
      District 9 Nominating Committee Nominees
      Richard Grobman Oppenheimer & Co. Inc. Philadelphia, PA
      W. Dean Karrash Burke, Lawton, Brewer & Burke Spring House, PAA
      Gregg A. Kidd Pinnacle Investments Inc. East Syracuse, NY
      Michael S. Mortensen PNC Investments Pittsburgh, PA
      Michael B. Row Pershing, LLC Jersey City, NJ
      Alternate Candidate
      Kimberly Tillotson Fleming Hefren-Tillotson, Inc. Pittsburgh, PA

      4 Mr. Corrao has been nominated to serve the remaining two years of the term of Dorothy G. Sanders, who has resigned from the District Committee.

      5 Mr. Holly has been nominated to serve the remaining year of the term of Barry M. Cash, who has resigned from the District Committee.



      District Committee and District Nominating Committee Nominees
      District 10
      Hans Reich, Regional Director  
      One Liberty Plaza, New York, NY 10006 (212) 858-4000
      New York (the counties of Nassau and Suffolk, and the five boroughs of New York City)
      2005 District Nominating Committee Chair
      Charles V. Senatore Fidelity Brokerage Services, LLC New York, NY
      District 10 Nominees
      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
      Alternate Candidate
      George Mandl ITG, Inc. New York, NY
      District 10 Nominating Committee Nominees
      Margaret M. Caffrey Schonfeld & Company, LLC Jericho, NY
      Jennifer A. Connors Lehman Brothers Inc. New York, NY
      Raymond C. Holland, Jr. Triad Securities Corp. New York, NY
      Richard J. Paley Carey Financial Corporation New York, NY
      Mark Ronda Oppenheimer & Co., Inc. New York, NY


      District Committee and District Nominating Committee Nominees
      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)
      2005 District Nominating Committee Chair
      John I. Fitzgerald Leerink Swann & Company Boston, MA
      District 11 Nominees
      Martin W. Courage Bank of America Investment Services Boston, MA
      Todd A. O'Connor6 Investors Securities Services LLC Boston, MA
      Robert J. Reilly Piper Jaffray & Co. Boston, MA
      District 11 Nominating Committee Nominees
      Michael C. Braun Moors & Cabot, Inc. Boston, MA
      Andrew F. Detwiler Virtua Research, an Affiliate of Vandham
      Securities Corp.
      Boston, MA
      Mark R. Hansen State Street Global Markets, LLC Boston, MA
      Lee G. Kuckro Advest, Inc. Hartford, CT
      Wilson G. Saville Barrett & Company Providence, RI

      6Mr. O'Connor, who was nominated as an alternate candidate for the District Committee, replaces Howard Messias, who withdrew his nomination.

    • 05-61 NASD Solicits Member Comment on Possible Realignment of the Trading Activity Fee; Comment Period Expired October 31, 2005

      View PDF File

      REQUEST FOR COMMENT

      Trading Activity Fee

      Comment Period Expires October 31, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations Managers
      Senior Management
      NASD By-Laws
      Trading Activity Fee

      Executive Summary

      NASD is issuing this Notice to Members to solicit comments from members on possible changes to the Trading Activity Fee (TAF). In 2003, the Securities and Exchange Commission (SEC or Commission) approved revisions to NASD By-Laws, eliminating the former regulatory fee assessed upon NASD members and instituting a new transaction-based TAF.1 The TAF, along with other revenue components, funds NASD's member regulatory activities. Recently, questions have arisen regarding whether the TAF should be modified to ensure that NASD's member regulatory fees are distributed appropriately among the member firms that drive member regulatory costs. NASD seeks input from the membership on the impact of any potential realignment of the fee. Specifically, NASD is seeking feedback on the potential impact on member firms if the TAF were restructured to assess any customer transaction in a covered security, regardless of whether an NASD member firm is on the buy or sell side of the transaction, and all proprietary transactions not effected in a firm's capacity as a market maker. NASD is committed to seeking additional member input as it refines its analysis, and is committed to ensuring that any realignment be revenue neutral to NASD. Therefore, in conjunction with the proposed realignment, NASD will re-analyze the funding required for its member regulatory program in order to determine any further rate reduction as previously committed to reduce the percentage that the TAF contributes to the overall funding structure.

      Questions/Further Information

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

      Request for Comment

      NASD encourages all members to comment on the proposed changes to the TAF. Comments must be received by October 31, 2005. Members and other interested parties can submit their comments using the following methods:

      • Mail Attachment A to the address below;
      • Mail comments in hard copy to the address below; or
      • E-mail comments to pubcom@nasd.com.

      To help NASD process and review comments more efficiently, persons commenting on this proposal should use only one method; however, if a person wishes to submit comments using both Attachment A and one of the other methods listed above, he or she should indicate that in the submissions.

      Attachment A is intended to offer a convenient way to participate in the comment process. It includes several specific questions that should be addressed, regardless of what method of comment is submitted. Furthermore, because the specific questions in Attachment A do not address all potential issues raised in this Notice, NASD encourages members using Attachment A to review the entire Notice and provide any additional written comments in Section 3 of Attachment A.

      Attachment A and/or 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.2

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the NASD Board, and then must be approved by the SEC, following publication for public comment in the Federal Register.3

      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 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.4 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. The changes to the regulatory pricing structure were designed to be revenue neutral to NASD and were intended to align NASD's regulatory fees with its regulatory functions, efforts and costs. Additionally, to minimize the impact on member firms, the restructuring of the fees was to be phased-in over a three-year period. As of 2005, the three-year phase-in for the GIA and PA are complete. Revenues generated from these fees have met expectations. One year of TAF rate reductions remains to be implemented, and separately, questions have been raised about whether restructuring of the scope of the TAF would better align that fee with NASD's costs.

      Realignment of the Trading Activity Fee

      NASD is seeking input from the membership on the fairness and feasibility of a potential TAF realignment. The primary issue that has been identified is that the TAF, a fee with the specific purpose of funding NASD's member regulatory efforts, is currently assessed for covered equity securities upon a class of transactions where there is no public customer involved in the transaction (i.e., a market maker trading as principal with another broker-dealer), and not assessed on certain transactions that have direct customer involvement.5 As a result, TAF assessments are concentrated to a certain extent in a small number of member firms or business lines within member firms that may not be significant drivers of member regulatory expenses. Further, for covered equity securities, registered NASDAQ market makers have identified what they believe to be certain competitive disparities resulting from assessing the fee on market maker transactions occurring in the NASDAQ marketplace, but exempting transactions that occur on an exchange in a floor capacity. Presently, NASD provides an exemption for floor-based activity that occurs on an exchange, because these transactions do not result directly in an NASD registration requirement (many specialists and other floor traders are NASD-registered for other reasons). NASDAQ market makers, however, do not get the benefit of this TAF exemption.

      As noted, NASD is analyzing whether to assess the TAF on all buy and sell transactions where a member trades as principal or riskless principal with a customer or acts as agent on behalf of a customer; and on all principal transactions with another brokerdealer not effected in a member's capacity as a registered market maker, exempting trades between a market maker in its market making capacity with another broker-dealer. In short, the contemplated changes to the scope of the TAF would spread the fee over a wider group of NASD members, re-distributing the fee in part from firms or business lines within firms that execute large numbers of transactions to firms or business lines within firms that deal directly with customers or trade proprietarily. As NASD proceeds with its analysis, it seeks member comment on whether a realignment is equitable, whether the proposed changes in scope would achieve the proposed re-distribution and whether such changes would require substantial re-programming of member firm systems.

      Rate Reduction for the Trading Activity Fee

      In order to ensure a member regulatory pricing structure that is revenue neutral to NASD, NASD management committed to a periodic analysis of rates, volumes and regulatory responsibilities to ensure adequate funding levels for its member regulatory programs. Further, as part of the three-year phase-in plan included in the proposed pricing structure, NASD stated its intent to reduce the percentage that the TAF contributes to the overall funding structure in 2004 and again in 2005 by increasing the percentage funded by the PA. In conjunction with the proposed realignment, NASD will re-analyze revenues and expenses to determine the appropriate rate reduction needed in order to reduce the share of the member regulatory program funded by transaction activity.


      1 Securities Exchange Act Rel. No. 47946 (May 30, 2003) , 68 FR 34021 (June 6, 2003) (approving SR-NASD-2002-148).

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

      3 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 rules thereunder.

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

      5 See Notice to Members 02-63, Question 14, which states that riskless principal transactions reported correctly will be viewed as one transaction for purposes of assessing the TAF. Because the TAF is applied in a manner consistent with Section 31 of the Exchange Act and Rule 31 thereunder, this results in the first leg of a riskless principal transaction being assessed while the second leg of the transaction with the customer being exempt from the fee.


      ATTACHMENT A

      Proposed Change to TAF and Related Financial Impact

      1. Do you support assessing the TAF on all buy and sell transactions effected with a public customer, as principal, riskless principal or agent; and on all proprietary transactions not effected in a member's capacity as a market maker?

      Yes No

      Please provide a written statement addressing your firm's position below.
      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      2. Will such a proposed change require significant programming efforts on your firm's behalf?

      Yes No

      Please explain your answer below and include an estimate of the necessary time frame required to implement such a change.
      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________
      3. Please comment below on any additional issues your firm would like to address regarding this Notice.
      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________

      ______________________________________________________________________


      Contact Information_________________________________________

      Name:_________________________________________

      Firm:_________________________________________

      Clearing #:_________________________________________

      Address:_________________________________________

      City/State/Zip:_________________________________________

      Phone:_________________________________________

      E-Mail:_________________________________________

    • 05-60 Important Information Regarding the Suspension of Trading in the Securities of Bancorp International Group, Inc. (BCIT.PK)

      View PDF File

      GUIDANCE

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      Rule 6740
      SEC Rule 15c2-11
      SEC Rule 15c3-3

      Executive Summary

      NASD is issuing this Special Notice to Members (Special NTM) to advise member firms and other interested parties of certain actions and issues relating to the trading of securities of Bancorp International Group, Inc. This Special NTM also is intended to remind members of their responsibilities with respect to Securities and Exchange Commission (SEC) Rule 15c2-11 and NASD Rule 6740.

      Questions/Further Information

      Questions regarding this Special NTM may be directed to Susan DeMando, Associate Vice President, Financial Operations, Member Regulation, at (202) 728-8411.

      Discussion

      On August 31, 2005, the SEC temporarily suspended trading in the securities of Bancorp International Group, Inc. (Pink Sheets– Symbol: BCIT) pursuant to Section 12(k) of the Securities Exchange Act of 1934. In its Release, the SEC stated that it temporarily suspended trading in the securities of BCIT because it appears that all of the securities currently trading in the name of Bancorp International Group, Inc. and purportedly signed by Thomas Megas as President and M. Puig as Secretary are counterfeit. The SEC trading suspension began on August 31, 2005, at 9:30 a.m. E.T., and terminates on September 14, 2005, at 11:59 p.m. E.T.1 Furthermore, The Depository Trust Company (DTC) issued a special alert regarding BCIT on August 16, 2005, which included a notice that DTC had discontinued all services relating to BCIT, other than custody services, as of August 11, 2005.

      Although trading will no longer be suspended, members should exercise great caution when executing customer or proprietary trades, including member-to-member transactions for the purposes of resolving open fails, until such time as members can be assured that the shares in circulation were part of a bona-fide issuance by the issuer.

      Members are reminded that, pursuant to SEC Rule 15c2-11 and NASD Rule 6740, no quotation may be entered unless and until a member has complied with all of the requirements of the rules, including SEC Rule 15c2-11(a)(5). SEC Rule 15c2-11(a) requires, among other things, that based on a member's review of the issuer information specified therein, a member must have a reasonable basis under the circumstances to believe that the issuer information is accurate in all material respects and the sources of such information are reliable. Until the questions surrounding the information and documents of Bancorp International Group, Inc. are resolved, member firms should be aware that, in the context of Form 211 filings, NASD has significant concerns as to whether a member would have a reasonable basis to believe the accuracy or reliability of information relating to Bancorp International Group, Inc.

      Based on the SEC Release and other information released by the company, member firms should consider the following with regard to BCIT shares:

      1) Deposit of physical shares by a customer should be scrutinized for authenticity and, at a minimum, should be checked against the outstanding shares recognized by the transfer agent. Firms are reminded of their obligation to "know your customer" under NASD Rules 2110 and 2310 and Section 326 of the USA PATRIOT Act.
      2) Any purchases should be undertaken with the knowledge that settlement is uncertain given the fact that the National Securities Clearing Corporation (NSCC) will not net obligations through the Continuous Net Settlement (CNS) system and that such trades will need to be settled broker-to-broker.
      3) Any sales should be completed only to the extent that delivery can be made.
      4) Member firms are reminded of their responsibilities to comply with the sales practices requirements under SEC Rules 15g-1 through 15g-9.

      Additionally, NASD has confirmed the position of the SEC staff relative to the application of SEC Rule 15c3-3(m) Completion of Sell Orders on Behalf of Customers and SEC Rule 15c3-3(d)(2) Requirement to Reduce Securities to Possession or Control. SEC Rule 15c3-3 requires member organizations to take prompt steps to buy-in securities to obtain physical possession or control under paragraph (d) (2) and to complete customer sell orders under paragraph (m). Such buy-in requirements related to BCIT are temporarily suspended until further notice.

      Similarly, the NYSE has issued Information Memorandum 05-67 stating that buy-in requirements pursuant to NYSE Rules 282 Mandatory Buy-In and 284 Procedures for Defaulted contracts, if applicable, are also suspended until further notice.


      1 See Securities Exchange Act Release No. 52363
      (August 31, 2005).

    • 05-59 NASD Provides Guidance Concerning the Sale of Structured Products

      View PDF File

      GUIDANCE

      Structured Products

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal and Compliance
      Retail
      Senior Management
      Derivatives
      Options
      Structured Products
      Structured Securities

      Executive Summary

      As a result of a recent review of members that sell structured products, NASD staff is concerned that members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers. This Notice to Members provides guidance to members concerning their obligations when selling structured products, including the requirements to: (1) provide balanced disclosure in promotional efforts; (2) ascertain accounts eligible to purchase structured products; (3) deal fairly with customers with regard to derivative products; (4) perform a reasonable-basis suitability determination; (5) perform a customer-specific suitability determination; (6) supervise and maintain a supervisory control system; and (7) train associated persons.

      Questions/Further Information

      Questions regarding this Notice may be directed to Gary L. Goldsholle, Associate Vice President and Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8104.

      Background

      Structured products are securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency.1 As the foregoing definition suggests, there are myriad types of structured products. Some structured products offer full protection of the principal invested, whereas others offer limited or no protection of the principal.

      Most structured products pay an interest or coupon rate substantially above the prevailing market rate.2 Structured products also frequently cap or limit the upside participation in the reference asset, particularly if some principal protection is offered or if the security pays an above-market rate of interest.

      Structured products, which are typically issued by investment banks or their affiliates, have a fixed maturity. Some, but not all, structured products may be listed on a national securities exchange. Moreover, even those structured products listed on a national securities exchange may be very thinly traded.

      Structured products typically have two components—a note and a derivative (often an option). The note pays interest to the investor at a specified rate and interval. The derivative component establishes the payment at maturity. In some products, the derivative is, in effect, a put option sold by the investor that gives the issuer the right, but not the obligation, to sell the investor the reference security or securities at a predetermined price. In other products, the derivative is, in effect, a call option sold by the investor that gives the issuer the right, but not the obligation, to buy from the investor the reference security or securities at a predetermined price. Despite the derivative component of a structured product, they are often marketed to investors as debt securities.

      Sales of structured products began in the 1980s. The products gained popularity with institutional investors in the 1990s. More recently, members have reported to NASD that structured products have been increasingly targeted at retail investors. Many of the structured products targeted at retail investors are based upon "blue-chip" and "household-name" stocks that comprise the S&P 500 or the NASDAQ-100 indexes. NASD staff has concerns about the manner in which structured products may be marketed to retail investors and the types of investors purchasing such products. As such, NASD is issuing this guidance to members addressing sales practice issues.

      Regulatory Requirements

      The application of NASD rules to activities involving structured products, including Rules 2110 (Standards of Commercial Honor and Principles of Trade), 2210 (Communications with the Public), 2310 (Recommendations to Customers), 2720 (Distribution of Securities of Members and Affiliates—Conflicts of Interest), 3010 (Supervision), and 3012 (Supervisory Control Systems), is discussed below.

      1. Promotion of Structured Products

      Offerings of structured products generally are conducted as public offerings of securities registered under the Securities Act of 1933. In most cases, structured products are offered from a shelf registration. An investor purchasing a structured product as part of a shelf distribution will, prior to purchase, receive a preliminary prospectus supplement that describes the characteristics and risks of the structured product being offered. To varying degrees, members also use supplemental sales materials. NASD staff has observed that the disclosures provided in supplemental sales materials tend to be less balanced and offer fewer risk disclosures than are contained in the preliminary and final prospectus supplements.

      NASD reminds members that pursuant to Rule 2210, all sales materials and oral presentations regarding structured products must present a fair and balanced picture regarding both the risks and benefits. For example, marketing materials should not portray structured products as "conservative" or a source of "predictable current income" unless such statements are accurate, fair, and balanced. In addition, Rule 2210 prohibits exaggerated statements and the omission of any material fact or qualification that would cause a communication to be misleading. Moreover, in promoting the advantages of structured products, such as the interest rate offered and the creditworthiness of the issuer, it is necessary that members balance their promotional materials with disclosures concerning the attendant risks, which may include loss of principal and the possibility that at expiration the investor will own the reference asset at a depressed price. In general, NASD staff believes that sales materials and oral presentations that omit a description of the derivative component of the product and instead present such products as ordinary debt securities would violate Rule 2210. In addition, members should be careful to balance any statements concerning the fact that a structured product has a ticker symbol or has been approved for listing on an exchange with the risks that an active and liquid trading market may not develop. Members are further reminded that providing risk disclosure in a prospectus supplement does not cure otherwise deficient disclosure in sales material, even if such sales material is accompanied or preceded by the prospectus supplement.3

      In some cases, structured products are assigned a credit rating by a nationally recognized statistical rating organization. To the extent that such credit rating pertains to the creditworthiness of the issuer (i.e., the ability of the issuer to meet its obligations under the terms of the structured product) and is not indicative of the market risk associated with the structured product or the reference security, members must be careful to delineate these distinctions. Presentation of a credit rating for a structured product that suggests that the rating pertains to the safety of the principal invested or the likely investment returns will be viewed as misleading. Members presenting a credit rating must address the fact that the creditworthiness of the issuer does not affect or enhance the likely performance of the investment other than the ability of the issuer to meet its obligations.

      2. Eligible Accounts

      A. Approved Accounts

      Member firms also should consider whether purchases of some or all structured products should be limited to investors that have accounts that have been approved for options trading. Given the similar risk profile of many structured products and options, particularly those where principal invested is at risk from market movements in the reference security, it may be an appropriate investor safeguard to require that such structured products only be purchased in accounts approved for options trading. Firms that determine not to limit purchases of structured products in which investors' principal is at risk from market movements in the reference security to accounts approved for options trading should develop other comparable procedures designed to ensure that structured products are only sold to persons for whom the risk of such products is appropriate. These firms should be prepared to demonstrate the basis for allowing investors with accounts not approved for trading options to purchase structured products.

      Members also are reminded that approving an account to trade structured products is not a substitute for a thorough suitability analysis. Not every structured product will be suitable for every account approved to trade structured products. A discussion of suitability is provided below.

      B. Discretionary Accounts

      Sales of structured products issued by a member, or an affiliate of a member, to discretionary accounts must comply with Rule 2720 (Distribution of Securities of Members and Affiliates—Conflicts of Interest). Specifically, paragraph (l) (Discretionary Accounts) provides that "a transaction in securities issued by a member or an affiliate of a member, or by a company with which a member has a conflict of interest shall not be executed by any member in a discretionary account without prior specific written approval of the customer." Members should review their written supervisory procedures and practices to ensure that they request and obtain the necessary written approval of the customer before purchasing structured products in a discretionary account.

      3. Suitability and Fair Dealing with Customers

      A. Fair Dealing with Customers with Regard to Derivative Products or New Financial Products

      IM-2310-2(e) (Fair Dealing with Customers with Regard to Derivative Products or New Financial Products) emphasizes members' obligations to deal fairly with customers when making recommendations or accepting orders for new financial products. The IM states that "[a]s new products are introduced from time to time, it is important that members make every effort to familiarize themselves with each customer's financial situation, trading experience, and ability to meet the risks involved with such products and to make every effort to make customers aware of the pertinent information regarding the products."

      For certain enumerated products, including a type of structured product listed on NASDAQ known as "Selected Equity-Linked Debt Securities" (SEEDS), IM-2310-2(e) provides specific guidelines that members must follow for "qualifying accounts to trade the products and for supervising the accounts. "In this regard, Rule 4420(g)(5) requires prior to the commencement of trading of particular SEEDS, delivery to a broker-dealer of a circular providing guidance regarding its compliance responsibilities (including suitability recommendations and account approval) when handling transactions in SEEDS.4 Similar disclosure requirements exist with respect to the listing standards of structured products on national securities exchanges.5

      B. Reasonable Basis Suitability

      As noted in Notices to Members (NTMs) 03-07 and 03-71, a member has an obligation to perform a reasonable basis suitability determination before recommending a product to investors. A reasonable basis suitability determination is necessary to ensure that a security—in this case a structured product—is suitable for some investors (as opposed to the customer-specific suitability determination, which is made on an investor-by-investor basis). To discharge its reasonable basis suitability obligation, a member must perform appropriate due diligence to ensure that it understands the nature of the product, as well as the potential risks and rewards. Members also are reminded of the guidance issued in NTM 05-26, which provides best practices for developing and vetting new products, including structured products.

      Members should consider whether an investment in a structured product meets the reasonable basis suitability standard if the instrument is priced such that the potential yield is not an appropriate rate of return in relation to the volatility of the reference asset based upon comparable or similar investments, in terms of structure, volatility, and risk in the market as determined at the time the structured product is issued. For example, similar structured products based on reference securities that possess substantially similar volatility characteristics, but which offer materially different rates of return in the note component, should call into question whether the instrument with the lower yield meets the reasonable basis suitability standard. While an exact risk/reward calibration among different instruments or investments may not be possible, NASD expects members to exercise their market expertise to recognize those situations where the materiality of difference is not in doubt and, consequently, identify that the lower yielding instrument does not represent a reasonable rate of return given the attendant risks as compared to other similarly composed products or direct investments in the underlying components of such products with similar risk/reward attributes.

      C. Customer Specific Suitability

      A member also must determine that its recommendation to purchase a structured product is suitable for that particular investor. Under Rule 2310, members must ensure that a recommendation is suitable for a specific customer by examining (1) the customer's financial status, (2) the customer's tax status, (3) the customer's investment objectives, and (4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.

      The derivative component of structured products and the potential loss of the principal for many such products may make them unsuitable for investors seeking alternatives to debt securities. While structured products pay interest like debt securities, they often exhibit very different profit and loss potential. The profit and loss potential of many structured products is more akin to an option contract, particularly those where principal invested is at risk from market movements in the reference security. For such products, it may be useful for registered representatives to consider whether the customer meets the suitability requirements for options trading.6 In particular, Rule 2860(b)(19)(B) requires that "no member or person associated with a member shall recommend to a customer an opening transaction in any option contract unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the option contract" (emphases added).

      Members also should not make any generalized conclusions about the "relative" suitability of a structured product and an investment in the reference asset. NASD does not believe that members should assume that if an investment in the reference asset is suitable, then an investment in a structured product pertaining to such reference asset also must be suitable. Conversely, members should not assume that if an investment in the structured product is suitable, then so too is an investment in the reference asset. As discussed above, structured products may have very different risk-reward profiles than their reference assets. Suitability must be determined on an investor-by-investor basis, with reference to the specific facts and circumstances of each investor.

      Moreover, where an instrument is structured such that there is a risk of losing all or a substantial portion of the principal in return for above-market rate current income, the volatility of the reference asset upon which total return of the investment depends will be an important factor in determining whether it is suitable for a customer. For example, structured product ABC with a highly volatile reference asset may pay an interest rate of 40 percent to account for the risk, whereas structured product XYZ with a less volatile reference asset may only pay an interest rate of 20 percent. Despite the higher interest rate of structured product ABC, the risk of principal owing to the increased volatility of the reference asset may make structured product ABC less suitable for an investor than structured product XYZ notwithstanding its lower interest rate.

      4. Supervision and Supervisory Control System

      Under Rule 3010, members must establish written supervisory procedures that are reasonably designed to ensure that sales of structured products comply with all applicable securities laws, and SEC and NASD rules. Members must ensure that their written procedures for supervisory and compliance personnel include that (1) reasonable-basis suitability is completed before products are offered for sale; (2) associated persons perform appropriate customer-specific suitability analysis; (3) the firm has procedures to determine accounts eligible to purchase structured products; and (4) all promotional materials are accurate and balanced. In addition, members are reminded that their written supervisory control system required under Rule 3012 requires members to test and verify that their written supervisory procedures are reasonably designed to ensure adequate compliance with all applicable securities laws, and SEC and NASD rules.

      Firms also should consider the best practices for vetting new products discussed in NTM 05-26. These best practices include having compliance and legal personnel involved in the initial product assessment and having supervisory personnel participate in the product review process.

      5. Training

      Members must train registered personnel about the characteristics, risks, and rewards of each structured product before they allow registered persons to sell that product to investors. In connection with such training, members should train registered persons about the factors that would make such products either suitable or unsuitable for certain investors. Members' focus on training should not be limited to representatives selling structured products; members also should provide appropriate training to supervisors of registered persons selling structured products.

      Training for all persons should emphasize that, due to the unique nature of these products, many investors, especially retail investors, may not understand the features of the product, and may not fully appreciate the associated risks of investing in them. Moreover, in light of the fact that investors may be turning to these products as an alternative to traditional equity and fixed income investments, it is crucial for registered persons to have a full and balanced understanding regarding both the risks and the rewards of these products.


      1 There is no standardized definition of a structured product in the federal securities laws. SEC Rule 434 (Prospectus Delivery Requirements in Firm Commitment Underwritten Offerings of Securities for Cash) defines structured securities as "securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor's investment return and the issuer's payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows." The Pacific Exchange defines structured products as "products that are derived from and/or based on a single security or securities, a basket of stocks, an index, a commodity, debt issuance and/or a foreign currency, among other things" and would include "index and equity linked notes, term notes and units generally consisting of a contract to purchase equity and/or debt securities at a specified time." Securities Exchange Act Rel. No. 51094 (Jan. 28, 2005), 70 FR 6489 (Feb. 7, 2005) (Order Approving Proposed Rule Change and Amendment No. 1 and 2 Thereto by the Pacific Exchange, Inc. and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 3 Thereto Relating to a Proposed Listing Fee Schedule for Structured Products). The NYSE defines a structured product as "a security, which is based on the value of another security." Securities Exchange Act Rel. No. 42746 (May 2, 2000), 65 FR 30171 n.7 (May 10, 2000) (Order Granting Approval to Proposed Rule Change and Amendment No. 1 Thereto Relating to the NYSE's Allocation Policy and Procedures).

      2 NASD staff has observed structured products paying interest rates as high as 40 percent per year.

      3 See, e.g., Department of Enforcement v. Hornblower & Weeks, 2004 NASD Discip. LEXIS 27 (respondent could not cure defects in disclosure by providing more detail and further disclosure in the same package or by answering questions); DOE v. Ryan Mark Reynolds, 2001 NASD Discip LEXIS 17 ("The SEC has held that, in the enforcement context, a registered representative may be found in violation of the NASD's rules and the federal securities laws for failure to fully disclose risks to customers even though such risks may have been discussed in a prospectus delivered to customers."); Department of Enforcement v. Pacific On-Line Trading & Securities, 2002 NASD Discip. LEXIS 19 (finding that the subsequent dissemination of disclosure information does not cure earlier misleading disclosures).

      Members also should consider whether their disclosures concerning structured products provide a basis for liability under sections 12(a)(2) and 17(a) of the Securities Act of 1933 (Securities Act) or section 10(b)(5) of the Securities Exchange Act of 1934 (Exchange Act). See In the Matter of Robert A. Foster, 51 SEC 1211 (1994) (notwithstanding distribution of the prospectuses, party is liable under Section 10(b)(5) of the Exchange Act and Section 17(a) of the Securities Act for making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made not misleading).

      4 A nearly identical requirement also exists with respect to listings of "Other Securities" pursuant to Rule 4420(f). See Rule 4420(f)(3).

      5 See, e.g., AMEX Rule 107A, PHLX Rule 803(f), NSX Section 1.3, CHX Rule 13.

      6 For structured products that are listed on an exchange (or traded on NASDAQ), the applicable listing standards typically require the exchange (or NASDAQ) to issue an information circular regarding compliance responsibilities, including suitability and account approval). See supra note 5. Member firms should review these information circulars to ensure that they adhere to the appropriate standards.

    • 05-58 Intermarket Surveillance Group (ISG)1 Requires Validation of Electronic Blue Sheet Submissions

      View PDF File

      GUIDANCE

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Senior Management
      Blue Sheets

      Executive Summary

      This Notice to Members reminds members of their reporting requirements concerning the automated submission of trading information via the Electronic Blue Sheet (EBS) System and provides information on the validation of certain data fields in a firm's EBS submission.

      This Notice was prepared by the following self-regulatory organizations (SROs) acting jointly as members of the Intermarket Surveillance Group (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)
      •   National Stock Exchange (NSX)
      •   New York Stock Exchange, Inc. (NYSE)
      •   Pacific Exchange, Inc. (PCX)
      •   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
      BOX 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
      NSX Nicole Guiffra (312) 786-8809 guiffran@nsx.com
      ISE Willie Wong (212) 897-8126 wwong@iseoptions.com
      NASD Rose Braisted (240) 386-4987 rose.braisted@nasd.com
      NYSE John Kroog (212) 656-6532 jkroog@nyse.com
      PCX John Chapin (312) 442-7790 jchapin@pacificex.com
      PHLX Edward Deitzel (215) 496-5298 ed.deitzel@phlx.com

      If you have questions regarding the interpretation of SEC Rule 17a-25 under Section 17 of the 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 2005-01

      Since 1988, member and member organizations have been submitting trading information requested by self-regulatory organizations (SROs) through the Electronic Blue Sheet (EBS) System. The ISG SROs and the Securities and Exchange Commission (SEC), during the course of inquiries and investigations, have encountered an increase in the number of EBS data submissions containing inaccuracies (e.g., options symbol, trade date, name address, buy/sell indicators, TIN1 and others). Some of these inaccuracies have been in existence for a significant period of time and have resulted in regulatory action being initiated by one or more of the ISG SROs. This is a reminder that EBS information is to be furnished in a timely and accurate manner.2

      In order to ensure that members and member organizations are reporting EBS data correctly, the ISG SROs require that all members and member organizations or their EBS data providers immediately conduct a validation of all required EBS data elements to ensure that EBS transmissions are consistent with current standards and accurately reflect members' books and records. The validation is to be conducted and completed by no later than March 31, 2006, and will require that documentation confirming that the validation has occurred be retained by members and member organizations.

      Members and member organizations have a continuing obligation to ensure that EBS submissions meet the requirements noted.

      Attachment A, Record Layout for Submission of Trading Information, describes the data elements required in EBS transmissions. While all EBS data is important and needs to be reported correctly for the purpose of complying with the validation requirement noted above, all layout records that include an "R" in the "Field Format" must be validated.

      Any inconsistency with overall EBS standards (discovered either as a result of the validation process or otherwise) should be reported immediately 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.

      If pursuant to an individual EBS request a member firm experiences reporting difficulties, it should contact the requesting SRO.

      Members and member organizations are reminded of their obligations as to timeliness, accuracy and completeness of data submitted by them or by service bureaus on their behalf.

      Timeliness

      Members and member organizations, pursuant to the rules governing the submission of blue sheet information, are required to meet the following requirements:

      [1] Response Time—In general, blue sheet submissions are to be received by a requesting organization within ten (10) business days following the date of the request for such information. However, members and member organizations may be requested to furnish blue sheet information in less than the normal ten—day reporting period and are expected to comply. Incomplete submissions do not fulfill a member's or member organization's obligation to make timely submissions.
      [2] Retention Time—Members and member organizations are required to maintain blue sheet information for the period of time set forth in Rule 17a-4(b) of the Securities Exchange Act of 1934, and in a manner that permits the submission of such data in accordance with [1] above.

      Accuracy

      It is the responsibility of members and member organizations to ensure that the EBS information submitted to the requesting organization is accurate. Items [1] through [6] below are areas in which inaccurate reporting of EBS data by certain members/member organizations has surfaced. Therefore, the ISG SROs are restating members' obligations with respect to certain codes in an effort to assist the membership in the submission of accurate EBS data. (This list is not all-inclusive as to EBS requirements. See above and also Attachment A.)

      [1] Buy/Sell Code—Members and member organizations are reminded that buy/sell codes for each trade must be designated:
      0 = Buy A = Buy Cancel
      1 = Long Sale B = Long Sale Cancel
      2 = Short Sale C = Short Sale Cancel
      3 = Open Long or Buy Open D = Open Long or Buy Open Cancel
      4 = Open Short or Sell Open E = Open Short or Sell Open Cancel
      5 = Close Long or Sell Close F = Close Long or Sell Close Cancel
      6 = Close Short or Buy Close G = Close Short or Buy Close Cancel

      NOTE: Buy/Sell Codes 3 through 6 and D through G pertain only to options information. Only these codes can be used when reporting options transactions.
      [2] Exchange Code—Each trade reported must contain the marketplace of execution:
      A = New York Stock Exchange L = London (OTC or Exchange)
      B = American Stock Exchange M = Toronto Stock Exchange
      C = Chicago Stock Exchange N = Montreal Stock Exchange
      D = Philadelphia Stock Exchange O = TSX Venture Exchange
      E = Pacific Exchange Q = NASD ADF
      F = Boston Stock Exchange R = NASDAQ
      G = National Stock Exchange S = Over-the-Counter
      I = International Securities Exchange T = Tokyo (OTC or Exchange)
      K = Chicago Board Options Exchange Z = Other — Foreign
      [3] Ticker Symbol — When submitting EBS information, all members and member organizations are required to use the recognized stock symbol, or when options information is requested, the appropriate OPRA symbol to identify transactions in the different option series of the underlying issue. The OPRA symbol must be reported in the following format:

      OPRA option symbol (space), OPRA expiration month symbol and OPRA strike price symbol. (For example, the Maytag January 25 call option series would be reported via blue sheets as MYG AE. This example uses six spaces in the field designated by SIAC as "symbol" in the automated format.)
      [4] Manual Components — Any members/member organizations that have to manually input any data as part of their EBS submission must use upper case alphas.
      [5] Average Price Account — The average price account field should be used to identify whether the account is the average price account itself or the recipient of transactions for an average price account.
      [6] Account Type Identifiers — In January 1993, members and member organizations were required to submit EBS information that contained expanded account type identifiers used by the SROs for audit trail purposes. A matrix containing the current account type identifiers is attached as Attachment B. To the extent that account type identifiers are expanded/changed in the future by one or more SRO, all EBS information, going forward, should reflect any such expansion/ change. The account type identifier in the EBS submission should correspond to the audit trail requirements of the market of execution. It should be noted that NASD currently accepts all expanded account type identifiers.

      In no event should EBS information contain summarized activity for accounts that purchased and/or sold the security under review. Transactions made through an average price account must be identified by the price of execution, as well as the average price given to the customer's account for which the transactions were effected. Every trade executed in a requested security by a member or member organization must be reported to the requesting organization, including partial fills on orders not completed.

      * * * * * * * *

      Members and member organizations must ensure that all EBS information is provided correctly to the SROs and SEC and that EBS information is regularly validated. Validation procedures and records pertaining to such validations are subject to examination by the SROs and SEC. These records must be retained for the time period set forth by Section 17 of the Securities Exchange Act of 1934. Any inconsistencies should be reported to the SROs immediately, in the manner previously described. Members and member organizations are reminded that failure to comply with EBS requirements will subject them to disciplinary action.

      To facilitate timely receipt of SROs' EBS requests, members and member organizations are to promptly notify the SROs of any changes regarding the identities and locations of the designated recipients of such EBS requests. This includes the situation where an SRO uses the Internet as its medium for transmitting its EBS requests. It is suggested that in situations where a member or member organization receives EBS requests via the Internet, such member/member organization create a shared Internet email mailbox address that would be accessible by several individuals, to facilitate transmission in the event that the primary recipient of EBS requests is unable to access his/her mailbox.

      Additionally, please be advised that the ISG SROs are contemplating possible future enhancements to EBS (e.g., the inclusion of order identification information to facilitate market reconstructions and more defined account name and address fields). In this context, the SROs would welcome having dialogue with the member and member organization community as such enhancements are initiated.

      Endnotes

      1 This Notice 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), National Stock Exchange (NSX), New York Stock Exchange, Inc. (NYSE), Pacific Exchange, Inc. (PCX) and Philadelphia Stock Exchange, Inc. (PHLX).

      2 AMEX Rule 153A; CBOE Rule 15.7; ISE Rule 1404; NASD Rules 8211, 8212 and 8213; NSX Rules 5.3 and 8.2; NYSE Rules 342.20, 410A and 476(a) (11); PCX Rule 10.2 (c); PHLX Rule 785; and SEC Rule 17a-25 under Section 17 of the Securities Exchange Act of 1934, as amended.

      ATTACHMENT A Record Layout for Submission of Trading Information
      Date: 09/07/2005

      Field Position Field
      Length
      Field Name/Description/Remarks Field
      Format
      Justify Picture Clause Default Value
      From To
            ***This Record Must Be the First Record of the File***        
      1 3 3 FILLER A LJ X (3) HDR
      4 5 2 FILLER A LJ X (2) .S
      6 10 5 DTRK-SYSID N LJ 9 (5) 12343
      11 12 2 FILLER A LJ X (2) .E
      13 14 2 FILLER N LJ 9 (2) 00
      15 16 2 FILLER A LJ X (2) .C
      17 20 4 DTRK-ORIGINATOR
        Please call SIAC for assignment (212) 383-2210
      A LJ X (4)
      21 22 2 FILLER A LJ x (2) .S
      23 26 4 DTRK-SUB-ORIGINATOR
        Please call SIAC for assignment (212) 383-2210
      A LJ X (4)
      27 27 1 FILLER A LJ X (1) B
      28 33 6 DTRK-DATE
        Contains submission date.
      N LJ 9 (6) MMDDYY
      34 34 1 FILLER A LJ X (1) B
      35 59 25 DTRK-DESCRIPTION
        Required to identify this file.
      A LJ X (25) FIRM TRADING
      INFORMATION
      60 80 21 FILLER A LJ X (21) B
      1 1 1 HEADER RECORD CODE
        Value: Low Values OR ZERO
      A X
      2 5 4 SUBMITTING BROKER NUMBER
        If NSCC member, use NSCC clearing number.
      If not a NSCC member, use clearing number
      assigned to you by your clearing agency.
      A-R LJ X (4) B
      6 40 35 FIRM'S REQUEST NUMBER
        Tracking number used by the firm to record
      requests from an organization.
      A X (35) B
      41 46 6 FILE CREATION DATE
        Format is YYMMDD
      A X (6)
      47 54 8 FILE CREATION TIME
        Format is HH:MM:SS
      A X (8)
      55 55 1 REQUESTOR CODE
      Requesting Organization Identification Values:
      A = New York Stock Exchange
      B = American Stock Exchange
      C = Chicago Stock Exchange
      D = Philadelphia Stock Exchange
      E = Pacific Exchange
      F = Boston Stock Exchange
      G = National Stock Exchange
      I = International Securities Exchange
      K = Chicago Board Options Exchange
      R = NASD
      X = Securities Exchange Commission
      Z = Other
      A X
      56 70 15 REQUESTING ORGANIZATION NUMBER
        Number assigned by requesting organization
      A LJ X (15) B
      71 80 10 FILLER A X (10) B
      1 1 1 RECORD SEQUENCE NUMBER ONE
        The first record of the transaction. Value: 1
      A X
      2 5 4 SUBMITTING BROKER NUMBER
        Identical to Submitting Broker Number in
      Header Record
      A-R LJ X (4)
      6 9 4 OPPOSING BROKER NUMBER
        The NSCC clearing house number of the broker
      on the other side of the trade.
      A-R LJ X (4) B
      10 21 12 CUSIP NUMBER
        The cusip number assigned to the security.
      Left justified since the number is nine characters at
      present (8+ check digit) but will expand in the future
      A LJ X (12) B
      22 29 8 TICKER SYMBOL
        The symbol assigned to this security. For options,
      the OPRA option symbol (space), OPRA expiration
      month symbol and OPRA strike price symbol
      should be used. (Ex. Maytag May 20 call option
      series would be reported as MYG ED. This example
      uses six spaces in the field with a space between
      the OPRA symbol and the OPRA expiration month.)
      A-R LJ X (8) B
      30 35 6 TRADE DATE
        The date this trade executed. Format is YYMMDD.
      A-R X (6) B
      36 41 6 SETTLEMENT DATE
        The date this trade will settle. Format is YYMMDD
      A X (6) B
      42 53 12 QUANTITY
        The number of shares or quantity of bonds or option contracts.
      N-R RJ 9 (12) Z
      54 67 14 NET AMOUNT
        The proceeds of sales or cost of purchases after
      commissions and other charges.
      N RJ S9(12)V99 Z
      68 68 1 BUY/SELL CODE
      Values: 0 = Buy
      1 = Sale
      2 = Short Sale
      3 = Buy Open
      4 = Sell Open
      5 = Sell Close
      6 = Buy Close
      A = Buy Cancel
      B = Sell Cancel
      C = Short Sale Cancel
      D = Buy Open Cancel
      E = Sell Open Cancel
      F = Sell Close Cancel
      G = Buy Close Cancel
      Values 3 to 6 and D to G are for options only
      A-R X B
      69 78 10 PRICE
        The transaction price. Format: $$$$ CCCCCC.
      N-R RJ 9(4)V(6) Z
        79 79 1 EXCHANGE CODE
        Exchange where trade was executed. Values:
      A = New York Stock Exchange
      B = American Stock Exchange
      C = Chicago Stock Exchange
      D = Philadelphia Stock Exchange
      E = Pacific Exchange
      F = Boston Stock Exchange
      G = National Stock Exchange
      I = International Securities Exchange
      K = Chicago Board Options Exchange
      L = London Stock Exchange
      M = Toronto Stock Exchange
      N = Montreal Stock Exchange
      O = TSX Venture Exchange
      Q = NASD ADF
      R = NASDAQ
      S = Over—the—Counter
      T = Tokyo Stock Exchange
      Z = Other
      A-R X B
      80 80 1 BROKER/DEALER CODE
        Indicate if trade was done for another Broker/Dealer.
      Values: 0 = No; 1 = Yes
      A-R X B
      1 1 1 RECORD SEQUENCE NUMBER TWO
       Value: 2
      A X
      2 2 1 SOLICITED CODE
        Values: 0 = No; 1 = Yes
      A-R X B
      3 4 2 STATE CODE
        Standard Postal two character identification.
      A-R X (2) B
      5 14 10 ZIP CODE/COUNTRY CODE
        Zip Code—five or nine character (zip plus four)
      Country code—for future use.
      A-R LJ X (10) B
      15 22 8 BRANCH OFFICE/REGISTERED REPRESENTATIVE
      NUMBER
        Each treated as a four—character field.
      Both are left justified.
      A-R LJ X (8) B
      23 28 6 DATE ACCOUNT OPENED
        Format is YYMMDD
      A-R X (6) B
      29 48 20 SHORT NAME FIELD
        Contains last name followed by comma (or space)
      then as much of first name as will fit.
      A LJ X (20) B
      49 78 30 EMPLOYER NAME A LJ X (30) B
      79 79 1 TIN 1 INDICATOR
        Values: 1 = SS#; 2 = TIN
      A-R X B
      80 80 1 TIN 2 INDICATOR
        Values: 1 = SS#; 2 = TIN—for future use.
      A X B
      1 1 1 RECORD SEQUENCE NUMBER THREE
        Value: 3
      A X
      2 10 9 TIN ONE
        Taxpayer Identification Number
      Social Security or Tax ID Number.
      A-R LJ X (9) B
      11 19 9 TIN TWO
      Taxpayer Identification Number #2
      Reserved for future use.
      A LJ X (9) B
      20 20 1 NUMBER OF N&A LINES A X B
      21 50 30 NAME AND ADDRESS LINE ONE A-R LJ X (30) B
      51 80 30 NAME AND ADDRESS LINE TWO A-R LJ X (30) B
      1 1 1 RECORD SEQUENCE NUMBER FOUR
        Value: 4
      A X
      2 31 30 NAME AND ADDRESS LINE THREE A-R LJ X (30) B
      62 62 1 ACCOUNT TYPE IDENTIFIERS
        See Attachment B for current codes.
      A-R X B
      63 80 18 ACCOUNT NUMBER
        Account number
      A-R LJ X (18) B
      1 1 1 RECORD SEQUENCE NUMBER FIVE
        Value: 5
      A X (1)
      2 31 30 NAME AND ADDRESS LINE FIVE A-R LJ X (30) B
      32 61 30 NAME AND ADDRESS LINE SIX A-R LJ X (30) B
      62 65 4 PRIME BROKER
        Clearing number of the account's prime broker.
      A-R LJ X (4) B
      66 66 1 AVERAGE PRICE ACCOUNT
        1 = recipient of average price transaction.
      2 = average price account itself.
      N-R 9 (1) Z
      67 71 5 DEPOSITORY INSTITUTION IDENTIFIER
        Identifying number assigned to the account by
      the depository institution.
      A-R LJ X (5) B
      72 80 9 FILLER A X (9) B
      1 1 1 TRAILER RECORD DATE
        One record per submission. Must be the last
      record on the file. Value: High Values or "9"
      A X
      2 17 16 TOTAL TRANSACTIONS
        The total number of transactions.
      This total excludes Header and Trailer Records.
      N RJ 9 (16) B
      18 33 16 TOTAL RECORDS ON FILE
        The total number of 80 byte records. This total
      includes Header and Trailer Records, but not the
      Datatrak Header Record (i.e., does not include the
      first record on the file).
      N RJ 9 (16) Z
      34 80 47 FILLER A X (47) B
      Field Format
      A = Alphanumeric (all caps)
      N = Numeric
      P = Packed
      B = Binary
      R = Validation Required
      Default Values—Code
      B = Blanks
      Z = Zero
      Justify
      RJ = Right Justification of Data
      LJ = Left Justification of Data

      Attachment B   Account Type Identifiers

      Transaction Type Security Type
      Equity* Options
      Non—Program Trading, Agency A C
      Non—Index Arbitrage, Program Trading, Proprietary C  
      Index Arbitrage, Program Trading, Proprietary D  
      Index Arbitrage, Program Trading, Individual Investor J  
      Non—Index Arbitrage, Program Trading, Individual Investor K  
      Non—Program Trading, Proprietary P F
      Non—Program Trading, Individual Investor I  
      Non—Index Arbitrage, Program Trading, Agency Y  
      Index Arbitrage, Program Trading, Agency U  
      Index Arbitrage, Program Trading, as Agent for Other Member M  
      Non—Index Arbitrage, Program Trading, as Agent for Other Member N  
      Non—Program Trading, as Agent for Other Member W  
      Specialist S S
      Market—Maker   M
      Non—Member Market—Maker/Specialist Account   N
      Stock Specialist — Assignment   Y
      Short Exempt, Agency B  
      Customer Range Account of a Broker/Dealer   B
      Registered Trader G  
      Error Trade Q  
      Competing Market Maker Proprietary Transaction: Affiliated w/ Clearing Member O  
      Competing Market Maker: Unaffiliated Member's Competing Market Maker T  
      Competing Market Maker: Non—Member R  
      Short Exempt Transaction: Proprietary Account of Clearing Member Organization or
      Affiliated Member/Member Organization
      E  
      Short Exempt Transaction: Proprietary Account of Unaffiliated Member/Member Organization F  
      Short Exempt Transaction: Individual Customer Account H  
      Short Exempt Transaction: Competing Market Maker this is a Member/Member Organization
      Trading for own account
      L  
      Short Exempt Transaction: One Member Acting as Agent for Another Member's Competing
      Market Maker Account
      X  
      Short Exempt Transaction: Account of Non Member Competing Market Maker Z  
      Amex Option Specialist/Market Maker Trading Paired Security V  
      Registered Trader Market Maker Transaction Regardless of the Clearing Number   P
      Transactions cleared for a NASDAQ market maker that is affiliated w/ the clearing member
      that resulted from telephone access to the specialist. Amex Only.
      3  
      Transactions cleared for a member's NASDAQ market maker that is not affiliated with the
      clearing member that resulted from telephone access to the specialist. Amex Only.
      4  
      Transactions cleared for a non—member NASDAQ market maker that is not affiliated with the
      clearing member that resulted from telephone access to the specialist. Amex Only.
      5  

      * Equity securities include those securities that trade like equities. For instance, ETFs and Structured Products.

    • 05-57 Guidance to Members Affected by Hurricane Katrina

      View PDF File

      GUIDANCE

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representative
      Senior Management
      Institutional
      Internal Audit
      Legal & Compliance
      Operations
      Registration
      Systems
      Business Continuity
      Disaster Recovery
      Emergency Preparedness
      Rule 3012 (Supervisory Control
      Systems)

      Executive Summary

      Due to the recent tragic events resulting from Hurricane Katrina, NASD is aware that members with offices in the affected areas are concerned with a number of regulatory and compliance issues. In this regard, NASD is providing guidance on these issue, including guidance on emergency office relocations, continuing education requirements for registered personnel, registered personnel engaged in active military duty, books and records, the handling of customers' funds and securities, and customer communications.

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Daniel M. Sibears, Executive Vice President and Deputy, Member Regulation, at (202) 728-6911 or Patricia Albrecht, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8026.

      Discussion

      Emergency Office Relocations

      To relocate displaced personnel, members not impacted by Hurricane Katrina are encouraged to make office space available and to otherwise assist those who have been recently displaced. If a member relocates displaced personnel to a temporary location that is not currently registered as a branch office or identified as a regular nonbranch location, members should use their best efforts to provide written notification to NASD as soon as possible after establishing a new temporary office or space sharing arrangement, to include at minimum: the office address, the entities involved, the names of registered personnel, a contact phone number and, if possible, the expected duration. The notification should also indicate whether the space sharing arrangement is with an organization in a securities or kindred business.

      Members designated to the New Orleans District Office may direct inquires to any of three NASD District Offices as follows:

      Dallas District Office (972) 701-8554
      Florida District Office (561) 443-8000
      Atlanta District Office (404) 239-6100

      Form U-4

      The requirement to maintain updated Form U-4 information (e.g., office of employment address) for registered employees affected by the referenced relocations associated with this event will be temporarily suspended. In addition, it is not necessary to submit branch office applications for any newly opened temporary office locations or space sharing arrangements established as a result of recent events.

      Books and Records Maintained at the Affected Locations

      Members that maintained books and records at the affected locations should make every effort to retrieve or back-up such records. If any such records were permanently destroyed, a list of the types of books and records required to be maintained pursuant to NASD Rule 3110 and Exchange Act Rules 17a-3 and 17a-4 must be prepared. The list should include the time periods affected, but need not include records that can be recreated from an electronic database or that can be retrieved otherwise from a service bureau, back-up records storage facility, etc. All such lists must be submitted to the contact information listed above as soon as possible, but no later than October 30, 2005. If you are unable to meet this time frame, please contact NASD at the aforementioned contact information.

      Customer Funds and Securities

      As soon as possible, members should determine the dollar amount of any customer checks or securities held at affected business offices that cannot be located or accounted for. This information should be provided, in writing, to NASD using the previously provided contact information. In areas where postal service has been suspended or the firm is concerned about the customer's ability to receive mail, NASD will not object to interim solutions to dealing with customer dividend, interest and similar cash payments. See the U.S. Postal Web Site for further information on areas with disrupted or suspended mail service at http://www.usps.com/communications/news/serviceupdates.htm?from=bannercommunications&page=katrina.

      In instances where a nonbranch location or branch office has been relocated or customer calls are being rerouted to another office, we understand that firms may need to deviate from standard operating procedures to accommodate customers who need to access their funds. Procedures that generally require written letters of authorization to move funds or direct a check to a third party address may be waived but firms should exercise as much due diligence as possible in validating the identity of the customer as well as provide heightened supervision of these accounts. Validating the identity of customers remains each member's responsibility.

      Members should also review their supervisory control policies and procedures to ensure that the policies and procedures relating to the transmittal of customer funds, customer change of address and increased requests for hand delivery of checks are adequate after considering changes to normal operations. Supervisory control policies and procedures should be considered that will mitigate risk that may arise due to reduced ability to communicate with customers, inability to rely on mail, or other disruption to the existing controls. Please consult Rule 3012 (Supervisory Control Systems) for further guidance.

      Members that clear for introducing firms who are unable to conduct business are encouraged to accept liquidating orders from customers so that customers' access to funds is not restricted.

      Credit Regulation

      NASD will be accepting margin extensions on a case-by-case basis for reason code "Acts of God," for customers located in regions affected by the hurricane. Please contact Financial Operations at (240) 386-5156 prior to transmission.

      Confirmations and Customer Statements

      NASD will not object to members holding confirmations, statements, and other communications or notices on behalf of those customers located in the affected areas for a period not to exceed 90 calendar days, or until further notice. Members must exercise appropriate supervisory review of the accounts affected, maintain a log of those accounts whose mail is being held, and notify the customer that those communications are being held on their behalf, as soon as possible. If additional time is required beyond 90 calendar days, please contact NASD using the contact information provided above.

      Customer Communication

      Members are encouraged to promptly place a notice on their Web sites that indicates to affected customers whom they may contact concerning their accounts, access to funds or securities, etc. If feasible, members should consider the activation of toll free numbers dedicated to responding to customers.

      Business Continuity and Contingency Plans

      A member affected by Hurricane Katrina should contact NASD to discuss those business continuity and contingency plan actions implemented to address any problems that have resulted.

      Qualifications Examinations and Continuing Education

      NASD is extending continuing education requirements and qualifications examination windows for candidates who reside in a Louisiana, Mississippi or Alabama county or parish declared a "major disaster" by the federal government. Registered representatives who have a qualifications examination or a continuing education window due to expire in September or October will have their windows extended to November 30, 2005. As more information becomes available, additional extensions may be provided. Please contact NASD Field Support Services at (800) 999-6647 with any questions or if you require additional information on test center status in these areas.

      Information for Applicants for NASD Membership and Existing Member Firms

      NASD is currently unable to access its offices in New Orleans to retrieve membership application files. As a result, we are working to contact firms that have applications pending with the New Orleans District Office. Due to disruption in telephone service, among other things, we have not been able to reach all applicants. Accordingly, we may request that applicants assist us in re-constructing their application files at the appropriate time. NASD remains committed to working through membership applications so that decisions on applications may be issued as quickly as possible. If you wish to begin gathering and forwarding the information prior to being contacted by NASD, you may do so. In the event that an application was submitted on or around Monday, August 29, 2005, it may not have been received, so please feel free to re-file such applications in their entirety, or contact us for assistance at: NASD, 12801 North Central Expressway, Suite 1050, Dallas, TX 75243.

      Military Personnel & National Guard

      NASD By-Laws provide specific relief to NASD registered persons engaged in the investment banking and securities business who volunteer or are called into active military duty. Under Interpretive Material 1000-2, such persons will be placed in a specially designated "inactive" status once NASD is notified of their military call-up, but will remain registered for NASD purposes. Such persons will remain eligible to receive transaction-related compensation, including continuing commissions, because they remain registered with a firm while on inactive status. Also, an employing firm may allow a registered person on inactive status to enter into an arrangement with another person registered with the employing firm to service his or her accounts and to share in commissions generated by those accounts. However, such a person on inactive status may not perform any duties of a registered person. In addition, dues and assessments identified in Article VI of the NASD By-Laws will be waived for such persons. Member firms should notify NASD of such events by mailing or faxing to the Registration and Disclosure Department a letter (on firm letterhead) identifying the name and CRD number of the person called into active duty, the name and CRD number of the firm (or firms) with whom the person is associated, the date the firm received notification from the individual, and a copy of the official call-up notification. Member firms should mail letters notifying NASD of military call-ups to NASD Registration and Disclosure Department, P.O. Box 9495, Gaithersburg, MD 20898-9495 or fax them to (240) 386-4751. If you have questions about this process, please call the Gateway Call Center at (301) 590-6500. For more information view our Active Military Leave Guidance Web page at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_005228&ssSourceNodeId.

    • 05-56 Extension of Pilot Program Increasing Position and Exercise Limits for Stock Options

      View PDF File

      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, 2005, NASD filed for immediate effectiveness with the Securities and Exchange Commission (SEC) amendments to Rule 2860, which extend a pilot program that increases certain stock options position and exercise limits to March 3, 2006. The pilot program was scheduled to expire on September 2, 2005.

      The rules, as amended, are set forth in Attachment A. The amendments became effective August 10, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Gary L. Goldsholle, Associate 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, 2005, NASD filed for immediate effectiveness with the Securities and Exchange Commission (SEC) amendments to Rule 2860, which extend a pilot program that increases certain stock options position and exercise limits to March 3, 2006.1 The pilot program was scheduled to expire on September 2, 2005.2 NASD extended the pilot program to allow it to continue without interruption and to conform to similar pilot programs that were recently extended by other self-regulatory organizations (SROs) with options rules.3

      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.4 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 a pilot program that began March 30, 2005, and now ends March 3, 2006, (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. 52271 (August 16, 2005), 70 FR 49344 (August 23, 2005) (SR-NASD-2005-097).

      2 See Securities Exchange Act Release No. 51520 (April 11, 2005), 70 FR 19977 (April 15, 2005) (SR-NASD-2005-040); NASD Notice to Members 05-31 (April 2005).

      3 See Securities Exchange Act Release No. 52260 (August 15, 2005), 70 FR 48991 (August 22, 2005) (SR-AMEX-2005-082); Securities Exchange Act Release No. 52261 (August 15, 2005), 70 FR 49004 (August 22, 2005) (SR-PHLX-2005-51); Securities Exchange Act Release No. 52262 (August 15, 2005), 70 FR 48995 (August 22, 2005) (SR-CBOE-2005-61); Securities Exchange Act Release No. 52263 (August 15, 2005), 70 FR 49003 (August 22, 2005) (SR-PCX-2005-95); Securities Exchange Act Release No. 52264 (August 15, 2005), 70 FR 48992 (August 22, 2005) (SR-BSE-2005-37); Securities Exchange Act Release No. 52265 (August 15, 2005), 70 FR 48996 (August 22, 2005) (SR-ISE-2005-39).

      4 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)(VV). 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

      Additions are 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 2, 2005] March 3, 2006 ("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.

    • 05-55 SEC Approves Amendments to IM-10104 to Provide Payment to Arbitrators for Deciding Discovery-Related Motions

      View PDF File

      GUIDANCE

      Discovery-Related Motions

      Effective Date: September 26, 2005

      SUGGESTED OUTING

      KEY TOPICS

      Legal & Compliance Discovery-Related Motions
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved an amendment to Interpretive Material (IM) 10104 of the NASD Code of Arbitration Procedure (Code) to provide payment to arbitrators for deciding discovery-related motions without a hearing session.1

      The text of the amendment is set forth in Attachment A. The amendment will become effective on September 26, 2005, and will apply to any arbitrator order issued on or after September 26, 2005, that decides a discovery-related motion.

      Questions/Further Information

      Questions regarding this Notice may be directed to Mignon McLemore, Assistant Chief Counsel, NASD Dispute Resolution, at (202) 728-8151, or via email at mignon.mclemore@nasd.com

      Background and Discussion

      When parties have a dispute over the pre-hearing production of information or documents ("discovery"), an arbitrator may choose to hold a hearing to hear arguments from the parties.2 The arbitrator conducts such hearings as pre-hearing telephone conferences, for which the arbitrator receives an honorarium of $200. Arbitrators currently are not, however, compensated for deciding discovery-related motions without a hearing ("on the papers"). In arbitrator focus groups conducted across the country, one of the consistently raised concerns was the amount of time and effort invested by arbitrators, particularly chairpersons, in reviewing and deciding various discovery motions. NASD considered these concerns and determined that the arbitrators performed a substantial amount of uncompensated work in resolving discovery-related motions.

      In light of these findings, NASD has amended IM-10104 of the Code to provide payment to arbitrators for deciding discovery-related motions without a hearing session. NASD believes this amendment will motivate a greater number of arbitrators to accept assignments as chairpersons, thus expanding the pool of qualified arbitrators willing to serve in this role. Moreover, NASD believes the amendment will encourage arbitrators to decide discovery-related motions on the papers without scheduling a pre-hearing conference, thereby expediting the pace of arbitrations.

      Under amended IM-10104, an arbitrator will be paid $200 to decide a discovery-related motion without a hearing session. This is the same amount an arbitrator receives to participate in a pre-hearing conference regarding discovery. For purposes of amended IM-10104, a discovery-related motion and any replies or other correspondence relating to the motion will be considered to be a single motion.3 If more than one arbitrator considers a discovery-related motion, each arbitrator will receive $200. The panel will allocate the cost of the honoraria as part of the allocation of fees in the eventual arbitration award. The rule will not apply to simplified cases administered under Rules 10203 and 10302.

      Effective Date Provisions

      The amendment described in this Notice will become effective on September 26, 2005. The amendment will apply to any arbitrator order issued on or after September 26, 2005, that decides a discovery-related motion.


      1 Exchange Act Release No. 51931 (June 28, 2005) (File No. SR-NASD-2005-052), 70 Federal Register 38989 (July 6, 2005).

      2 Rule 10321(d) provides that the Director of Arbitration may appoint a person to preside at a pre-hearing conference to deal with the exchange of information, the exchange or production of documents, identification of witnesses, and other pre-hearing matters. Normally, the single arbitrator or the chair of a three-arbitration panel will be appointed to preside.

      3 A motion for sanctions for failure to comply with discovery will be considered a "discovery-related" motion.


      ATTACHMENT A

      Additions are underlined; deletions are in brackets.

      Code of Arbitration Procedure

      * * *

      IM-10104. Arbitrators' Honorarium

      (a) All persons selected to serve as arbitrators pursuant to the Association's Code of Arbitration Procedure shall be paid an honorarium for each hearing session (including a prehearing conference) in which they participate.
      (b) The honorarium shall be $200 for each hearing session and $75 per day additional honorarium to the chairperson of the panel. The honorarium for a case not requiring a hearing shall be $125.
      (c) The honorarium for travel to a canceled hearing session shall be $50. If a hearing session other than a prehearing conference is adjourned pursuant to Rule 10319(d), each arbitrator shall receive an additional honorarium of $100.
      (d) The Director may authorize a higher or additional honorarium for the use of a foreign hearing location.
      (e) Payment for Deciding Discovery-Related Motions Without a Hearing Session
      (1) NASD will pay each arbitrator an honorarium of $200 to decide a discovery-related motion without a hearing session. This paragraph does not apply to cases administered under Rules 10203 and 10302.
      (2) For purposes of paragraph (e)(1), a discovery-related motion and any replies or other correspondence relating to the motion shall be considered to be a single motion.
      (3) The panel will allocate the cost of the honoraria under paragraph (e)(1) to the parties pursuant to Rules 10205(c) and 10332(c).

      * * *

    • 05-54 NASD Announces Nominee for Regional Industry Member Vacancy on the National Adjudicatory Council

      View PDF File

      INFORMATIONAL

      NAC Nominee

      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 nominee for the National Adjudicatory Council (NAC) from the North Region. The nominee, nominated for a three-year term beginning in January 2006, is listed in Exhibit I. The nominee 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 North Regional Nominating Committee thoroughly reviewed the background of every candidate before selecting their nominee in an effort to secure appropriate and fair representation of the region.

      Contested Election Procedures

      If an officer, director, or employee of an NASD member in the North Region has not been proposed for nomination by the Regional Nominating Committee and wants to seek the nomination, he or she should send a written notice to Barbara Z. Sweeney, NASD's Corporate Secretary, at the address below within 14 calendar days after the publishing date (August 25) of this Special Notice.

      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 North Regional Nominating Committee shall certify its candidate to the 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 Board of Directors of NASD Regulation, Inc., 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: 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)

      One region (North) has a vacancy for this election. NAC members for the other four regions (New York, Midwest, South, and West) 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

      Nominee for NAC Industry Member Vacancy

      North Region
      (Districts 9 and 11)
      Stephanie L. Brown Linsco/Private
      Ledger Corporation
      Boston, MA

      EXHIBIT II

      NAC Member with Term Expiring in January 2006

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

      NAC Members with Terms Expiring in January 2007

      New York Judith R. MacDonald Rothschild, Inc. New York, NY
      West Region Neal E. Nakagiri   Van Nuys, CA

      NAC Members with Terms Expiring in January 2008

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

    • 05-53 Due to a change in the publishing schedule, there is no Notice numbered 05-53.

       

    • 05-52 SEC Approves Amendments to TRACE Fee Structure Establishing an Enterprise Fee and Lowering Fee for Receipt of Real-Time TRACE Transaction Data via Web Browser

      View PDF File

      GUIDANCE

      Trade Reporting and Compliance Engine (TRACE)

      Effective Date: October 1, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Registered Representatives
      Senior Management
      Technology
      Training

      Debt Securities
      Operations
      Rule 7010
      Transaction Reporting

      Executive Summary

      On August 1, 2005, the Securities and Exchange Commission (SEC or Commission) approved an amendment to Rule 7010(k), adding an enterprise fee structure and lowering another fee related to the receipt of Real-Time TRACE transaction data. This fee change will enable an enterprise such as a broker-dealer to display Real-Time TRACE transaction data on an unlimited number of internal display devices for a fee of $7,500 per month. The fee for Level II Full Service Web Browser Access also has been lowered, so that the charge for the first user ID obtained for such access will be $50 per month rather than the current $80 per month.

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

      The amendments become effective October 1, 2005.

      Questions/Further Information

      Questions concerning this Notice should be directed to James L. Eastman, Assistant General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-6961; Sharon K. Zackula, Associate General Counsel, OGC, RPO, at (202) 728-8985; or David Lefferts, Associate Vice President, Corporate Debt, at (212) 858-4389.

      Background and Discussion

      On August 1, 2005, the SEC approved an amendment to Rule 7010(k)(3)(A)(i), the Bond Trade Dissemination Service (BTDS) Professional Real-Time Data Display Fee, to enable an enterprise such as a broker-dealer to display Real-Time TRACE transaction data within the enterprise on an unlimited number of internal display devices for a fee of $7,500 per month.1 The SEC also approved an amendment to Rule 7010(k)(1)(A), Web Browser Access, to lower the fee for Level II Full Service Web Browser Access, so that the charge for the first user ID obtained for such access will be $50 per month rather than the current $80 per month.

      NASD has modified the TRACE fee structure because NASD believes the new structure may significantly increase the use of Real-Time TRACE transaction data among users of such data (Subscribers) such as registered representatives, investment advisors, and other persons serving retail investors, as well as address cost concerns that have been expressed by members. NASD believes that broadening the distribution of Real-Time TRACE transaction data will facilitate its use by persons who provide brokerage and/or advisory services to retail investors, and will provide such professionals with an additional tool to better serve and inform retail investors. Moreover, broadening the distribution of Real-Time TRACE transaction data is likely to have an incremental, beneficial effect on corporate bond market transparency and pricing by generally raising the level of awareness and overall knowledge of specific bond issues as well as the bond market generally.

      Proposed "Enterprise" Fee

      Currently, NASD charges Subscribers $60 per month, per terminal (the BTDS Professional Real-Time Data Display Fee) to display Real-Time TRACE transaction data. Members have indicated that this $60 per month, per terminal charge is cost prohibitive for organizations with large numbers of potential internal users of the data. Subscribers serving large numbers of retail investors have indicated that they likely would distribute Real-Time TRACE transaction data much more widely within their organizations if the costs were reduced.

      To address these concerns, NASD has amended Rule 7010(k)(3)(A)(i) to provide Subscribers the option of paying a flat, enterprise fee of $7,500 per month instead of $60 per terminal (i.e., per screen or interrogation or display device). This amendment is intended to benefit Subscribers that have a large staff of potential internal data users who desire access to Real-Time TRACE transaction data. Instead of paying multiple $60 BTDS Professional Real-Time Data Display Fees, a Subscriber would have the option to pay a flat fee of $7,500 per month to display Real-Time TRACE transaction data on an unlimited number of internal terminals/workstations.

      The proposed amendment to Rule 7010(k)(3)(A)(i) will apply only to a Subscriber's internal display of Real-Time TRACE transaction data and will be independent of access method or data vendor. The proposed $7,500 enterprise fee option will include unlimited terminal display use for individual access for all of a Subscriber's employees and the employees of certain of its corporate affiliates.2

      Level II Full Service Web Browser Access Fee

      To encourage use of Real-Time TRACE transaction data among Subscribers of varying sizes, NASD also has amended Rule 7010(k)(1)(A) to reduce the fees paid by Subscribers who receive Real-Time TRACE transaction data through Level II Full Service Web Browser Access. Such smaller Subscribers are unlikely to directly benefit from the new enterprise pricing structure.

      Currently, the implicit cost for Level II Full Service Web Browser Access used to receive Real-Time TRACE transaction data is $60 per month (per user ID).3 NASD has reduced the cost of the first user ID per Subscriber to receive Level II Full Service Web Browser Access from $80 per month to $50 per month. This change will reduce a Subscriber's marginal cost for the data portion of Level II Full Service Web Browser Access for the first user ID by 50 percent to $30 per month.


      1 See Securities Exchange Act Release No. 52183 (August 1, 2005), 70 FR 46239 (August 9, 2005) (SR-NASD-2005-063).

      2 A Subscriber wishing to take advantage of this option must first enter into an agreement directly with NASD, which in turn will notify the data vendors with which the Subscriber does business to provide blanket permission for use of Real-Time TRACE transaction data to any user within that organization. A Subscriber interested in this option should contact NASD's TRACE group at (888) 507-3665.

      3 Level II Full Service Web Browser Access today costs $80 per month. However, Level II Full Service Web Browser Access also grants users Level I Web Trade Report Only Browser Access (for trade reporting), which otherwise would cost an additional $20 per month per user ID. Therefore, prior to the fee changes adopted by NASD the marginal cost of Level II Full Service Web Browser Access was $60 per month, per user ID.


      ATTACHMENT A

      7010. System Services

      (a) through (j) No change.
      (k) Trade Reporting and Compliance Engine (TRACE)
      The following charges shall be paid by participants for the use of the Trade Reporting and Compliance Engine ("TRACE"):

      System Fees Transaction Reporting Fees Market Data Fees
      Level I Trade Report Only Web Browser Access — $20/month per user ID

      Level II Full Service Web Browser Access — $80/month per user ID, except that the charge for the first such user ID shall be $50/month
      Trades up to and including $200,000 par value — $0.475/ trade;
      Trades between $201,000 and $999,999 par value — $0.002375 times the number of bonds traded/ trade;
      Trades of $1,000,000 par value or more — $2.375/trade
      BTDS Professional Real-Time Data Display — $60/month per terminal, or a flat fee of $7,500/month entitling Professionals to make unlimited internal use of Real-Time TRACE transaction data on any number of interrogation or display devices
      CTCI/Third Party — $25/month/per firm Cancel/Correct — $1.50/trade Vendor Real-Time Data Feed — $1,500/month for Real-Time TRACE transaction data, except for qualifying Tax-Exempt Organizations
        "As of" Trade Late — $3/trade Vendor Real-Time Data Feed — $400/month for Real-Time TRACE transaction data for qualifying Tax- Exempt Organizations
        BTDS TRACE Non-Professional Real-Time Data Display — No charge
      (1) System Related Fees
      There are three methods by which a member may report corporate bond transactions that are reportable to the Association pursuant to the Rule 6200 Series. A member may choose among the following methods to report data to the Association: (a) a TRACE web browser; (b) a Computer-to-Computer Interface ("CTCI") (either one dedicated solely to TRACE or a multi-purpose line); or (c) a third-party reporting intermediary. Fees will be charged based on the reporting methodology selected by the member.
      (A) Web Browser Access
      The charge to be paid by a member that elects to report TRACE data to NASD via a TRACE web browser shall be as follows: $20 per month, per user ID for Level I Web Trade Report Only Browser Access and $80 per month, per user ID for Level II Full Service Web Browser Access, except that the charge for the first such user ID for Level II Full Service Web Browser Access shall be $50 per month.
      (B) No change.
      (C) No change.
      (2) Transaction Reporting Fees
      For each transaction in corporate bonds that is reportable to the Association pursuant to the Rule 6200 Series, the following charges shall be assessed against the member responsible for reporting the transaction:
      (A) through (C) No change.
      (3) Market Data Fees
      Professionals and Non-Professionals may subscribe to receive Real-Time TRACE transaction data disseminated by NASD in one or more of the following ways for the charges specified, as applicable. Members, vendors and other redistributors shall be required to execute appropriate agreements with NASD.
      (A) Professional Fees
      Professionals may subscribe for the following:
      (i) Bond Trade Dissemination Service ("BTDS") Professional Real-Time Data Display Fee of $60 per month, per terminal charge for each interrogation or display device receiving Real-Time TRACE transaction data, or a flat fee of $7,500 per month entitling Professionals to make unlimited internal use of Real-Time TRACE transaction data on any number of interrogation or display devices.
      (ii)–(iii) No change.
      (B) through (D) No change.
      (l) through (v) No change.

    • 05-51 Member Obligations with Respect to Volume-Weighted Average Price Transactions

      View PDF File

      ACTION REQUIRED

      Volume-Weighted Average Price Transactions

      SUGGESTED ROUTING

      KEY TOPICS

      Capital Markets
      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management
      Trading

      Conflicts of Interest
      Order Handling
      Supervision

      Executive Summary

      NASD reminds members that when executing a volume-weighted average price (VWAP) or other large, potentially market-moving transactions for a customer,1 it is inconsistent with just and equitable principles of trade (Rule 2110) and a member's best execution obligations (Rule 2320) to engage in proprietary trading activity that compromises the customer's interest in favor of a member's proprietary trading interest. Moreover, members who have received such orders have a duty to disclose in writing to the customer that the member may engage in hedging or other positioning activity that could affect the market for a security that is involved in the transaction. Depending on the nature of the order and the specificity known about it by the member, a duty to disclose such trading activity may arise even before a member is awarded the order for execution.

      Members are further cautioned against manipulative activity or impermissible market conditioning in connection with executing a VWAP or other large order and reminded that best execution obligations always pertain once an order is received. Members also must establish and maintain information barriers and appropriate supervisory procedures reasonably designed to ensure the integrity of the trading activity and to evaluate the execution quality of VWAP and other large orders.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or Philip A. Shaikun, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8451.

      Background and Discussion

      Adherence to just and equitable principles of trade as mandated by Rule 2110 requires that members handle and execute any order received from a customer in a manner that does not disadvantage the customer or place the member's financial interests ahead of those of its customer. Furthermore, Rule 2320 requires a member to fill an order for a customer at a price as favorable as possible under prevailing market conditions; consequently, transactions by a member that disadvantage or place the member's financial interests ahead of those of its customer may violate Rule 2320. In the context of certain large, potentially market-moving orders—VWAPs, large institutional orders, and basket transactions, for example—a member's duty to a customer may arise even prior to the actual receipt of an order and may include an additional obligation to disclose hedging or other positioning activity that could affect the market for a security that is involved in the transaction.

      The potential for the duty to arise prior to receipt of the order results from the process involved in negotiating and executing such large transactions. Typically, a customer will procure confidential bids to execute a large order in one or more stocks that could move the market if known publicly. In order to minimize its risk, a member that is awarded the order may engage in bona fide hedging or positioning activity prior to execution of the order. In some instances, members that are competing to fill the order also will enter into similar transactions in anticipation of winning the bid. Such trading activity might include buying or selling a security (if known) that is involved in the bid or buying an option or a future on the underlying security or basket of securities.

      While these transactions do not constitute a per se violation of NASD rules, they can have an effect on the market for the security or securities that are the subject of the solicited transaction. For example, a member competing for a VWAP buy order might, in anticipation of winning the bid, begin to accumulate a sizeable position in the security that is being bought by the customer. Such buying activity could affect the trading price of the security and consequently the VWAP to the customer.2

      When a member receives the customer's order, its duty to the customer is unequivocally established, and the member therefore is obligated to: (1) refrain from any conduct that could disadvantage or harm the execution of the customer's order or place the member's financial interests ahead of those of its customer's, and (2) if applicable, disclose in writing to the customer that the member intends to engage in hedging and other positioning activity that could affect the market for the security that is the subject of the transaction, and consequently the cost or proceeds to the customer (collectively referred to as "the duty to refrain and disclose"). The disclosure must be made prior to receipt and/or execution of the order and be in the form of an affirmative consent letter that covers potential hedging and positioning transactions related to the handling of VWAP and other large orders. Members need not obtain affirmative consent on a transaction-by-transaction basis; however, members should at least annually take steps to have their customers reaffirm their consent.

      Whether the same duty exists before a member is awarded an order for execution will turn on, among other factors, the type of order and the specifics of the order known by the member. Depending on the type of order, the specifics might include the name of the security, the size of the order, the side of the market (i.e., buy or sell), the weighting of a basket order, and the timing for completion of the order. Thus, a duty could be established as early as the initial contact by the customer to seek bids for its order. In any event, once a member knows or has reason to know the order details to a degree of confidence whereby the member can engage without undue speculative risk in targeted hedging or positioning activity, then the same duty under Rules 2110 and 2320 to refrain and disclose attaches as if the member had actually received the order. This duty remains in place until the transaction is completed or the information upon which the member bid for the transaction becomes stale or obsolete. In addition, a member that bids unsuccessfully for the transaction, yet knows or has reason to know the order details to a degree of confidence, similarly must refrain from trading on, or communicating to another party, the information gleaned during the bidding process until the transaction is completed or the information becomes stale or obsolete, unless the trading is carried out by individuals who have been sufficiently walled off from obtaining the non-public information.

      Other than for the purpose of fulfilling the customer order, under no circumstances may a member trade for its proprietary account on the non-public information it receives from the current or prospective customer or communicate such non-public information to another entity or person outside of the member. Such conduct is inconsistent with Rule 2110 and may also violate other NASD rules or the federal securities laws. A member may continue to engage in market making or proprietary trading in the subject securities only where the member has established effective information barriers reasonably designed to prevent internal disclosure of the non-public information.3

      NASD cautions that, irrespective of whether a member is competing for or has received an order, under no circumstances may a member engage in manipulative market activity. Disclosure of hedging and positioning trading set forth above does not create a safe harbor from market manipulation, fraud, or best execution violations. Accordingly, members are reminded that they may not take any steps to create an artificial appearance of demand (supply) for the security or establish artificially high (low) prices by engaging in unnecessary trading, increased quote activity, or entering orders around the close of when a VWAP or other large order is executed. NASD will aggressively pursue any such conduct to manipulate or condition the market to achieve a favorable execution of a large customer order.4

      Marking of Orders

      Depending on the terms and characteristics of an order, a VWAP or similar transaction must be classified as either long or short for purposes of order entry and reporting. Short sale orders must be executed in compliance with all applicable NASD and SEC short sale rules and regulations. With respect to a VWAP, both the individual trades by the member to accommodate the VWAP and the aggregate VWAP trade itself are subject to those short sale rules and regulations. In the event that a member is short the securities underlying a VWAP sell order, the member's order(s) may need to be marked "short" (or "short exempt," if applicable), depending on the firm's (or aggregation unit's) overall position, even if the customer is long the subject securities. Members should refer to applicable NASD and SEC rules, interpretations, and no-action letters when determining how to mark the individual trades by the member to accommodate the VWAP and the aggregate VWAP trade itself.

      Failure to accurately mark orders also may result in disciplinary action for failure to maintain proper books and records.

      Compensation

      Members that receive a VWAP or similar order must disclose to the customer in writing the specifics of the terms of compensation it will receive to execute the order. Thus, for example, a member must disclose if intends to retain or split with the customer any profits that result if the member improves upon the VWAP.

      Supervision

      Pursuant to Rule 3010, members must have in place supervisory procedures reasonably designed to ensure that the order handling and trading activities discussed in this Notice comply with NASD Rules and the applicable federal securities laws. Thus, members should establish and maintain adequate procedures to evaluate the quality of execution of VWAP and other large orders. Those procedures should include, without limitation, an evaluation of proprietary trading that took place in advance of the execution of such orders. If applicable, the procedures also should be designed reasonably to ensure that customers affirmatively acknowledged the receipt of notice that the member may engage in hedging or other trading activity related to the execution of the customer's order.

      Members should specify in their written supervisory procedures the circumstances under which hedging or positioning trades will be reviewed and identify which trades will be reviewed and the manner in which such review will take place. The written procedures further should identify who will conduct the review, how often the review will occur, what steps should be taken if suspicious activity is discovered, and how the discharge of the supervisory responsibilities will be documented. In addition, members should establish and maintain adequate information barriers to prevent and surveil for suspect simultaneous trading away from the sales desk.


      1 Consistent with NASD Rule 0120(g), the term "customer order" for purposes of this Notice shall not include an order received from another broker-dealer.

      2 Members are encouraged to review the March 2004 decision of the United Kingdom's Financial Services Authority in which it levied a £190,000 fine against Morgan Grenfell & Company Limited for failing to disclose its hedging activity in anticipation of winning a blind bid to execute a customer's program trade. The firm's proprietary trading caused the customer to pay more to execute the transaction. The decision and findings can be found at: www. fsa.gov.uk/pubs/final/m-grenfell_18mar 04.pdf.

      3 Even where a duty exists to a customer, a member is not precluded from all trading activity related to the subject securities or required to disclose every such transaction. Thus, for example, members may execute: a prior customer order; bona fide hedge transactions that the member can demonstrate are unrelated to the information received in connection with the VWAP or other large customer orders and where the member has information barriers established to prevent internal disclosure of non-public information; "black box" orders where the member has no actual knowledge that such order has been routed for execution; trades to correct a bona fide error; and odd-lot transactions to offset odd-lot orders. Furthermore, this Notice is not intended to prevent a member from handling multiple customers' orders that might compete with or disadvantage each other. However, it may be a violation of Rule 2110 for a member to share information about the order other than to facilitate that specific customer transaction.

      4 This Notice is not intended to set out all violations that may occur in connection with the execution of VWAP orders and other large orders; members should be aware that the conduct described may also violate other NASD rules or federal securities laws.

    • 05-50 Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities

      View PDF File

      GUIDANCE

      Equity-Indexed Annuities

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Executive Representatives
      Insurance
      Variable Contracts

      Equity-Indexed Annuities
      Rule 3030 (Outside Business Activities
      of an Associated Person)
      Rule 3040 (Private Securities Transactions of an Associated Person)
      Supervision

      Executive Summary

      This Notice to Members addresses the responsibility of firms to supervise the sale by their associated persons of equity-indexed annuities (EIAs) that are not registered under the federal securities laws.1

      Questions/Further Information

      Questions concerning this Notice may be directed to Thomas M. Selman, Senior Vice President, Investment Companies/Corporate Financing, (240) 386-4500.

      Background and Discussion

      Equity-indexed annuities are financial instruments in which the issuer, usually an insurance company, guarantees a stated interest rate and some protection from loss of principal, and provides an opportunity to earn additional interest based on the performance of a securities market index. Some EIAs are not registered under the Securities Act of 1933 (the Securities Act) based on a determination that they are insurance products that fall within that statute's Section 3(a)(8) exemption and therefore are not considered to be securities.2

      According to one recently published estimate, in 2004 sales of equity-indexed annuities increased over 50 percent, from $14 billion in 2003 to an estimated $22 billion.3

      1. Investor Protection Issues Presented by Equity-Indexed Annuities

      EIAs are complex investments. Many EIAs permit investors to participate in only a stated percentage of an increase in an index. Many of these investments also impose a "cap rate" that represents the maximum annual account value percentage increase allowed to investors. Unregistered EIAs typically do not provide for investor participation in the dividends accumulated on the securities represented by the index.4 EIAs have other features that contribute to their complexity such as minimum guarantees and fees and expenses, including surrender charges, premium bonuses, and multiple premium payment arrangements. In addition, investors may assume mistakenly that EIAs provide the same returns as an index mutual fund.

      NASD is concerned about the manner in which associated persons are marketing and selling unregistered EIAs, and the absence of adequate supervision of these sales practices. We have seen sales material for unregistered EIAs that do not fully describe the features and risks of the product. For example, we have seen the following claims:

      • "What if the market goes down and you would lose nothing? The market goes up-you gain!"
      • "A Win/Win Investment Vehicle!"
      • "How Your Retirement Funds Can Have: Security of Principal, Higher Than CD Rates of Interest, Opportunity for Growth (No Losses)"
      • "Pick up where Social Security leaves off with NEW tax-deferred annuities…featuring… 2 indexed accounts linked to a popular stock market index."
      • If you're looking for upside potential and no market downside look no further than [name of EIA]. This fixed annuity… enables you to make the most of S&P 500 Index gains…"
      • "Growth Potential without Market Risk."
      We understand that some associated persons who also act as insurance agents might be using this type of sales material in their insurance sales capacity. NASD is concerned that the unsupervised use of such sales material could confuse or mislead investors. If sales pieces containing these statements were deemed to be broker-dealer communications with the public, then they would be subject to the NASD advertising rules, and would have to provide a balanced description of the features and risks of the product.

      Moreover, because of the product's complexity, some associated persons might have difficulty understanding all of the features of the product and determining the extent to which those features meet the needs of the customer. While unregistered EIAs may be appropriate for some retail investors, they are not suitable for all investors. For example, possible surrender charges and the combination of caps and participation rates associated with a particular product are factors that must be considered in any suitability determination.
      2. The Uncertain Status of Unregistered Equity-Indexed Annuities

      The question of whether a particular EIA is an insurance product or a security is complicated and depends upon the particular facts and circumstances concerning the instrument offered or sold. NASD does not seek to resolve that issue in this Notice; nor is this Notice intended to describe those circumstances in which an EIA might be deemed to be a security. However, a brief summary of the applicable provisions of the federal securities laws may be useful.

      Section 2(a)(1) of the Securities Act broadly defines "security" to include such financial instruments as evidence of indebtedness, participation in profit-sharing agreements, and investment contracts. Section 3(a)(8) generally exempts from the Securities Act any security that is an "insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States or the District of Columbia."

      In 1986, the Commission adopted Rule 151, a "safe harbor" under the Securities Act, which clarifies when certain annuity contracts are exempted securities under Section 3(a)(8). The fundamental construct of Rule 151 is derived from prior judicial interpretations of Section 3(a)(8). Consequently, the Commission has stated that the rationale underlying the conditions set forth in the rule are, along with applicable judicial interpretations, relevant to any Section 3(a)(8) analysis.5

      In order for the Rule 151 safe harbor to apply:

      • the product must be issued by an insurer that is subject to state insurance regulation;
      • the insurer must assume investment risk, as provided in paragraph (b) of the rule; and
      • the product may not be marketed primarily as an investment.
      As noted above, the status of any particular EIA under the safe harbor (or under Section 3(a)(8)) will depend on the facts and circumstances. In 1997 the Commission issued a concept release requesting comment regarding EIAs.6
      3. Supervision under Rule 3030 and Rule 3040

      Many firms assume that EIAs that are not registered under the Securities Act are insurance products and not securities. These firms treat the sale of unregistered EIAs by associated persons in their capacity as insurance agents as an outside business activity under Rule 3030, beyond the mandated purview of the firm's supervision. Rule 3030 does not require that the firm supervise or even approve an outside business activity, although a firm may choose to deny or limit the ability of associated persons to engage in the activity. Rule 3030 simply requires that an associated person promptly notify the firm in writing that he is engaging in a business activity outside the scope of his relationship with the firm.

      However, if a particular EIA were a security, and an associated person sold the EIA outside the regular scope of his employment with the firm, Rule 3040 requires that the firm treat the sale as a private securities transaction and supervise the sale in accordance with the provisions of that rule. The associated person must notify the firm in writing before participating in a private securities transaction. If the associated person will receive compensation for the transaction, the firm must provide written approval of his participation in the transaction. If the firm does approve the participation, it must record the transaction on its books and records and supervise the associated person's participation in the transaction as if the transaction were executed on behalf of the firm.

      A broker-dealer runs certain risks in applying Rule 3030 to the sale of an unregistered EIA on the assumption that the product is not a security. It is often unclear whether a particular EIA qualifies for the exemption under Section 3(a)(8), since the analysis is made on a case-by-case basis and may turn on the particular features and marketing materials associated with the product. As a result, if a particular EIA did not qualify for the exemption, a firm might incorrectly treat the EIA transaction as an outside business activity under Rule 3030 rather than a private securities transaction under Rule 3040 and thereby fail to supervise sales of the product as required by NASD rules.

      Perhaps for these reasons, some firms require that associated persons obtain firm approval to sell exempt insurance products. Other firms require that their associated persons obtain more specific approval to sell unregistered EIAs. Still other firms maintain a list of approved EIAs and prohibit the sale of all others.
      4. Supervisory Measures

      Due to the uncertainty as to whether a particular unregistered EIA may be a security, as well as the potential regulatory violations and investor protection issues that would arise by the marketing and sale of unregistered EIAs that are deemed to be securities, firms must adopt special procedures under Rule 3030 with respect to these products. In particular, firms must require that their associated persons promptly notify the firm in writing when they intend to sell unregistered EIAs. Moreover, all recommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrender are for the purpose of funding the purchase of an unregistered EIA.

      As discussed above, NASD is not taking a position on whether a particular EIA is a security, nor are we attempting to describe the circumstances in which an EIA would be deemed a security. However, the uncertainty of this matter has led some firms to treat an associated person's sale of an unregistered EIA outside the regular course or scope of his employment with the firm, as a private securities transaction. These firms supervise the sale according to Rule 3040 procedures. Firms are well advised to consider whether they should take a similar approach. Firms should consider maintaining a list of acceptable unregistered EIAs and prohibiting their associated persons from selling any other unregistered EIA, unless the associated person notifies the firm in writing that he intends to recommend an unregistered EIA that is not on the firm's list, and receives the firm's written confirmation that the sale of the unregistered EIA is acceptable.

      Firms are encouraged to consider whether other supervisory procedures also might help protect the firm's customers. For example, a firm could require that all sales of unregistered EIAs occur through the firm. If an associated person is selling the unregistered EIA through the firm, the firm must supervise the marketing material, suitability analysis, and other sales practices associated with the recommendation of unregistered EIAs in the same manner that it supervises the sale of securities.

      Firms also must provide any associated person selling any unregistered EIA through the firm with the proper training to understand the EIA's features and the extent to which the EIA meets the needs of a particular customer. The fact that an associated person holds a license as an insurance agent may not adequately qualify him to understand the features of an EIA or the extent to which an EIA meets the needs of a particular customer.

      Of course, in this as in all other areas, NASD expects every associated person to comply with the procedures adopted by his firm.

      1 The sale of an EIA registered under the federal securities laws is subject to the full panoply of regulation applicable to the sale of any security.

      The principles articulated in this Notice apply to EIAs that are sold by associated persons of a broker-dealer, whether the EIA has been manufactured by an insurance company that is affiliated with the broker-dealer or by an unaffiliated insurance company.

      2 The Securities and Exchange Commission (the Commission) has previously stated that Congress intended any insurance contract falling within Section 3(a)(8) to be excluded from all provisions of the Securities Act notwithstanding the language of the Act indicating that Section 3(a)(8) is an exemption from registration but not the antifraud provisions. See Definition of "Annuity Contract or Optional Annuity Contract," Securities Act Release No. 6558 (Nov. 21, 1984), 49 Fed. Reg. 46750, 46753 (Nov. 28, 1984).

      3 "A Do-It-Yourself Kit for Investors: Build Your Own Equity-Indexed Annuity," The Wall Street Journal (January 26, 2005).

      4 The index return may be calculated in a variety of ways, such as the "annual reset" method, under which the index starting point is reset each contract year; the "point-to-point" method, under which the change in the index from the start of a term is compared to the index at the end of the term; and the "annual high-water mark with look-back" method, which is a variation on the point-to-point method except that it compares the index starting point to the highest anniversary value during the term.

      5 Securities Act Release No. 6645, 35 SEC Docket 952 (May 29, 1986) (adopting Rule 151) ("Adopting Release").

      6 Request for Comment on Equity-Indexed Products, Securities Act Release No. 7438; File No. S7-22-97 (August 20, 1997). At least one court has ruled on the question of whether an EIA is a security. The court granted a motion to dismiss based upon the finding that the EIA, which was the subject of litigation, in that case was exempt from the federal securities laws. See Malone v. Addision Insurance Marketing, 225 F. Supp. 2d 743 (W.D. Ky. 2002).

    • 05-49 NASD Reminds Members of Their Obligations Relating to the Protection of Customer Information

      View PDF File

      GUIDANCE

      Safeguarding Confidential Customer Information

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Systems
      New Technology

      Privacy
      Protection of Customer Information

      Executive Summary

      NASD members are required to maintain policies and procedures that address the protection of customer information and records. Among other things, these policies and procedures must be reasonably designed to protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer. This Notice reminds members of their obligation to maintain policies and procedures that are intended to protect customer information and to ensure that their policies and procedures adequately reflect changes in technology or alternative work arrangements.1

      Questions/Further Information

      Legal questions or comments concerning this Notice may be directed to the Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071.

      Background

      Under Securities and Exchange Commission (SEC) Rule 30 of Regulation S-P, members, as well as other financial institutions, are required to adopt written policies and procedures that address the protection of customer information and records.2 Specifically, the policies and procedures must be reasonably designed to:

      (1) ensure the security and confidentiality of customer records and information;
      (2) protect against any anticipated threats or hazards to the security or integrity of customer records and information; and
      (3) protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

      Thus, members must be mindful of the importance of safeguarding customer information. This Notice reminds members of their obligation to protect confidential customer records and information and provides two examples of the types of technological or other changes that may implicate a member's duty to protect customer information and the issues the member should consider in connection with those changes.

      Recent Developments

      Within the past several years, there have been numerous technological advancements and other changes in the workplace that may raise concerns regarding the safeguarding of customer information. For example, an increasing number of individuals across all sectors of the workforce, including the financial services industry, are now telecommuting or working part-time from their homes or while on travel.3 The increased use of laptops and wireless email devices, for example, provide employees with numerous alternative work arrangements. While these new methods of working and communicating are often beneficial to both employers and employees, they can present concerns for the privacy of customer information that members should keep in mind. This Notice addresses two increasingly widespread issues: wireless technology and remote access to information.4

      Wireless Fidelity (Wi-Fi)

      One relatively recent advance in technology that is being more widely embraced with each passing year is the use of wireless fidelity, or "Wi-Fi." While Wi-Fi is a generic term used to refer to various types of wireless networks, it often refers to wireless connectivity to the Internet. This connectivity can take several forms. For example, many people have wireless capabilities in their homes, and some telecommunications vendors now offer wireless Internet connectivity that is as broad-based as cell phone coverage, which can allow people to connect wirelessly to the Internet from anywhere within the coverage area (e.g., an entire city). In addition, people can also tap into a wireless Internet connection in some business establishments (e.g., hotels, coffee shops, and Internet cafes).

      There are at least two major issues members should consider if they allow their associated persons to use wireless technology when servicing customer accounts. The first is that the data is broadcast out into the airwaves, thus making any confidential information in that data easier to intercept than if the user is required to tap into a physical wire. This is why the use of appropriate safeguards, for example encryption, is important to help prevent unauthorized parties from accessing the data.

      Another issue raised by the use of Wi-Fi is that wireless connections present an attractive mechanism for hackers to tap into the user's workstation to gain access toa corporate network.5 A corporate network's protective measure (e.g., firewalls and similar defensive software) could be by-passed under such circumstances because, when a user connects a workstation directly to the Internet, the workstation itself becomes the connection point, without the benefit of all the protections available to a corporate network. Every workstation connected directly to the Internet creates a separate opportunity for intrusion. Wi-Fi users can mitigate the risks of this intrusion by, for example, having the same or similar types of protections installed locally in the workstation that a corporate network provides. Regardless of the protective methods employed, members must consider the protection of customer information when determining whether to allow associated persons to use Wi-Fi or other types of new technology.

      Remote Access

      In addition to wireless technological advances that may raise concerns regarding the security of customer information, remote access to corporate networks through VPNs or other technology may raise similar concerns. As mentioned above, each year, more employees are taking advantage of alternative working arrangements by working from home and also working while traveling. While some employees may use wireless connections, others access corporate networks remotely through physical wire connections. Physical connections to corporate networks present similar concerns as Wi-Fi connections, although members can more easily address some of these concerns through the use of firewalls, routers, filters, and other means to guard against intrusion. Before permitting associated persons to access customer information remotely, members must implement appropriate measures to secure the customer information.6

      Members' Obligations

      As members update their technology and use new and different methods of communication, whether through the use of wireless technology or allowing employees to work remotely, they should consider whether these methods necessitate updates or changes in their policies and procedures. Each member should tailor its policies and procedures to address specifically the technology used by its associated persons with access to customer records and information. There can be no "one-size-fits-all" policy or procedure; however, members should consider the following, at a minimum:

      • whether the member's existing policies and procedures adequately address the technology currently in use;


      • whether the member has taken appropriate technological precautions to protect customer information;


      • whether the member is providing adequate training to its employees regarding the use of available technology and the steps employees should take to ensure that customer records and information are kept confidential; and


      • whether the member is conducting, or should conduct, periodic audits to detect potential vulnerabilities in its systems and to ensure that its systems are, in practice, protecting customer records and information from unauthorized access.

      The use of new technologies can benefit members, employees, and customers; however, these new technologies can also present risks that members must consider and address appropriately. In some instances, the appropriate way to deal with these risks is not only through technological solutions, but may also involve changes to the member's training regimen and/or to the member's policies and procedures. Members should consider whether the adoption of new technologies would necessitate changes in its compliance policies and procedures or systems before implementation so that issues can be identified and addressed in a timely way and problems can be avoided. In this regard, members must understand their obligations under Regulation S-P and related SEC rules and interpretations, as well as the requirements to have policies and procedures and a supervisory scheme as mandated by NASD Rules 3010, 3012, and 3013.


      1 As discussed in greater detail below, members must ensure that reasonable measures have been or will be implemented to protect customer information regarding the member's use of new technology before the member actually uses or allows its associated persons to use such technology.

      2 Recent amendments to Rule 30 of Regulation S-P made in response to the Fair and Accurate Transactions Act of 2003 (FACT Act) governthe disposal of consumer report information. See Disposal of Consumer Report Information, Exchange Act Release No. 50781 (Dec. 2, 2004), 69 Fed. Reg. 71322 (Dec. 8, 2004).

      3 A recent survey indicates that the number of telecommuters working from their home "almost every day" rose to over 12 million in 2004. See Home-Based Work Force Grows 23% in Decade, CBS Marketwatch (Oct. 20, 2004). In addition, the same survey showed that over 44 million employees performed some work at home in 2004, up approximately 3 million from 2003. See More Bosses Getting Into the Telecommuting Biz, USA Today, at B2 (Nov. 3, 2004). For the press release announcing the findings, see www.telecommute.org/news/ pr090204.htm.

      4 One significant concern that has driven recent regulations regarding the confidentiality and privacy of customer information is identity theft. See 69 Fed. Reg. at 71322 (noting that Section 216 of the FACT Act was "designed, in general, to protect a consumer against the risks associated with unauthorized access to information about the consumer contained in a consumer report, such as fraud and related crimes, including identity theft"). While some of the recent, high-profile cases of identity theft involve unauthorized access to electronic information, some recent reports indicate that the majority of identity theft cases are still committed with information obtained offline. See generally ID Theft is Declining and Mostly Offline, New Study Finds, Wall Street Journal, at D2 (Jan. 26, 2005) (discussing a 2005 study by the Better Business Bureau that found that approximately 68 percent of cases of identity fraud in 2004 relied on information acquired offline). Thus, members are reminded that their procedures should not focus solely on the use of electronic information, but should also address the proper use and destruction of paper documents (including, of course, consumer report information under the recent amendments to Regulation S-P) that could raise privacy concerns.

      5 This is sometimes called a "back door."

      6 Of course, members must also take reasonable measures to ensure that they have adequate procedures in place to address customer privacy concerns with regard to their current methods of communication (e.g., procedures regarding the inclusion of confidential customer information in email messages).

    • 05-48 Members' Responsibilities When Outsourcing Activities to Third-Party Service Providers

      View PDF File

      GUIDANCE

      Outsourcing

      SUGGESTED ROUTING KEY TOPICS
      Legal and Compliance
      Operations
      Senior Management
      Due Diligence
      Outsourcing
      Supervisory Responsibilities
      Third-Party Service Providers

      Executive Summary

      NASD is aware that members are increasingly contracting with third-party service providers to perform certain activities and functions related to their business operations and regulatory responsibilities that members would otherwise perform themselves—a practice commonly referred to as outsourcing. NASD is issuing this Notice to remind members that, in general, any parties conducting activities or functions that require registration under NASD rules will be considered associated persons of the member, absent the service provider separately being registered as a broker-dealer and such arrangements being contemplated by NASD rules (such as in the case of clearing arrangements), MSRB rules, or applicable federal securities laws or regulations. In addition, outsourcing an activity or function to a third party does not relieve members of their ultimate responsibility for compliance with all applicable federal securities laws and regulations and NASD and MSRB rules regarding the outsourced activity or function. As such, members may need to adjust their supervisory structure to ensure that an appropriately qualified person monitors the arrangement. This includes conducting a due diligence analysis of the third-party service provider.

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Patricia Albrecht, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8026.

      Background

      The practice of contracting with third-party service providers/vendors to perform certain activities and functions on a continuing basis (outsourcing) is not new to the securities industry. For example, NASD Rule 3230 (Clearing Agreements) has long permitted members that are introducing broker-dealers to enter into contracts with registered clearing broker-dealers that allocate certain functions and responsibilities, such as providing execution services, custody, and margin; maintaining books and records; and receiving, delivering, and safeguarding funds. Over the years, however, members' outsourcing activities have grown beyond the use of clearing agreements. Now, members regularly enter into outsourcing arrangements with entities other than broker-dealers. These entities may be unregulated, such as providers of data services, or regulated, such as transfer agents. Additionally, members increasingly are outsourcing activities other than those traditionally performed pursuant to clearing agreements.

      To better understand their members' outsourcing activities, NASD and the New York Stock Exchange (NYSE) conducted a joint survey in October 2004 of a select number of broker-dealers. The survey sought to determine whether broker-dealers had procedures in place to determine the proficiency of service providers, whether outsourced business functions were properly monitored, and whether broker-dealers were in compliance with applicable regulations pertaining to the privacy of customer information in connection with such outsourcing arrangements. The survey found that, in many instances, there was a lack of written procedures to monitor the outsourcing of services, a lack of business continuity plans on the part of service providers and members with respect to outsourced services, and a lack of formalized due diligence processes to screen service providers for proficiency. However, while not always in the form of written procedures, most participants reported that they did have methods that they used to monitor and assess a third-party vendor's own procedures and performance and the accuracy and quality of the work product produced on a continuing basis. These methods included (1) using programmatic checks through business operations; (2) including the procedures in the contracts with the vendors; (3) requiring status reports and periodic meetings; and (4) testing and reviewing the third parties' procedures.

      The survey results also provided a snapshot of the type and range of activities being outsourced and the nature of the third-party service providers being used. Survey participants frequently outsourced functions associated with accounting/finance (payroll, expense account reporting, etc.), legal and compliance, information technology (IT), operations functions (e.g., statement production, disaster recovery services, etc.), and administration functions (e.g., human resources, internal audits, etc.). Approximately two-thirds of the third-party vendors used by survey participants were regulated entities, subject to the jurisdiction of the Securities and Exchange Commission, NASD, NYSE, the Board of Governors of the Federal Reserve System, and/or the Office of the Comptroller of the Currency. The remaining third-party vendors were unregulated entities—both foreign and domestic. Survey participants indicated that they used foreign third-party vendors most often when outsourcing IT and communications activities.1

      Discussion

      Given the growing trend among members to outsource an increasing number of activities and functions to outside entities—both regulated and unregulated—and the lack of uniformity in members' procedures regarding members' use of outsourcing NASD is issuing this Notice to provide guidance on requirements that pertain to the outsourcing of activities and functions that, if performed directly by members, would be required to be the subject of a supervisory system and written supervisory procedures pursuant to Rule 3010 (covered activities).2 In addition, members are reminded that, in the absence of specific NASD rules, MSRB rules, or federal securities laws or regulations that contemplate an arrangement between members and other registered broker-dealers with respect to such activities or functions (e.g., clearing agreements executed pursuant to NASD Rule 3230), any third-party service providers conducting activities or functions that require registration and qualification under NASD rules will generally be considered associated persons of the member and be required to have all necessary registrations and qualifications.

      I. Accountability and Supervisory Responsibility for Outsourced Functions

      Rule 3010 requires NASD members to design a supervisory system and corresponding written supervisory procedures that are appropriately tailored to each member's business structure.3 If a member, as part of its business structure, outsources covered activities, the member's supervisory system and written supervisory procedures must include procedures regarding its outsourcing practices to ensure compliance with applicable securities laws and regulations and NASD rules. The procedures should include, without limitation, a due diligence analysis of all of its current or prospective third-party service providers to determine whether they are capable of performing the outsourced activities.4

      After the member has selected a third-party service provider, the member has a continuing responsibility to oversee, supervise, and monitor the service provider's performance of covered activities. This requires the member to have in place specific policies and procedures that will monitor the service providers' compliance with the terms of any agreements and assess the service provider's continued fitness and ability to perform the covered activities being outsourced. Additionally, the member should ensure that NASD and all other applicable regulators have the same complete access to the service provider's work product for the member, as would be the case if the covered activities had been performed directly by the member.

      Members should also include specific policies and procedures to determine whether any covered activities that the member is contemplating outsourcing is appropriate for outsourcing. To determine the appropriateness of outsourcing a particular activity, firms may want to consider certain factors, such as the financial, reputational, and operational impact on the member firm if the third-party service provider fails to perform; the potential impact of outsourcing on the member's provision of adequate services to its customers; and the impact of outsourcing the activity on the ability and capacity of the member to conform with regulatory requirements and changes in requirements.5 These factors, however, are not meant to illustrate all of the factors a member may want to consider and are not meant to be an exclusive or exhaustive list of factors a member may need to consider.

      In addition, members are reminded that outsourcing covered activities in no way diminishes a member's responsibility for either its performance or its full compliance with all applicable federal securities laws and regulations, and NASD and MSRB rules.

      II. Activities and Functions that are Prohibited from being Outsourced

      A. Activities and Functions Requiring Registration and Qualification

      It is NASD's view that the performance of covered activities, which require qualification and registration, cannot be deemed to have been outsourced because the person performing the activity is an associated person of the member irrespective of whether such person is registered with the member. An exception would be where a third-party service provider is separately registered as a broker-dealer and the contracted arrangement between the member and the service provider is contemplated by NASD rules, MSRB rules, or applicable federal securities laws or regulations.6 An example of such an exception would be a clearing agreement executed pursuant to NASD Rule 3230 between a member and a clearing broker-dealer.7

      B. Supervisory and Compliance Activities

      NASD has noted in previous guidance that the ultimate responsibility for supervision lies with the member.8 Accordingly, a member may never contract its supervisory and compliance activities away from its direct control. This prohibition, however, does not preclude a member from outsourcing certain activities that support the performance of its supervisory and compliance responsibilities. For example, a member may implement a supervisory system designed by another party, which could include a computer software program that detects excessive trading in customer accounts. However, if a member chooses to implement such a system, it must make its own determination that the system implemented is current and reasonably designed to achieve compliance as required under Rule 3010. This may include, for example, monitoring the system to ensure that it functions as designed and that such design is of an adequate nature and breadth.9


      1 A February 2005 joint report by the Joint Forum of the Basel Committee on Banking Supervision found similar trends in the use of outsourcing by financial firms. See Outsourcing in Financial Services, The Joint Forum of the Basel Committee on Banking Supervision (February 2005). The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision (Basel Committee), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS) to address issues common to the banking, securities, and insurance sectors, including the regulation of financial conglomerates. The Joint Forum is composed of an equal number of senior bank, insurance, and securities supervisors representing each supervisory constituency.

      2 Examples of covered activities include, without limitation, order taking, handling of customer funds and securities, and supervisory responsibilities under Rules 3010 and 3012.

      3 See Rule 3010(a) and (b); Notice to Members (NTM) 99-45 (June 1999).

      4 Rule 3012 also requires a member firm to have a written supervisory control system that will, among other things, test and verify that the member's supervisory policies and procedures are reasonably designed to achieve compliance with the applicable securities laws and regulations and NASD rules. Members are reminded that this requirement includes the testing and verification of their supervisory procedures regarding their outsourcing practices, including testing and verifying that any due diligence procedures meet the "reasonably designed to achieve compliance" standard. See NTM 99-45 (June 1999) (providing guidance on the meaning of the term "reasonably designed to achieve compliance"). Such testing and verifying will help firms to ensure that their due diligence analyses of third-party service providers remain current and relevant.

      5 Members may also want to consult a February 2005 IOSCO report for more factors that they should consider in connection with outsourcing. See Principles of Outsourcing of Financial Services for Market Intermediaries, IOSCO Technical Committee (February 2005). Another resource members may want to consider is the previously mentioned report by the Joint Forum of the Basel Committee on Banking Supervision. Outsourcing in Financial Services, supra note 1.

      6 NASD does not view a third-party vendor as an associated person of the member if it solely provides services such as a trade execution and reporting system or automated data services in connection with back-office functions that, in turn, are utilized by registered or other associated persons of the member.

      7 See Rule 3230(a)(1). Some members also enter into secondary or sub-clearing (sometimes referred to as "piggyback clearing") arrangements for clearing services with an intermediary firm that has an existing contract with a clearing firm instead of contracting directly with the clearing firm. Because intermediary firms do not always identify to clearing firms which accounts belong to the piggybacking firms, NASD has filed with the SEC a proposed rule change to Rule 3230 and Rule 3150 (Reporting Requirements for Clearing Firms) that would require intermediary firms to identify the accounts belonging to the piggybacking firms and that would require clearing firms to distinguish the data belonging to intermediary firms from the data belonging to the piggybacking firms.

      8 See NTM 99-45 (June 1999).

      9 See id.

    • 05-47 Unexpected Close of Securities Markets

      View PDF File

      GUIDANCE

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Senior Management
      Systems
      Exchange Act Rule 15c3-1
      Exchange Act Rule 15c3-3

      Federal Reserve Board Regulation T
      NASD Rule 2520
      Unexpected Close

      Executive Summary

      This Notice provides guidelines to members regarding the applicability of Exchange Act Rules 15c3-1 and 15c3-3, NASD Rule 2520, and Federal Reserve Board Regulation T in the event the securities markets unexpectedly close. The Notice explains the circumstances under which the day of the unexpected close is to be considered a "regular business day" and the circumstances under which it should be considered a "non-business day."

      Questions/Further Information

      Questions regarding 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

      On occasion, the securities markets may unexpectedly close for business; e.g., on a national day of mourning. However, the Federal Reserve regional banks, other banks, and the Depository Trust & Clearing Corporation (DTCC) may elect to remain open for clearance and settlement of securities. Such an event occurred on June 11, 2004, the day of former President Ronald Reagan's funeral.

      In anticipation of future unexpected closings similar to the closing that occurred on June 11, 2004, this Notice provides members with guidelines regarding the applicability of various regulations.1 NASD members should follow these guidelines in the event of an unexpected close. This Notice will hereafter refer to an unexpected close of securities markets as "that day."

      1. Regarding the applicable regulatory requirements pursuant to Exchange Act Rules 15c3-1 and 15c3-3, NASD Rule 2520, and Federal Reserve Board Regulation T, if the banks and DTCC are open, members should consider "that day" as a regular business day for the following:
      (A) Exchange Act Rule 15c3-1 (Net Capital)

      For aging purposes, in determining net capital charges (fail to deliver, suspense charges, etc.), "that day" should be considered as a regular business day.
      (B) Exchange Act Rule 15c3-3 (Reserve Formula and Possession or Control)

      (1) If "that day" occurs on a Friday, the weekly reserve formula computation should be prepared, as usual, as of close of business on Friday, with the deposit requirement (if any) to be made by 10 a.m. on the second business day following the computation date.
      (2) If "that day" occurs on the normal month-end date, the reserve formula computation should be prepared, as usual, as of close of business on the month-end date with the deposit requirement (if any) to be made by 10 a.m. on the second business day following the computation date.
      (3) For purposes of possession or control requirements, bank loan and stock loan recalls, if required, should be effected on "that day."
      (C) Federal Reserve Board Regulation T (Extensions)

      Margin extensions due on "that day" can be filed either on "that day" or on the next business day (as of "that day"). All subsequent extensions required to be filed after "that day" should be filed on the normal due date, counting "that day" as a business day. However, if the request for an extension has expired or is denied, "that day" should be treated as a non-business day since securities cannot be liquidated when the primary market where the securities are traded is closed.
      (D) NASD Rule 2520 (Margin Calls)

      For maintenance margin calls, pursuant to NASD Rule 2520(f)(6), "that day" should be counted as a regular business day.
      (E) Federal Reserve Board Regulation T (DKs on COD Deliveries)

      Extensions on DK'd COD transactions due on "that day" can be filed either on "that day" or on the next business day (as of "that day"). If "that day" falls within the granted two-day extension period, members may treat "that day" as either a business day or a non-business day. All subsequent extensions should be filed on the normal due date, counting "that day" as a business day. However, if the request for an extension has expired or is denied, "that day" should be treated as a non-business day since securities cannot be liquidated when the primary market where the securities are traded is closed.
      (F) Exchange Act Rule 15c3-3(m) (Sell Order Extensions)

      Extensions on customers' sell orders under Exchange Act Rule 15c3-3(m) due on "that day" can be filed either on "that day" or on the next business day (as of "that day"). All subsequent extensions should be filed on the normal due date, counting "that day" as a business day. However, if the request for an extension has expired or is denied, "that day" should be treated as a non-business day since securities cannot be purchased when the primary market where the securities are traded is closed.
      (G) NASD Rule 2520(f)(8)(B)(iv)(e) (Day Trading Requirements)

      Funds deposited into a day trader's account to meet the minimum equity or maintenance margin requirements of NASD Rule 2520(f)(8)(B) cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit. In making this determination, "that day" should be counted as a business day.
      2. For regulatory purposes, in regards to the applicable requirements pursuant to Exchange Act Rules 17a-5(a) and (b), members should consider the day the securities markets are closed ("that day") as a non-business day for the following:
      (A) Exchange Act Rule 17a-5(a) (FOCUS Report)

      For purposes of determining the FOCUS Report due date, "that day" should not be considered as a business day.
      (B) Exchange Act Rule 17a-5(b)

      For filing a report upon termination of membership interest, "that day" should not be considered as a business day.
      3. For purposes of Exchange Act Rule 15c3-3 (Reserve Formula Computation), if "that day" occurs on a Friday or on a month-end date and money markets funds are closed, the SEC has granted two options to members when computing its reserve formula:
      (A) Recording of Bookkeeping Entries on Liquidation/Sweep of Money Market Funds:

      Members can decide to record the bookkeeping entries on the liquidation of customers' money market funds or on the sweep of customers' balances into money market funds that are not open on "that day." Members can net the receivable and the payable only between the same family of funds. If this netting results in a net receivable from the fund, nothing further needs to be done. In addition, any unsecured receivables due from the money market fund may be considered as an allowable asset for net capital purposes for "that day" only if the following conditions are met:
      (1) the broker-dealer has control over the money market fund; and
      (2) the customer of the broker-dealer cannot access the fund; and
      (3) the broker-dealer must receive the money from the fund on the next business day.
      However, if recording the bookkeeping entries results in a net payable to the fund, that amount needs to be locked up on "that day" into the broker-dealer's 15c3-3 Reserve Bank Account. A separate 15c3-3 Reserve Bank Account need not be set up for this deposit. The required deposit can be made into the broker-dealer's already established 15c3-3 Reserve Bank Account. The funds can then be withdrawn on the next business day, directly from the 15c3-3 Reserve Bank Account, to pay the money market fund. The amount of funds deposited and the subsequent withdrawal for payment of such funds must be separately identified on the broker-dealer's records. In this option, the reserve formula computation as of close of business of "that day" would not include the customers' free credit balances, nor would it include any customer debits related to trades that settled on "that day" who had money market positions.

      Whether the reserve formula computation of "that day" results in an excess of total debits over total credits or in an excess of total credits over total debits has no impact on the requirement that any net payable to a money market fund must be locked up into a 15c3-3 Reserve Bank Account on "that day."
      (B) Non-Recording of Bookkeeping Entries on Liquidation/Sweep of Money Market Funds:

      Members can decide not to record the bookkeeping entries on the liquidation of customers' money market funds or on the sweep of customers' balances into money market funds that are not open on "that day." Therefore, the reserve formula computation as of the close of business "that day" would include customers' free credit balances that were not swept, as well as customer debits relating to their trades that settled on "that day," even though the customers had money market positions. Members can, if needed, use the securities of the customers who had debit balances in their customer accounts to finance their business.
      4. For securities lending, it is understood that the business will continue to operate as usual on "that day," even though the primary securities markets will be closed.
      5. On a case-by-case basis, NASD will consider a request for relief from regulatory requirements resulting from the closing of the securities markets on "that day." In cases where undue hardship can be demonstrated, members should contact Susan M. DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411 to discuss the specific relief sought and the reason for such relief.

      1 The guidelines in this Notice are consistent with those provided by the New York Stock Exchange (NYSE) in NYSE Information Memo, Number 05-25, April 8, 2005.

    • 05-46 SEC Approves Amendments Relating to Taping Rule "Opt Out" and Exemption Provisions

      View PDF File

      GUIDANCE

      Taping Rule

      Effective Date: August 1, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Senior Management
      Rule 3010
      Taping Rule

      Executive Summary

      On May 5, 2005, the Securities and Exchange Commission approved amendments to paragraph (L) of Rule 3010(b)(2) (Taping Rule or Rule). The amendments require member firms that are seeking an exemption from the Rule to submit their exemption requests to NASD within 30 days of receiving notice from NASD or obtaining actual knowledge that they are subject to the provisions of the Rule. The amendments also clarify that firms that trigger application of the Taping Rule for the first time can elect to either avail themselves of the one-time "opt out provision" or seek an exemption from the Rule, but they may not seek both options.1

      The Rule, as amended, is set forth in Attachment A. The amendments become effective on August 1, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Afshin Atabaki, Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8902; or Courtney A. Dinsmore, Senior Attorney, Department of Member Regulation, at (202) 728-8402.

      Background and Discussion

      The Taping Rule, which has been in effect since 1998, is designed to ensure that members with a significant number of registered persons that previously were employed by firms that have been expelled from membership or have had their registrations revoked for sales practice violations (Disciplined Firms) have proper supervisory procedures in place relating to telemarketing activities to prevent fraudulent and improper sales practices or other customer harm.

      Under the Rule, member firms that hire a specified number of registered persons from Disciplined Firms must establish, maintain, and enforce special written procedures for supervising the telemarketing activities of all their registered persons. Such procedures must include tape-recording all telephone conversations between such firms' registered persons and both existing and potential customers. The Rule provides firms up to 60 days from the date they receive notice from NASD or obtain actual knowledge that they are subject to the provisions of the Rule to establish and implement the required supervisory procedures, including installing taping systems. Such firms also are required to review the tape recordings, maintain appropriate records, and file quarterly reports with NASD.

      The Taping Rule permits member firms that become subject to the Rule for the first time a one-time opportunity to adjust their staffing levels to fall below the prescribed threshold levels and thus avoid application of the Rule (often referred to as the "opt out provision"). A firm that elects this one-time option must reduce its staffing levels to fall below the applicable threshold levels within 30 days after receiving notice from NASD or obtaining actual knowledge that it is subject to the provisions of the Rule. Once a firm has made the reductions, the firm is not permitted to rehire the terminated individuals for at least 180 days.

      NASD also has the authority to grant exemptions from the Rule in "exceptional circumstances." In reviewing exemption requests, NASD generally has required a firm to establish that it has alternative procedures to assure supervision at a level functionally equivalent to a taping system. Prior to these amendments to Rule 3010(b)(2)(L), the Rule was silent on the time frame for submitting an exemption request. However, because the Rule provides a firm a total of 60 days from the date it receives notice from NASD or obtains actual knowledge that it is subject to the provisions of the Rule to implement the required supervisory procedures, a firm implicitly had that 60-day period to submit an exemption request.

      A firm that submits an exemption request is not required to establish and implement the required supervisory procedures, including the taping system (i.e., such requirements are "tolled") while the staff is reviewing the request and during the course of any subsequent appeals to NASD's National Adjudicatory Council (NAC). NASD tolls the Taping Rule's requirements during the exemption appeal process primarily due to the significant costs involved with installing a taping system and the possibility that the staff or NAC will grant the exemption. At the same time, firms often waited until the 60th day (or shortly before) to request the exemption, which, assuming the exemption was not granted, only further prolonged the establishment and implementation of the required supervisory procedures.

      To reduce these possible delays in implementation of the Taping Rule requirements, NASD has amended Rule 3010(b)(2)(L) to require firms that are seeking an exemption from the provisions of the Rule to submit their exemption requests to NASD within 30 days of receiving notice from NASD or obtaining actual knowledge that they are subject to the provisions of the Rule. Specifying a time frame for submitting an exemption request is consistent with the investor protection concerns that the Rule is intended to address, especially given that the requirement to establish and implement the appropriate supervisory procedures is tolled upon the submission of an exemption request. Moreover, based on NASD's experience, 30 days will provide ample time for firms to decide whether to seek an exemption and to submit their requests to NASD.

      NASD also received inquiries from some firms as to whether they could elect to use the "opt out" while simultaneously seeking an exemption, with the goal being that the firm would be granted an exemption and be able to immediately rehire the persons whose employment was terminated as part of the "opt out" (rather than waiting the requisite 180 days). However, firms may not pursue these two alternatives simultaneously. A core purpose of the "opt out provision" is to provide relief to those firms that may have inadvertently or unintentionally become subject to the Taping Rule for the first time due, for example, to sudden turnover among registered persons or other events beyond the firm's control. In contrast, exemptions, which are granted only in "exceptional circumstances," are for those situations where the firm has demonstrated that it has supervisory procedures that are equivalent to a taping system or is otherwise in a truly unique situation. It would be inconsistent with the purposes of these two provisions to permit a firm to pursue both options with NASD, either simultaneously or one after the other.

      Accordingly, NASD has amended Rule 3010(b)(2)(L) to clarify that firms that trigger application of the Taping Rule for the first time must elect to either avail themselves of the one-time "opt out provision" (i.e., make the staff adjustment to fall below the thresholds of the Rule) or seek an exemption from the Rule, but they may not elect to do both. Pursuant to the amended Rule, firms that become subject to the Taping Rule for the first time have 30 days to decide between the above options.


      1 See Securities Exchange Act Release No. 51658 (May 5, 2005), 70 FR 24848 (May 11, 2005) (Order Granting Approval of Proposed Rule Change Relating to Taping Rule "Opt Out" and Exemption Provisions; File No. SR-NASD-2005-033).


      ATTACHMENT A

      New language is underlined; deleted language is in brackets.

      3010. Supervision

      (a) No Change.
      (b) Written Procedures
      (1) No Change.
      (2) Tape recording of conversations
      (A) Each member that either is notified by NASD [Regulation] or otherwise has actual knowledge that it meets one of the criteria in paragraph (b)(2)(H) relating to the employment history of its registered persons at a Disciplined Firm as defined in paragraph (b)(2)(J) shall establish, maintain, and enforce special written procedures for supervising the telemarketing activities of all of its registered persons.
      (B) The member must establish and implement the supervisory procedures required by this paragraph within 60 days of receiving notice from NASD [Regulation] or obtaining actual knowledge that it is subject to the provisions of this paragraph.
      A member that meets one of the criteria in paragraph (b)(2)(H) for the first time may reduce its staffing levels to fall below the threshold levels within 30 days after receiving notice from NASD [Regulation] pursuant to the provisions of paragraph (b)(2)(A) or obtaining actual knowledge that it is subject to the provisions of the paragraph, provided the firm promptly notifies the Department of Member Regulation, NASD [Regulation], in writing of its becoming subject to the Rule. Once the member has reduced its staffing levels to fall below the threshold levels, it shall not rehire a person terminated to accomplish the staff reduction for a period of 180 days. On or prior to reducing staffing levels pursuant to this paragraph, a member must provide the Department of Member Regulation, NASD [Regulation] with written notice, identifying the terminated person(s).
      (C) No Change.
      (D) The member shall establish reasonable procedures for reviewing the tape recordings made pursuant to the requirements of this paragraph to ensure compliance with applicable securities laws and regulations and applicable rules of [the Association] NASD. The procedures must be appropriate for the member's business, size, structure, and customers.
      (E) through (F) No Change.
      (G) By the 30th day of the month following the end of each calendar quarter, each member firm subject to the requirements of this paragraph shall submit to [the Association] NASD a report on the member's supervision of the telemarketing activities of its registered persons.
      (H) No Change.
      (I) For purposes of this Rule, the term "registered person" means any person registered with [the Association] NASD as a representative, principal, or assistant representative pursuant to the Rule 1020, 1030, 1040, and 1110 Series or pursuant to Municipal Securities Rulemaking Board ("MSRB") Rule G-3.
      (J) through (K) No Change.
      (L) Pursuant to the Rule 9600 Series, [the Association] NASD may in exceptional circumstances, taking into consideration all relevant factors, exempt any member unconditionally or on specified terms and conditions from the requirements of this paragraph. A member seeking an exemption must file a written application pursuant to the Rule 9600 Series within 30 days after receiving notice from NASD or obtaining actual knowledge that it meets one of the criteria in paragraph (b)(2)(H). A member that meets one of the criteria in paragraph (b)(2)(H) for the first time may elect to reduce its staffing levels pursuant to the provisions of paragraph (b)(2)(B) or, alternatively, to seek an exemption pursuant to paragraph (b)(2)(L), as appropriate; such a member may not seek relief from the Rule by both reducing its staffing levels pursuant to paragraph (b)(2)(B) and requesting an exemption.
      (3) through (4) No Change.
      (c) through (g) No Change.

    • 05-45 Agency Securities Lending Disclosure Initiative

      View PDF File

      GUIDANCE

      Agency Securities Lending

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Systems
      Senior Management

      Agency Securities Lending
      Net Capital Rule
      Stock Borrow Deficits

      Executive Summary

      This Notice advises broker-dealers engaged in the business of agency securities lending that the Agency Lending Disclosure Taskforce (Industry Taskforce), composed of, among others, representatives of the securities industry, regulators, and the Depository Trust & Clearing Corporation (DTCC), has recommended, through its Agency Lending Disclosure Initiative, certain uniform processes and a proposed calendar of milestones, to help broker-dealers engaged in agency securities lending activities comply with existing rule requirements relating to books and records, net capital requirements, and internal and supervisory controls.1

      Questions/Further Information

      Questions concerning this Notice may be directed to Richard Jardine, Financial Analyst, Department of Member Regulation, at (202) 728-6937; or Susan M. DeMando, Associate Vice President, Financial Operations, Department of Member Regulation, at (202) 728-8411.

      Background and Discussion

      Agency lending of securities involves the use of an intermediary, or agent, that acts on behalf of both the borrower and lender(s) and does not have title to the securities being loaned. It is common practice for broker-dealers to rely on agents to locate securities they wish to borrow, pay collateral to these agents, and record agency securities lending transactions at the agent level. Often, borrowing broker-dealers record little or no details regarding the underlying principal lender(s). The borrowing broker-dealer may not even know the identity of the actual lender(s).2

      SEC staff has raised concerns regarding the level of transparency and information disclosure in agency securities lending transactions and the impact on credit and regulatory capital monitoring, given that broker-dealers generally conduct lending transactions through an agent, rather than with the principal lender(s). SEC staff has concluded that in order to comply with existing financial responsibility rules, particularly the net capital rule and related interpretations, broker-dealers engaged in the business of agency securities lending must (i) maintain books and records of loan activity with each underlying principal lender, (ii) monitor credit exposure as to each underlying principal lender, and (iii) calculate regulatory capital exposure as to each underlying principal lender.

      Regulators and industry representatives, including staff of the SEC, the NYSE, NASD, the Federal Reserve Bank of New York, and the Securities Lending Division and Capital Committee of the Securities Industry Association (SIA), began meeting to discuss this issue in January 2003. These discussions led to the formation, in January 2004, of the Industry Taskforce. The Industry Taskforce consists of representatives from the SIA's Securities Lending Division and Capital Committee, the Risk Management Association's Committee on Securities Lending, The Bond Market Association, DTCC, and technology vendors that support securities lending.

      The Industry Taskforce was created to coordinate efforts and facilitate the development of processes and technical standards to support compliance with the SEC's regulatory requirements. In order to accomplish this goal, the Industry Taskforce is organized into five working groups: Regulatory Capital, Credit, Infrastructure, Legal, and Testing. In May 2004, the Industry Taskforce engaged Capco as a project manager to provide support for the Agency Lending Disclosure Initiative. The purpose of the Agency Lending Disclosure Initiative is to establish uniform processes to assist broker-dealers in complying with existing rule requirements related to books and records, net capital, and internal and supervisory controls when engaged in agency securities lending activities.

      Dialogue between regulators and the Industry Taskforce has been ongoing in order to reach a consensus on an industry approach to improve agency securities lending disclosure and satisfy SEC financial responsibility requirements. Industry Taskforce discussions have focused on improving transparency by having agent lenders provide data to broker-dealers that will permit them to accurately and adequately monitor credit exposure and calculate capital requirements based on securities loans with the underlying principal lender executed under securities lending agreements; e.g., by giving borrowers the name of the underlying lender and the ability to assess its credit worthiness.

      In order to ensure agreement with the regulators, the Industry Taskforce has developed a specific timeline for the Agency Lending Disclosure Initiative. Broker-dealers that engage in the business of agency securities lending should be aware of the Agency Lending Disclosure Initiative and the timeline. The timeline requires broker-dealers to be ready to accept and retain data from agent lenders by the first quarter of 2006.

      Again, it is important to note that the purpose of the Agency Lending Disclosure Initiative is to establish uniform processes to assist broker-dealers in their compliance with existing rule requirements related to books and records, net capital, and internal and supervisory controls when engaged in agency securities lending transactions.

      Based upon the current project plan, broker-dealers that engage in the business of agency securities lending should be aware of the following upcoming milestones established by the Industry Taskforce:

      Credit
      July 2005 By July 1, borrowers will need to have completed testing of the systems for credit eligibility checks and need to be able to receive incremental add/delete requests for credit pre-qualification for new principals. This includes borrowers connecting directly to DTCC, as well as through vendor systems, such as EquiLend or SunGard systems.
      August 1, 2005
      through
      October 31, 2005
      During this period, borrowers will need to perform credit eligibility checks for all existing principals who had been previously approved counterparties lending through agent lenders.
      Regulatory Capital
      September 2005 By September 1, borrowers will need to have in place the systems and procedures to test the daily loan data file receipt process with their vendors or directly with DTCC, as applicable.
      September 1, 2005
      through
      January 31, 2006
      During this period, borrowers will be conducting testing and preparing for implementation.
      March 2006 By March 1, borrowers should be fully integrated with their vendors or DTCC and fully implemented.

      For information regarding infrastructure and technology, please contact your vendor or DTCC. For any other information, or answers to questions regarding the Agency Lending Disclosure Initiative, please visit their Web site at www.agencylending.capco.com or contact the Capco Project Management Office. All contacts are available at www.agencylending.capco.com/contacts.htm.


      1 The New York Stock Exchange (NYSE) has published Information Memo 05-39, dated June 6, 2005, which provides substantially the same information.

      2 The SEC's Division of Market Regulation addressed the appropriate method of calculating borrowed securities deficit charges for net capital purposes in a December 7, 1983, letter to the Chicago Board Options Exchange (CBOE). The letter states, in relevant part:

      A broker-dealer which has borrowed securities (borrower) must mark the borrowed securities to market each business day, as of the close of the prior day's business, and determine the amount of collateral held by any securities lender (lender) which exceeds the current market value of the securities borrowed from that lender (excess collateral). The borrower must deduct from its net worth in computing net capital:

      (a) the amount of excess collateral held by any one lender which exceeds one hundred and five percent (105%) of the current market value of the securities borrowed from that lender;

      (b) or, if greater, the amount of excess collateral held by any one lender to the extent the excess collateral is greater than twenty percent (20%) of the borrower's excess net capital (net capital greater than the minimum required); plus,

      (c) the total amount of excess collateral held by all lenders in aggregate which exceeds three hundred percent (300%) of the borrower's excess net capital reduced by the charge that the broker-dealer has already incurred under the above standards.

    • 05-44 SEC Approves Amendments Relating to Annual Compliance Meetings

      View PDF File

      GUIDANCE

      Annual Compliance Meetings

      Effective Date: July 25, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Senior Management

      Annual Compliance Meetings
      Rule 3010

      Executive Summary

      On April 25, 2005, the Securities and Exchange Commission (SEC) approved amendments to Rule 3010(a)(7) to require that registered principals, in addition to registered representatives, attend an annual compliance meeting. The SEC also approved amendments to Rules 3010(a), 3010(a)(3), and 3010(b)(1) to clarify that the scope of these rules specifically extends to registered representatives, registered principals, and other associated persons.1

      The rules, as amended, are set forth in Attachment A. The amendments become effective on July 25, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Afshin Atabaki, Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8902.

      Background and Discussion

      Prior to the rule amendments discussed in this Notice, Rule 3010(a)(7) required the attendance of registered representatives at annual compliance meetings, but it did not require the attendance of registered principals. Given the supervisory and compliance-related functions that principals perform and that the primary purpose of annual compliance meetings is to discuss compliance issues and keep registered persons current on changing compliance requirements or changes in the firm, NASD has amended Rule 3010(a)(7) to require that all registered principals, in addition to registered representatives, attend an annual compliance meeting in accordance with the Rule.

      As amended, Rule 3010(a)(7) now requires that each registered representative and registered principal participate, at least once each year, in an interview or meeting at which compliance matters relevant to the activities of the particular representative and principal are discussed. These interviews or meetings can be held individually or with a group and can be held at a central or regional location or at the representative's or principal's place of business. As discussed in Notice to Members (NTM) 99-45 (June 1999), members are provided with substantial flexibility in implementing the annual compliance meeting. For instance, as further detailed in NTM 99-45, the interview or meeting may be conducted by video conference, interactive classroom setting, telephone, or other electronic means (including webcast), provided that certain safeguards are in place.

      NASD also has made technical amendments to Rules 3010(a), 3010(a)(3), and 3010(b)(1) to clarify that the scope of these rules specifically extends to registered representatives, registered principals, and all other associated persons.


      1 See Securities Exchange Act Release No. 51605 (April 25, 2005), 70 FR 22732 (May 2, 2005) (Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Annual Compliance Meetings; File No. SR–NASD–2005–004).


      ATTACHMENT A

      New language is underlined; deleted language is in brackets.

      3010. Supervision

      (a) Supervisory System
      Each member shall establish and maintain a system to supervise the activities of each registered representative, registered principal, and other associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD Rules. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:
      (1) through (2) No Change.
      (3) The designation as an office of supervisory jurisdiction (OSJ) of each location that meets the definition contained in paragraph (g) of this Rule. Each member shall also designate such other OSJs as it determines to be necessary in order to supervise its registered representatives, registered principals, and other associated persons in accordance with the standards set forth in this Rule, taking into consideration the following factors:
      (A) whether registered persons at the location engage in retail sales or other activities involving regular contact with public customers;
      (B) whether a substantial number of registered persons conduct securities activities at, or are otherwise supervised from, such location;
      (C) whether the location is geographically distant from another OSJ of the firm;
      (D) whether the member's registered persons are geographically dispersed; and
      (E) whether the securities activities at such location are diverse and/or complex.
      (4) through (6) No Change.
      (7) The participation of each registered representative and registered principal, either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the member at which compliance matters relevant to the activities of the representative(s) and principal(s) are discussed. Such interview or meeting may occur in conjunction with the discussion of other matters and may be conducted at a central or regional location or at the representative's(') or principal's(') place of business.
      (b) Written Procedures
      (1) Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives, registered principals, and other associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable Rules of NASD [this Association].
      (2) through (4) No Change.
      (c) through (g) No Change.

    • 05-43 NASD Announces Nomination Procedures for Regional Industry Member Vacancies on the National Adjudicatory Council

      View PDF File

      GUIDANCE

      NAC Nominations

      Nomination Deadline: August 1, 2005

      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 one upcoming vacancy on the National Adjudicatory Council (NAC). The three-year term of the NAC regional Industry member from the North Region expires in January 2006. Exhibit I contains information regarding the NAC regional Industry member whose term expires in January 2006. Exhibit II contains a list of all NAC members. The procedures to fill the NAC regional Industry vacancy is 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 vacancy. 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 District Directors, or the NASD Corporate Secretary (listed in Exhibit I) by August 1, 2005.

      The completed Candidate Profile Sheets will be provided to all Regional Nominating Committee members for review. On or about August 12, 2005, the Regional Nominating Committee will provide NASD members with written notice of the NAC candidate that the Committee proposes for nomination to the National Nominating Committee. Pursuant to Article V, Section 5.3(a) of the NASD Regulation By-Laws, the NASD National Nominating Committee shall nominate all candidates for the NAC for subsequent appointment by the Board.

      Questions/Further Information

      Questions concerning this Special Notice may be directed to the District Directors listed in Exhibit I or to Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, NASD, at (202) 728-8062 or via e-mail at barbara.sweeney@nasd.com .

      National Adjudicatory Council Membership and Function

      Membership

      The NAC consists of 14 members—seven Industry members and seven Non-Industry members. Exhibit II contains a list of all current NAC members. Two Industry members are appointed by the NASD Regulation Board of Directors as at-large members. Five Industry members each represent one of the following geographic regions:

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

      We are seeking nominations for the North Region.

      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 2006

      North Region (Districts 9 and 11)

      NAC Incumbent: A. Louis Denton

      If you are interested in nominating yourself or a colleague to represent the North 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 August 1, 2005.

      W. Dean Karrash

      Regional Nominating Committee Chair

      Burke, Lawton, Brewer & Burke
      516 N. Bethlehem Pike
      P.O. Box 950-C
      Spring House, PA 19477

      (215) 643-9100

      Gary K. Liebowitz Frederick F. McDonald
      District 9 Director (New Jersey) District 11 Director
      NASD
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095

      (732) 596-2000
      NASD
      99 High Street, Suite 900
      Boston, MA 02110

      (617) 532-3400
      John P. Nocella Barbara Z. Sweeney
      District 9 Director (Philadelphia) Senior Vice President and
      Corporate Secretary
      NASD
      11 Penn Center
      1835 Market Street, 19th Floor
      Philadelphia, PA 19103

      (215) 665-1180
      NASD
      1735 K Street, NW
      Washington, DC 20006

      (202) 728-8062

      EXHIBIT II

      2005 National Adjudicatory Council

      Geoffrey F. Aronow    Heller Ehrman White & McAuliffe LLP

      Constance Bagley    Harvard Business School

      A. Louis Denton    Philadelphia Corporation for Investment Services

      W. Dennis Ferguson    Sterne Agee Clearing

      Amy Bowerman Freed    Hogan & Hartson, L.L.P.

      Kathleen M. Hagerty    Northwestern University

      Timothy Henahan    Baker & Co., Inc.

      David A. Lipton    Catholic University of America

      Judith R. MacDonald    Rothschild, Inc.

      Neal E. Nakagiri

      James M. Rogers    J.J.B. Hilliard, W.L. Lyons, Inc.

      Brian T. Shea    Pershing LLC

      William Wang    Hastings College of Law

      Samuel Wolff    Akin Gump Strauss


      EXHIBIT III

      National Adjudicatory Council Nomination Procedures

      1. NASD maintains Regional Nominating Committees in the manner specified in Article VI of the By-Laws of NASD Regulation, Inc.
      2. Members located in the North Region are hereby notified of the upcoming election of a member to the National Adjudicatory Council and are encouraged to submit names of potential candidates to the Chair of the Regional Nominating Committee, District Directors, or to the NASD Corporate Secretary, Barbara Z. Sweeney (see Exhibit I) by August 1, 2005.
      3. Nominees will be asked to complete a Candidate Profile Sheet, which will be reviewed by the Regional Nominating Committee.
      4. The Regional Nominating Committee shall review the background of the candidates and the description of the NASD membership provided by NASD staff and shall propose to the National Nominating Committee a candidate 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 12, 2005, 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 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 Committee shall certify their candidate to the National Nominating Committee. Additional information pertaining to the National Adjudicatory Council Election Procedures can be found in Article VI of the By-Laws of NASD Regulation. The By-Laws can be found in the online NASD Manual at www.nasd.com.

      EXHIBIT IV

      Candidate Profile Sheet

      Current Registration

      Name: CRD#:
      Firm: #RRs at Firm:
      Title/Primary Responsibility:
      Address:
      City: State: Zip:
      Phone: Fax:
      Email:

      Prior Registration (List the most recent first. Feel free to include extra pages if necessary.)

      Firm:
      Title/Primary Responsibility:
      Firm:
      Title/Primary Responsibility:


      General Areas of Expertise (please check all that apply) Product Expertise (please check all that apply)
      Compliance/Legal Investment Advisory Corporate Bonds Investment Company
      Corporate Finance Retail Sales Direct Participation Programs Options
      Financial/Operational Trading/Market Making Equity Securities Variable Contracts Securities
      Institutional Sales Other Municipal/Government
      Securities
      Other

      Memberships/Positions Held in Trade or Business Organizations

      ____________________________________________________________________________________________________

      ____________________________________________________________________________________________________

      ____________________________________________________________________________________________________

      Past NASD Experience and Dates of Service (please check all that apply)

      Committee Member (Identify committee:    ) Approx. Dates:
      Arbitrator Approx. Dates:
      Mediator Approx. Dates:
      Expert Witness (arbitrations; disciplinary proceedings): Approx. Dates:
      Other: Approx. Dates:

      Educational Background

      School: Degree:
      School: Degree:

    • 05-42 NASD Informs Members of Upcoming District Committee and District Nominating Committee Elections

      View PDF File

      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 2006, 2007, and 2008 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 July 29, 2005. 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 and 8.9 of the NASD Regulation By-Laws (By-Laws) establish formal eligibility requirements for members of the District Committee and District Nominating Committee. They provide that such members:

      1) Be employed by an NASD member eligible to vote in the district for District Committee elections;2 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 July 29, 2005, will be provided to all members of the appropriate District Nominating Committee for review. It is anticipated that on or before September 9, 2005, 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.

      2 NASD will be filing with the Securities and Exchange Commission, for immediate effectiveness, an amendment to Article VIII of the By-Laws to modify the eligibility requirements for membership on the District Committee and District Nominating Committee by providing that candidates must be "registered with" rather than "employed by" an NASD member. The rationale for this change is that any person who engages in the investment banking or securities business of a member must be registered with NASD and be an associated person of that member. There is, however, no requirement that associated persons be employees. They may, in fact, operate for employment law purposes as independent contractors. The staff believes the requirement of being "registered with" as opposed to "employed by" the member more accurately aligns the candidacy requirements with the qualification of persons who may represent a member.

      NASD also will be filing a second change to Article VIII to permit each District Nominating Committee, at the time it nominates its slate of nominees, to identify one alternate nominee for the District Committee and one alternate nominee for the District Nominating Committee who will, in an uncontested election, replace a member of the slate of nominees who withdraws or is otherwise determined to be ineligible.


      ATTACHMENT A

      District 1 Committee and District Nominating Committee Members

      Elisabeth P. Owens, District Director
      525 Market Street, Suite 300, San Francisco, CA 94105

      (415) 882-1201
      (415) 546-6991 fax

      District 1 Committee—Chair: Francis X. Roche, II

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      Warren E. Gordon Charles Schwab & Co., Inc. San Francisco, CA
      William P. Hayes Wells Fargo Investments, LLC San Francisco, CA
      Francis X. Roche, II RBC Dain Rauscher, Inc. San Francisco, CA

      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, Incorporated San Francisco, CA

      Committee members to serve until January 2008

      Howard Bernstein Pacific Growth Equities, LLC San Francisco, CA
      Bruce Nollenberger Nollenberger Capital Partners, Inc. San Francisco, CA
      Daniel W. Roberts Roberts & Ryan Investments Inc. San Francisco, CA

      District 1 Nominating Committee—Chair: Robert S. Basso

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Robert S. Basso National Financial Services, LLC San Francisco, CA
      L. Robert McKulla Wachovia Securities Walnut Creek, CA
      Robert A. Muh Sutter Securities, Inc. San Francisco, CA
      G. Stuart Spence UBS Financial Services, Inc. San Francisco, CA
      Samuel Yates RBC Dain Rauscher San Francisco, CA

      District 2 Committee and District Nominating Committee Members

      Lani M. Sen Woltmann, District Director

      300 South Grand Avenue, Suite 1600, Los Angeles, CA 90071

      (213) 613- 2601
      (213) 617-3299 fax

      District 2 Committee — Chair: Don S. Dalis

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      A. William Cohen Integrated Trading and
      Investments, Inc.
      Las Vegas, NV
      Don S. Dalis UBS Newport Beach, CA
      Ismael Manzanares, Jr. Foresters Equity Services, Inc. San Diego, CA

      Committee members to serve until January 2007

      Stephen B. Benton Financial Network Investment
      Corporation
      El Segundo, CA
      James M. S. Dillahunty Fixed Income Securities, LLC San Diego, CA
      John D. 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 CUSO Financial Services, L.P. San Diego, CA

      District 2 Nominating Committee—Chair: Richard B. Gunter

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Richard B. Gunter Wedbush Morgan Securities Los Angeles, CA
      James E. Biddle The Securities Center Incorporated Chula Vista, CA
      Terry L. Chase Wachovia Securities, Inc. Pasadena, CA
      Steven K. McGinnis   Irvine, CA
      Joel H. Ravitz Quincy Cass Associates Los Angeles, CA

      District 3 Committee and District Nominating Committee Members

      Joseph M. McCarthy, District Director

      James G. Dawson, District Director

      370 17th Street, Suite 2900 Two Union Square, 601 Union Street, Suite 1616
      Denver, CO 80202 Seattle, WA 98101-2327
      (303) 446-3100
      (303) 620-9450 fax
      (206) 624-0790
      (206) 623-2518 fax

      District 3 Committee—Chair: Bridget M. Gaughan

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      Gene G. Branson Partners Investment Network, Inc. Spokane, WA
      Bridget M. Gaughan SunAmerica Securities, Inc. Phoenix, AZ
      John W. Goodwin Goodwin Browning & Luna Securities, Inc. Albuquerque, NM

      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 TCAdvisors Network Inc. Englewood, CO
      Craig A. Jackson Northwest Consulting, LLC Roseburg, OR
      Harry L. Striplin Paulson Investment Company, Inc. Portland, OR

      District 3 Nominating Committee—Chair: Kathryn A. Supko

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Gregory R. Anderson TIAA-CREF Individual & Institutional Services, Inc. Denver, CO
      Elyssa S. Baltazar Morgan Stanley Dean Witter, Inc. Denver, CO
      Thomas R. Hislop Peacock, Hislop, Staley & Given, Inc. Phoenix, AZ
      Clarence Fredrick Roed McAdams Wright Ragen, Inc. Bellevue, WA
      Kathryn A. Supko Northwestern Mutual Investment
      Services, LLC
      Boise, ID

      District 4 Committee and District Nominating Committee Members

      Thomas D. Clough, District Director

      120 West 12th Street, Suite 900, Kansas City, MO 64105 (816) 802-4708
      (816) 421-5029 fax

      District 4 Committee—Chair: Deborah M. Castiglioni

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      Michael D. Burns USAllianz Securities, Inc. Minneapolis, MN
      Deborah M. Castiglioni Cutter & Company, Inc. Chesterfield, MO
      Kevin P. Maas PrimeVest Financial Services, Inc. St. Cloud, MN

      Committee members to serve until January 2007

      Joseph D. Fleming Piper Jaffray & Co. Minneapolis, MN
      Mark T. Lasswell Wells Fargo Brokerage Services, LLC Minneapolis, MN
      Vacancy1      

      Committee members to serve until January 2008


      Allen J. Moore SMITH HAYES Financial Services Lincoln, NE
      Stephen R. Oliver Gold Capital Management, Inc. Overland Park, KS
      Minoo Spellerberg Princor Financial Services Corporation Des Moines, IA

      District 4 Nominating Committee—Chair: Pamela R. Ziermann

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members


      Frank H. Kirk Wachovia Securities, LLC Kansas City, MO
      Jeffrey A. Schuh Residential Funding Securities Corporation Minneapolis, MN
      James H. Warner The Warner Group Sioux City, IA
      Pamela R. Ziermann Dougherty & Company LLC Minneapolis, MN
      Vacancy2      

      District 5 Committee and District Nominating Committee Members

      Warren A. Butler, Jr., Regional Director

      1100 Poydras Street, Energy Centre, Suite 850
      New Orleans, LA 70163
      (504) 522-6527
      (504) 522-4077 fax

      District 5 Committee—Chair: Carolyn R. May

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      John J. Dardis Jack Dardis & Associates, Ltd. Metairie, LA
      Carolyn R. May Simmons First Investment Group, Inc. Little Rock, AR
      F. Eugene Woodham Sterne, Agee & Leach, Inc. Birmingham, AL

      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 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

      District 5 Nominating Committee—Chair: David A. Knight

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      David A. Knight Stephens Inc. Little Rock, AR
      LeRoy H. Paris, II InvestLinc Securities, LLC Jackson, MS
      Tom R. Steele Equitable Advisors, Inc. Nashville, TN
      David W. Wiley, III Wiley Bros., Aintree, LLC Nashville, TN
      John J. Zollinger, III Morgan Keegan & Company, Inc. New Orleans, LA

      District 6 Committee and District Nominating Committee Members

      Virginia F. M. Jans, District Director

      12801 N. Central Expressway, Suite 1050, Dallas, TX 75243 (972) 701-8554
      (972) 716-7646 fax

      District 6 Committee—Chair: John R. Muschalek

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      Brent T. Johnson Multi-Financial Securities Corporation Houston, TX
      John R. Muschalek First Southwest Company Dallas, TX
      Robert L. Nash Southwest Securities, Inc. Dallas, TX

      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
      Sennett Kirk, III3 Kirk Securities Corporation Denton, 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 1st Global Capital Corp. Dallas, TX

      District 6 Nominating Committee—Chair: William B. Madden

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Christoper R. Allison M.E. Allison & Co., Inc. San Antonio, TX
      William B. Madden Madden Securities Corporation Dallas, TX
      V. Keith Roberts Stanford Group Company Houston, TX
      David W. Turner Wachovia Securities, Inc. Fort Worth, TX
      Vacancy4      

      District 7 Committee and District Nominating Committee Members

      Daniel J. Stefek, District Director

      One Securities Centre, Suite 500, 3490 Piedmont Road (404) 239-6128
      NE, Atlanta, GA 30305 (404) 237-9290 fax

      District 7 Committee—Chair: Dennis S. Kaminski

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      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

      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 Scott & Stringfellow, Inc. Columbia, SC
      Charles F. O'Kelley Atlantic Coast Securities Corporation Tampa, FL

      District 7 Nominating Committee—Chair: Kenneth W. McGrath

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Jeffrey P. Adams Balentine & Company Atlanta, GA
      Richard G. Averitt, III Raymond James Financial Services, Inc. St. Petersburg, FL
      Kenneth W. McGrath Popular Securities, Inc. Hato Rey, PR
      Richard V. McGalliard Wachovia Securities, Inc. Atlanta, GA
      Roark A. Young Young, Stovall and Company Miami, FL

      District 8 Committee and District Nominating Committee Members

      Carla A. Romano, District Director

      55 West Monroe Street, Suite 2700, Chicago, IL 60603 (312) 899-4324
      (312) 606-0742 fax

      District 8 Committee—Chair: Thomas M. McDonald

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      Wilbur H. Burch Newbridge Securities Corporation Saginaw, MI
      Thomas M. McDonald Wayne Hummer Investments, L.L.C. Chicago, IL
      James J. Roth Pershing A BNY Securities Group Co. Oak Brook, IL

      Committee members to serve until January 2007

      Michael E. Bosway City Securities Corporation Indianapolis, IN
      Mari Buechner5 Coordinated Capital Securities, Inc. Madison, WI
      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

      District 8 Nominating Committee—Chair: Bruce J. Young

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Bernard A. Breton Carillon Investments, Inc. Cincinnati, OH
      William K. Curtis M & I Brokerage Services, Inc. Milwaukee, WI
      Carol P. Foley Podesta & Company Chicago, IL
      Gregory W. Goelzer Goelzer Investment Management Indianapolis, IN
      Bruce J. Young Mesirow Financial, Inc. Chicago, IL

      District 9 Committee and District Nominating Committee Members


      John P. Nocella, District Director Gary K. Liebowitz, District Director
      1835 Market Street, Suite 1900 581 Main Street, 7th Floor
      Philadelphia, PA 19103 Woodbridge, NJ 07095
      (215) 963-1992 (732) 596-2025
      (215) 496-0434 fax (732) 596-2001 fax

      District 9 Committee—Chair: W. Dean Karrash

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      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
      Jerome J. Murphy Janney Montgomery Scott LLC Philadelphia, PA

      Committee members to serve until January 2007


      Peter P. Jenkins Credit Suisse First Boston LLC Baltimore, MD
      Harold N. Peremel Peremel & Co., Inc. Baltimore, MD
      Vacancy6      

      Committee member to serve until January 2008

      Scott L. Fagin The Jeffrey Matthews Financial Group, L.L.C. Millburn, NJ
      Rebecca L. Kohler American Express Financial Advisors Inc. Roanoke, VA
      Vacancy7      

      District 9 Nominating Committee—Chair: J. Lee Keiger, III

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      James E. Bickley Cresap, Inc. Horsham, PA
      J. Lee Keiger, III Davenport & Company, LLC Richmond, VA
      Michael S. Mortensen PNC Investments Pittsburgh, PA
      Michael B. Row Pershing LLC Jersey City, NJ
      Howard B. Scherer Janney Montgomery Scott LLC Philadelphia, PA

      District 10 Committee and District Nominating Committee Members

      Hans L. Reich, Regional Director

      One Liberty Plaza, 49th Floor, 165 Broadway, New York, NY 10006 (212) 858-4180
      (212) 858-4189 fax

      District 10 Committee—Chair: Richard J. Paley

      Members to be elected to terms expiring January 2009: 4

      Committee members to serve until January 2006

      Margaret M. Caffrey Schonfeld & Company, LLC Jericho, NY
      Raymond C. Holland, Sr. Triad Securities Corp. New York, NY
      Andrew H. Madoff Bernard L. Madoff Investment Services LLC New York, NY
      Richard J. Paley Carey Financial Corporation New York, NY

      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 Solutions New York, NY

      District 10 Nominating Committee—Chair: Charles V. Senatore

      Committee members to be elected to terms expiring January 2005: 5

      Committee Members

      William Behrens Northeast Securities, Inc. New York, NY
      Jennifer A. Connors Lehman Brothers Inc. New York, NY
      Ruth S. Goodstein UBS Financial Services, Inc. New York, NY
      Mark W. Ronda Oppenheimer & Co. Inc. New York, NY
      Charles V. Senatore Fidelity Brokerage Services, LLC New York, NY

      District 11 Committee and District Nominating Committee Members

      Frederick F. McDonald, District Director

      99 High Street, Suite 900, Boston, MA 02110 (617) 532-3401
      (617) 451-3524 fax

      District 11 Committee—Chair: Mark R. Hansen

      Members to be elected to terms expiring January 2009: 3

      Committee members to serve until January 2006

      Mark R. Hansen State Street Global Markets, LLC Boston, MA
      Lee G. Kuckro Advest, Inc. Hartford, CT
      Wilson G. Saville Barrett & Company Providence, RI

      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 Tower Square Securities, Inc. Hartford, CT

      District 11 Nominating Committee—Chair: John I. Fitzgerald

      Committee members to be elected to terms expiring January 2006: 5

      Committee Members

      Michael C. Braun Moors & Cabot, Inc. Boston, MA
      Andrew F. Detwiler Vandham Securities Corp. Boston, MA
      John I. Fitzgerald Leerink Swann & Company Boston, MA
      Gregory D. Teese Equity Services, Inc. Montpelier, VT
      Peter T. Wheeler Commonwealth Financial Network Waltham, MA

      1 This vacancy was created by the resignation of Richard M. Hurwitz. The term expires in January 2007.

      2 This vacancy was created by the resignation of Timothy J. Lyle. The term expires in January 2006.

      3 Mr. Kirk resigned from the District 6 Nominating Committee and was appointed to fill a vacancy on the District 6 Committee created by the resignation of Darryl W. Traweek. Mr. Kirk must stand for election to serve out the remaining term on the District 6 Committee, which expires in January 2007.

      4 This vacancy was created by the resignation of Sennett Kirk, III. The term expires in January 2006.

      5 Ms. Buechner was appointed to fill a vacancy created by the resignation of Lora Rosenbaum. Ms. Buechner must stand for election to serve out the remaining term, which expires in January 2007.

      6 This vacancy was created by the resignation of Barry M. Cash. The term expires in January 2007.

      7 This vacancy was created by the resignation of Dorothy G. Sanders. The term expires in January 2008.


      ATTACHMENT B

      Procedures for Electing District Committee and District Nominating Committee Members1

      1. Each NASD District shall maintain a District Nominating Committee in the manner specified in Article VIII of the By-Laws of NASD Regulation, Inc.
      2. The Secretary of NASD has sent Notice to Members 05-42 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 2006. The notice 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 Representatives. 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 July 29, 2005. 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 July 29, 2005, 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

      • 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.
      7. On or before September 9, 2005, 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, 2005, 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 By-Laws of NASD Regulation.


      1 NASD will be filing with the Securities and Exchange Commission, for immediate effectiveness, amendments to Article VIII of the By-Laws relating to District Committee and District Nominating Committee elections to: (1) clarify the eligibility requirements for membership on the District Committee and District Nominating Committee by providing that candidates must be "registered with," rather than "employed by," an NASD member; and (2) permit each District Nominating Committee, at the time it nominates its slate of nominees, to identify one alternate nominee for the District Committee and one alternate nominee for the District Nominating Committee who will, in an uncontested election, replace a member of the slate of nominees who withdraws or is otherwise determined to be ineligible.


      ATTACHMENT C

      Candidate Profile Sheet

      Current Registration

      Name CRD#:
      Firm: #RRs at Firm:
      Title/Primary Responsibility:
      Address:
      City: State: Zip:
      Phone: Fax:
      Email:

      Prior Registration (List the most recent first. Feel free to include extra pages if necessary.)

      Firm:
      Title/Primary Responsibility:
      Firm:
      Title/Primary Responsibility:


      General Areas of Expertise (please check all that apply) Product Expertise (please check all that apply)
      Compliance/Legal Investment Advisory Corporate Bonds Investment Company
      Corporate Finance Retail Sales Direct Participation Programs Options
      Financial/Operational Trading/Market Making Equity Securities Variable Contracts Securities
      Institutional Sales Other Municipal/Government Securities Other

      Memberships/Positions Held in Trade or Business Organizations

      _________________________________________________________________________________________________________

      _________________________________________________________________________________________________________

      _________________________________________________________________________________________________________

      Past NASD Experience and Dates of Service (please check all that apply)

      Committee Member (Identify committee:     ) Approx. Dates:
      Arbitrator Approx. Dates:     
      Mediator Approx. Dates:     
      Expert Witness (arbitrations; disciplinary proceedings): Approx. Dates:     
      Other: Approx. Dates:     

      Educational Background

      School: Degree:
      School: Degree:

    • 05-41 Important Information Regarding the Suspension of Trading in the Securities of Gluv Corp.1

      View PDF File

      GUIDANCE

      SUGGESTED ROUTING

      KEY TOPICS

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

      Rule 6740
      SEC Rule 15c2-11

      Executive Summary

      NASD is issuing this Special Notice to Members (Special NTM) to advise member firms and other interested parties of certain actions and issues relating to the trading of the securities of Gluv Corp. This Special NTM also is intended to remind members of their responsibilities with respect to Securities and Exchange Commission (SEC) Rule 15c2-11 and NASD Rule 6740.

      Questions/Further Information

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

      Discussion

      Gluv Corp. recently announced that 3 million shares of its common stock were issued prior to the dividend payment date. The company further stated that it appears that an unknown number of those shares have been improperly traded in the marketplace. In response to the company's press release and other discussions between the company and SEC staff, on May 27, 2005, the SEC temporarily suspended trading in the securities of Gluv Corp. pursuant to Section 12(k) of the Securities Exchange Act of 1934. The SEC issued this suspension because of questions surrounding the accuracy and adequacy of publicly disseminated information concerning, among other things, the total shares outstanding, the availability of non-restricted shares for trading and delivery, the company's shareholders, and rights with respect to shares of Gluv Corp. The SEC's trading suspension terminates on June 10, 2005, at 11:59 p.m. ET. Although trading will no longer be suspended, members should exercise great caution when executing customer or proprietary trades, including member-to-member transactions for the purposes of resolving open fails, until such time as members can be assured that the shares in circulation were part of a bona-fide issuance.

      Members are reminded that, pursuant to SEC Rule 15c2-11 and NASD Rule 6740, no quotation may be entered unless and until a member has complied with all of the requirements of the rules, including SEC Rule 15c2-11(a)(5). SEC Rule 15c2-11(a) requires, among other things, that based on a member's review of the issuer information specified therein, a member must have a reasonable basis under the circumstances to believe that the issuer information is accurate in all material respects and the sources of such information are reliable. Until the questions surrounding the information and documents of Gluv Corp. are resolved, member firms should be aware, that in the context of Form 211 filings, NASD has significant concerns as to whether a member would have a reasonable basis to believe the accuracy or reliability of information relating to Gluv Corp.

      In addition, SEC staff has indicated that it will entertain requests for relief by firms with regard to the net capital charges related to trades in Gluv Corp. that occurred before the close of business on May 27, 2005, but that such relief will not extend to trading that commences after the cessation of the temporary suspension.


      1 NASD has been informed by issuer's counsel that Gluv Corp. has changed its name to Media Magic, Inc., although NASD has not received formal notice of such.

    • 05-40 NASD Requests Comment on Proposal to Prohibit All Product-Specific Sales Contests and to Apply Non-Cash Compensation Rules to Sales of All Securities Comment Period Expired August 5, 2005

      View PDF File

      REQUEST FOR COMMENT

      Sales Contests and Non-Cash Compensation

      Comment Period Expires August 5, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Investment Companies
      Legal & Compliance
      Registered Representatives
      Senior Management
      Variable Contracts

      Sales Contests
      Non-Cash Compensation

      Executive Summary

      NASD currently restricts the payment and acceptance of non-cash compensation in connection with the sale of direct participation programs (DPPs), variable insurance contracts, investment company securities, and public offerings of real estate investment trusts (REITs) and other securities. NASD also prohibits internal non-cash sales contests in connection with the sale of variable insurance contracts or investment company securities unless they meet certain criteria, including that such contests are based on principles of total production and equal weighting. NASD proposes to expand the prohibitions of non-cash compensation to the sale and distribution of any security or type of security, rather than just those enumerated above. NASD also proposes to prohibit all product-specific cash and non-cash "sales contests" as defined by the proposed rule.

      Questions/Further Information

      Questions concerning this Notice may be directed to Thomas M. Selman, Senior Vice President, Investment Companies/Corporate Financing, at (240) 386-4533; Joseph P. Savage, Associate Vice President, Investment Companies Regulation, at (240) 386-4534; or Philip A. Shaikun, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8451.

      Action Requested

      NASD encourages all interested parties to comment on the proposed rule change. Comments must be received by August 5, 2005. Members and other interested parties can submit their comments using the following methods:

      • Mail comments in hard copy to the address below; or

      • Email 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 Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500

      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 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 in the Federal Register.2

      Background and Discussion

      Current Rules Governing Non-Cash Compensation and Sales Contests

      NASD rules generally prohibit members and their associated persons from directly or indirectly accepting or making payments or offers of non-cash compensation in connection with the sale of DPPs, variable insurance products, investment company securities, and the public offering of other securities, including REITs. These prohibitions are subject to certain exceptions that permit:

      (A) Gifts that do not exceed an annual amount per person fixed by the NASD Board of Governors (currently $100) and are not preconditioned on achievement of a sales target;
      (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target;
      (C) Payment or reimbursement by offerors3 in connection with meetings held by an offeror or by a member for the purpose of training or educating associated persons of a member, provided that the meeting meets certain criteria;4
      (D) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that the arrangement meets certain criteria (discussed below);5 and
      (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that the arrangement meets the requirements for a non-cash compensation arrangement between a member and its associated persons pursuant to sub-paragraph (D) (discussed below).

      Under the provisions permitting non-cash compensation arrangements between a member and its associated persons, a member may hold an internal non-cash sales contest with respect to the sale of investment company securities or variable insurance products provided that the contest is based on total production and the credit for each type of security sold (e.g., investment company or variable insurance product) is equally weighted. While this exception excludes sales contests that award credit only for specific securities within a category, such as only awarding credit for sales of proprietary mutual funds, it does allow sales contests that award credit for all sales within a particular category of securities (e.g., all sales of mutual funds), subject to the total production and equal weighting requirements.

      NASD believes that general prohibitions concerning payment or receipt of non-cash compensation should be extended beyond investment companies, variable insurance products, DPPs, and public offerings of securities such as REITs, as the conflicts underlying these prohibitions exist with respect to all securities. NASD also believes that product-specific sales contests—even those that conform to the total production and equal weighting requirements of the current non-cash rules—should be prohibited.

      Extension of Non-Cash Compensation Prohibitions to All Securities

      The proposal would eliminate the current non-cash compensation provisions—Rules 2710(i) (REITs and other publicly offered securities), 2810(c) (DPPs), 2820(g)(4) (variable contracts), and 2830(l)(5) (investment companies)—and replace them with a new Rule 2311, which would apply to the payment or receipt of non-cash compensation and the sponsoring or participation in any sales contest with respect to the sale or distribution of any security or type of security. Thus, for example, the restrictions on the payment of non-cash compensation that currently apply to investment company securities, variable insurance products, REITs, and DPPs also would apply to the sale of stocks, bonds, or other securities.

      Under proposed Rule 2311, members and their associated persons would be prohibited from directly or indirectly accepting or making payments or offers of payments of any non-cash compensation, subject to certain exceptions. One such exception would permit gifts that do not exceed in value an annual amount per person established by the NASD Board of Governors (currently $100) and that are not preconditioned on the achievement of a sales target. Another exception would permit an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on the achievement of a sales target.

      The proposal also would permit offerors6 and members to make payments or reimbursements of associated persons' expenses in connection with training or education meetings, provided that the meetings meet certain conditions.

      First, the member would have to maintain records of all such payments or reimbursements, including the names of the associated persons who attended, and the amounts of the payments or reimbursements.

      Second, the associated persons would have to obtain the member's prior approval to attend the meeting and attendance or reimbursement of expenses could not be preconditioned on the achievement of a sales target. The proposal would explicitly define the term "preconditioned on the achievement of a sales target" (which also relates to the gift and entertainment exceptions above) as meaning an arrangement pursuant to which associated persons understand in advance that they must achieve either a dollar-denominated goal for selling any security or type of security or a goal of finishing within a group of top sellers of a security or type of security. The definition would state that a training or education meeting shall not be considered preconditioned on the achievement of a sales target if a member or an offeror designates persons to attend the meeting to recognize past performance or to encourage future performance, provided that associated persons do not understand in advance that receipt of compensation in connection with the meeting requires achievement of a sales target.

      Third, the location would have to be appropriate to the purpose of the meeting, which the proposal would define as a United States office of the offeror or member holding the meeting, a facility located in the vicinity of such office, a U.S. regional location with respect to meetings of associated persons who work within that region or, with respect to meetings dealing with REITs or DPPs, a U.S. location at which a significant asset of the program is located.

      Fourth, consistent with past staff interpretations, the proposed rule would explicitly permit only reimbursement for training, education, meals, lodging, and transportation of the associated person.7 Consequently, the proposed rule would make clear that in a training and education meeting, the offeror or member firm could not pay for or provide reimbursement for entertainment or for the expenses of guests of attendees.8

      NASD believes that these provisions are largely consistent with the current non-cash compensation rules applicable to investment company securities, variable insurance products, DPPs, and REITs. However, NASD has made some changes to these provisions to improve their clarity and members' understanding of the rules. NASD requests comments as to whether these changes make the rules clearer.

      Prohibition of Product-Specific Sales Contests

      While proposed Rule 2311 expands many of the non-cash compensation provisions to all types of securities, NASD also is proposing to eliminate the current exception for product-specific sales contests. Specifically, the proposal would ban all "sales contests," which are defined as "any contest among associated persons for cash or non-cash prizes that is preconditioned on the achievement of a sales target within a defined period of time with respect to the sale or distribution of any security or any type of security." The meaning of "preconditioned on the achievement of a sales target" is discussed above.

      NASD views any sales contest that favors one security (e.g., a proprietary investment company) or one type of security (e.g., investment companies or stocks) as having the potential to create an incentive to engage in sales conduct unrelated to the best interests of customers. Consequently, the ban on sales contests would prohibit "stock of the day" and similar promotions. It also would prohibit increased bonuses or "President's Club" memberships that are awarded for the sale of specific securities or types of securities within a defined period of time.

      The definition of sales contest would permit broker-dealers to hold a contest among its associated persons that is based on their total production on the sale of all securities, provided certain records were kept. By permitting contests that are based on an associated person's total production, the rule also would allow cash bonuses to registered representatives who attained a higher total production across all securities. The member would be required to maintain records of those contests, including the criteria for awarding prizes and the names of the associated persons who participate in them.

      NASD specifically seeks comment on the proposed definition of "sales contest." Does it adequately address those compensation arrangements that create inappropriate incentives, without prohibiting legitimate forms of compensation?

      The proposal also would eliminate a current provision that permits non-member companies or other members to contribute to a non-cash arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that the it meets the requirements for such arrangements (such as the total production and equal weighting standards). NASD requests comment on whether there is any need to retain this provision in some form, given that the proposal would ban product-specific sales contests.

      NASD does not intend these changes to cover different sales load structures or ongoing differential cash payouts among various products. Thus, for example, a member would be permitted to sell fund families that pay higher sales loads (e.g., a fund that pays a highest sales load of 5.75 percent of the purchase price) than other fund families that the member sells (e.g., funds whose highest sales loads are 4.5 percent). Likewise, for example, the rule would not apply to a member that, on an ongoing basis, pays out to associated persons 80 percent of commissions earned from the sales of proprietary products but only pays out 60 percent of commissions earned from the sale of non-proprietary products. The regulatory treatment of these so-called "differential compensation" arrangements is the subject of SEC rulemaking.9


      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 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 rules thereunder.

      3 The term "offeror" generally refers to issuers, sponsors, advisers to issuers or sponsors, underwriters and their affiliates. See Rules 2710(i)(1)(C), 2810(c)(1)(C), 2820(b)(3)(E) and 2830(b)(1)(E).

      4 Generally, training and education meetings must meet the following requirements:

      i) the member must maintain certain records of these meetings, including the names of the offerors involved, the names of the associated persons attending the meetings, and the nature and value of the non-cash compensation received;
      ii) the associated persons must obtain the member's prior approval to attend the meeting and attendance is not preconditioned by the member on achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph (D);
      iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;
      iv) the payment or reimbursement is not applied to the expenses of guests of the associated persons; and
      v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph (D).

      See Rules 2710(i)(2)(C), 2810(c)(2)(C), 2820(g)(4)(C) and 2830(l)(5)(C).

      5 Under Rules 2820 and 2830, non-cash compensation arrangements between a member and its associated persons or, in the case of variable contracts, between a non-member company and its sales personnel who are associated persons of an affiliated member, generally must meet the following requirements:

      i) the member's or non-member's non-cash compensation arrangement is based on the total production of associated persons with respect to all securities within a specific category (such as mutual funds, variable annuities, or variable life insurance) distributed by the member;
      ii) the non-cash compensation arrangement requires that the credit received for each security is equally weighted;
      ii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and
      iv) the record keeping requirements of the non-cash rules are satisfied.

      See Rules 2820(g)(4)(D) and 2830(l)(5)(D). Rules 2710 and 2810 permit non-cash arrangements between a member and its associated persons or a company that controls a member company and the member's associated persons, provided that no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement. See Rules 2710(i)(2)(D) and 2810(c)(2)(D).

      6 The proposal would modify the definition of "offeror" depending upon the type of product that is the subject of the training or education meeting. The modified definition is based upon the current definitions of "offeror" in Rules 2710, 2810, 2820, and 2830.

      7 See "Non-Cash Compensation – Training or Education Meetings," NASD Regulatory & Compliance Alert 13 (Summer 2000), available at http://www.nasd.com/rca/summer_00; Letter from Mary L. Schapiro, President, NASD (March 7, 2001), available at http://www.nasd.com/schapiro_030701.

      8 The staff has interpreted the training or education meeting exception "as an event that is first and foremost intended to provide training or education to an associated person. Any training meeting should occupy substantially all of the work day." "Non-Cash Compensation – Training Or Education Meetings," NASD Regulatory & Compliance Alert 13 (Summer 2000).

      9 See SEC Rel. No. 33-8544 (Feb. 28, 2005), 70 Fed. Reg. 10521 (Mar. 4, 2005).


      ATTACHMENT A

      Proposed rule text.

      2311. Non-Cash Compensation and Sales Contests

      (a) Definitions
      (1) "Compensation" shall mean cash compensation and non-cash compensation.
      (2) "Cash compensation" shall mean any, discount, concession, fee, service fee, commission, asset-based sales charge, loan, override, cash employee benefit or cash prize received in connection with the sale and distribution of any security or type of security.
      (3) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of any security or type of security that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.
      (4) "Offeror" shall mean:
      (A) with respect to a training or education meeting concerning variable contracts, an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to a separate account of an insurance company or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities;
      (B) with respect to a training or education meeting concerning investment company securities not sold through variable contracts, an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities; and
      (C) with respect to a training or education meeting concerning any other type of security, an issuer, sponsor, an adviser to an issuer or sponsor, an underwriter and any affiliated person of such entities.
      (5) "Preconditioned on the achievement of a sales target" shall mean an arrangement pursuant to which associated persons understand in advance that they must achieve either a dollar-denominated goal for selling any security or type of security or a goal of finishing within a defined number of top sellers of a security or type of security. A training or education meeting shall not be considered preconditioned on the achievement of a sales target if a member or an offeror designates persons to attend the meeting to recognize past performance or to encourage future performance, provided that associated persons do not understand in advance that the receipt of compensation in connection with the meeting requires achievement of a sales target.
      (6) "Sales contest" shall mean any contest among associated persons for cash or non-cash prizes that is preconditioned on the achievement of a sales target within a defined period of time with respect to the sale or distribution of any security or type of security. The term "sales contest" shall not mean any contest among associated persons that is based upon the total production of the associated persons for all types of securities, provided that the member maintains records of all such contests, including the criteria for awarding prizes and the names of the associated persons who participate in such contests.
      (b) Restrictions on Non-cash Compensation and Sales Contests.
      No member or person associated with a member shall sponsor or participate in any sales contest or directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except the following:
      (1) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors1 and are not preconditioned on achievement of a sales target.
      (2) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
      (3) Payment or reimbursement by offerors or members in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (A) the member maintains records of all such payments or reimbursements, including the names of the offerors, the names of the associated persons who attended, and the amount of the payment or reimbursement;
      (B) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target;
      (C) the location is appropriate to the purpose of the meeting, which shall mean a United States office of the offeror or the member holding the meeting, or a facility located in the vicinity of such office, or a United States regional location with respect to meetings of associated persons who work within that region or, with respect to meetings dealing with real estate investment trusts or direct participation programs, a United States location at which a significant asset of the program is located;
      (D) the payment or reimbursement applies only to training, education, meals, lodging and transportation for associated persons, and is not applied to the expenses of guests of associated persons, or to the entertainment of associated persons; and
      (E) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target.

      1 The current annual amount fixed by the Board of Governors is $100.

    • 05-39 NASD Suggests Best Practices for Fingerprinting Procedures

      View PDF File

      GUIDANCE

      Fingerprinting Procedures

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Registration
      Senior Management

      Best Practices
      Fingerprinting

      Executive Summary

      NASD is issuing this Notice to Members to remind members to review and, as necessary, update their fingerprinting procedures to help ensure that fingerprints submitted to the Federal Bureau of Investigation (FBI) as part of the hiring process belong to the employee being hired by the member. This Notice also suggests best practices for members' consideration.

      Questions/Further Information

      Questions concerning this Notice may be directed to Victoria Pawelski, Assistant Chief Counsel/Assistant Director, Registration and Disclosure, Markets, Services and Information, at (240) 386-4803; or Shirley H. Weiss, Associate General Counsel, Regulatory Policy and Oversight, at (202) 728-8844.

      Background and Discussion

      Under the federal securities laws, certain persons employed in the securities industry are required to be fingerprinted for purposes of a criminal background check.1 Members are responsible for obtaining a prospective employee's fingerprints and certain required identifying information.2 Members then submit the prospective employee's fingerprints together with the required identifying information to NASD. NASD, in turn, submits these fingerprints to the FBI. NASD also makes the fingerprint results, which may include information about criminal charges and convictions that are required to be reported on the Form U4 (the Uniform Application for Securities Registration or Transfer), available to the employing member and regulators, consistent with applicable federal laws and FBI and NASD requirements.

      Members use the fingerprint results to assist them in making informed hiring decisions. Among other things, members and NASD must determine whether a prospective employee is subject to a statutory disqualification under Article III, Section 4 of NASD's By-Laws. It is essential that the fingerprint results being reported to a member actually belong to the prospective employee, so that the person's criminal history, or lack thereof, is accurately reported to the member. Certain criminal convictions may cause an individual to be subject to a statutory disqualification. In addition, this information helps members fulfill their obligations in connection with hiring persons who are seeking to work in NASD-registered capacities. Under Rule 3010(e), members are required to ascertain by investigation the good character, business repute, qualifications, and experience of persons seeking NASD registration.

      Accordingly, a member's supervisory procedures and internal controls surrounding the hiring process should attempt to ensure that the fingerprints submitted to the FBI belong to the individual seeking employment. These procedures and controls may differ, depending upon whether the member fingerprints prospective employees in-house, or requires or allows prospective employees to be fingerprinted by a third party in a separate location. Members should use all available information gathered in the hiring process (both from the Form U4 responses, if applicable, and from any other sources gathered as a result of the member's investigation of a prospective employee, including, but not limited to, any private background checks conducted by the member and communications with previous employers), to confirm that the person being fingerprinted is the same person who is seeking employment with the member.

      Suggested "Best Practices"

      Members' internal procedures addressing the fingerprinting of prospective employees as required under Exchange Act Section 17(f)(2) and Exchange Act Rule 17f-2 should attempt to ensure that the person being fingerprinted is the same person who is seeking employment with the member. NASD suggests the following best practices.

      Members that elect to fingerprint prospective employees in-house should consider:

      • training appropriate staff on how to verify the authenticity of the prospective employee's identification cards, and to roll high-resolution fingerprints that will be accepted by the FBI;

      • requiring that the individual being fingerprinted present at least two forms of identification immediately before fingerprints are taken, one of which is a valid picture driver's license, state identification card, or U.S. passport; if there is any doubt about the individual's identity, consider requiring additional picture identification;

      • requiring the individual to submit a signature for comparison purposes;

      • including an attestation form in the fingerprint process, whereby the individual seeking to become associated attests in writing and in person that he or she is in fact the person being fingerprinted3; and

      • requiring the person rolling or otherwise taking the fingerprints to attest in writing that he or she has followed the member's compliance procedures.

      Members that rely on third parties in an off-site location to collect fingerprints and to verify the identity of the person being fingerprinted should consider:

      • requiring applicants to be fingerprinted at a local law enforcement office, where officers likely are trained to verify identity as well as the authenticity of identification cards presented;

      • notifying local law enforcement officials to inform them of securities industry fingerprinting requirements, and to discuss reasonable identification verification procedures;

      • giving applicants a list of acceptable third-party vendors that provide fingerprinting services; and

      • discouraging the practice of allowing applicants to fingerprint themselves.

      Conclusion

      NASD encourages its members to review and, if necessary, update their fingerprinting procedures so that, to the extent possible, they are able to verify the identity of persons submitting fingerprints in the employment process. Robust procedures will help reduce the possibility of an individual entering the securities industry under an assumed identity, thereby furthering NASD's goals of investor protection and market integrity.


      1 Section 17(f)(2) of the Securities Exchange Act of 1934 and Exchange Act Rule 17f-2 govern the fingerprinting of securities industry personnel. Unless otherwise exempted from these requirements, every member of a national securities exchange, broker, dealer, registered transfer agent, and registered clearing agency must: (1) require each of its partners, directors, officers, and employees to be fingerprinted; and (2) submit these fingerprints to the Attorney General or its designee (the FBI) for identification and appropriate processing.

      2 The identifying information is required either by the FBI or NASD and generally includes the person's full name; Social Security Number; date and place of birth; physical features such as height, gender, and eye color; the firm's name, address, and CRD® number; and certain transaction identification numbers required by the FBI.

      3 For any person seeking NASD registration, this attestation would be in addition to the attestation on the Form U4, whereby the person attests to the completeness and accuracy of the information submitted on the Form.

    • 05-38 NASD Reminds Broker-Dealers of Their Responsibilities Regarding Deficits in Introduced Accounts; Immediate Action May Be Required to Ensure Compliance

      View PDF File

      ACTION REQUIRED

      Deficits in Introduced Accounts

      SUGGESTED ROUTING

      KEY TOPICS

      Senior Management
      Executive Representatives
      Legal & Compliance
      Operations

      Clearing Firms
      Deficits in Introduced Accounts
      Introducing Firms

      Executive Summary

      NASD is concerned that clearing firms and introducing firms are frequently failing to properly consider deficits in introduced accounts in accordance with an August 1988 interpretation published in NASD Guide to Rule Interpretations (May 1996). This Notice is intended to remind members of their responsibilities in this regard. In addition, please note that reviews for the proper handling of deficits in introduced accounts will be an integral part of NASD's examination program for both clearing and introducing firms.

      Questions/Further Information

      Questions concerning this Notice may be directed to Susan M. DeMando, Associate Vice President, Financial Operations, at (202) 728-8411; or Anne Harpster, Financial Analyst, Financial Operations, at (202) 728-8092.

      Discussion

      The SEC's Net Capital Rule specifies the circumstances in which a clearing firm must take a charge to its net capital for unsecured or partly secured debits.1 Since most clearing agreements, however, usually state that clearing firms have the right to charge their introducing firms for certain losses, NASD published the following interpretation (Interpretation):

      Deficits In Introduced Accounts

      Deficits in unsecured and partly secured introduced accounts shall be deducted by the carrying broker-dealer and the introducing broker-dealer when the clearing agreement states that such deficits are the liability of the introducing broker-dealer.2 .... The amount is deductible by the carrying broker-dealer upon occurrence after application of timely calls for margin, marks to market, or other required deposits which are not outstanding for more than five business days unless there is reason to believe payment will not be made. The introducing broker-dealer must deduct the charge on the day after it becomes a charge to the carrying broker and the carrying broker-dealer must advise the introducing broker-dealer in writing on a daily basis of all such deficits to be charged. (Emphasis added.)

      SEC Staff to NYSE, August 1988

      NASD believes that some clearing firms may fail to notify their introducing firms of the deficits to be charged, as required by the Interpretation. Even when notified, introducing firms may fail to take the capital charge. Some clearing firms appear to believe that the use of the term "when" in the Interpretation (which specifically refers to the existence of language in the clearing agreement indicating that deficits are the responsibility of the introducing firm) can be read to permit the clearing firm to determine "when" a deficit has occurred. Some clearing and introducing firms appear to have concluded that as long as they are "in discussions" as to how to collect or otherwise resolve a deficit, the clearing firm can delay providing the required notification, and the introducing firm can postpone taking the capital charge.

      The Interpretation does not permit a clearing firm to delay "passing on the deficit," nor does it permit an introducing firm to postpone taking a capital charge for deficits in introduced accounts. If the clearing agreement states that the introducing broker-dealer is responsible for customer deficits, the clearing firm and the introducing broker-dealer must comply with the conditions of the Interpretation. These conditions require that the amount (of the deficit) is deducted by: (1) the carrying broker-dealer "upon occurrence…"; and (2) the introducing broker-dealer "on the day after it becomes a charge to the carrying broker." This language, therefore, does not permit any delay in "passing on the deficit," as the Interpretation requires the clearing firm must advise the introducing broker-dealer in writing on a daily basis of all such deficits.

      NASD believes that the delays in "passing on the deficit" may be more prevalent when the size of the deficit would cause the introducing firm to be under capital. In such cases, failure to properly inform the introducing firm of a deficit allows the clearing firm to continue to receive revenue (for example, ticket charges and/or execution fees) and permits the introducing firm to continue to conduct a securities business even though it is not in compliance with the Net Capital Rule. This conduct gives the introducing firm a competitive advantage compared to other introducing firms that voluntarily cease conducting a securities business when under capital. The economics of such situations have caused some clearing firms to regard delays in "passing on the deficit" as simple "business decisions," rather than conduct entirely inconsistent with the Interpretation.

      Action Required

      Clearing firms must review their operations to ensure that they have policies and procedures in place to comply with the Interpretation. Firms must immediately correct any deficiencies noted as a result of this review. If a clearing firm designated to NASD for financial and operational purposes determines that it does not have systems in place to ensure its compliance with this Notice and/or cannot remedy the deficiency by June 30, 2005, the clearing firm must contact its district office immediately to discuss an anticipated timeframe to ensure compliance. Where necessary, NASD may impose limitations on a clearing firm's operations relative to introduced accounts until the clearing firm can demonstrate compliance with this Notice.

      Record Retention

      Clearing firms issuing deficit reports, and introducing firms receiving such reports, must maintain these records for a period of not less than three years, the first two years in an easily accessible place.3 Such reports are considered "working papers" connected with net capital computations.

      Satisfaction of Deficits

      NASD anticipates that deficits will be satisfied in several ways. We believe the most common will be: (1) full cash payment by the owner of the introduced account to satisfy the deficit; (2) full cash payment by the correspondent to satisfy the deficit in an introduced account; (3) a write-off of the loss by the clearing firm (i.e., the write-off must be without any right/intent to re-establish the receivable or enter into any legal proceeding to collect it; and/or (4) the establishment of a payment plan (by the customer or correspondent) to satisfy the obligation.

      If the correspondent satisfies the deficit by agreeing to a payment schedule, or agrees to make the clearing firm whole if the customer fails to honor a payment schedule that he/she has agreed to, then the correspondent broker-dealer must deduct the entire unpaid amount from its net worth in its net capital calculation.

      If the parent or affiliate of the broker-dealer (or other third party) agrees to pay the deficit in full or through payments, the introducing firm must comply with the SEC July 11, 2003, letter titled Recording Certain Broker-Dealer Expenses and Liabilities (see NASD Notice to Members 03-63), whether or not the introducing firm and the paying party have an expense sharing agreement for other purposes.

      Reporting the "Deficit" to Introducing Firms

      For each correspondent, the clearing firm must report the total deficit, in writing, on a daily basis.4


      1 See SEC Rule 15c3-1(c)(2)(iv)(B), Certain Unsecured and Partly Secured Receivables.

      2 The Interpretation also states: "If the carrying broker-dealer subordinates its receivable for the deficit amount to the claims of creditors of the introducing broker-dealer, the subordinated receivable shall be deducted as a nonallowable asset by the carrying broker-dealer. The introducing broker-dealer may exclude the subordinated liability from Aggregate Indebtedness; however, it shall be considered as a liability in the determination of net worth if it is not subject to a satisfactory subordination agreement as defined in Appendix D of SEC Rule 15c3-1." The interpretation, as quoted in the body of this Notice, does not contain the "subordination language" as NASD has encountered few instances of subordination. This language is relevant to the discussion, however, in that it states that where no subordination agreement exists relative to a deficit in an unsecured or partly secured introduced account, it must be considered as a liability in the determination of the net worth of the introducing firm.

      3 SEC Rule 17a-4(b)(5) requires every broker or dealer to preserve for a period of not less than three years, the first two years in an easily accessible place…"[a]ll trial balances, computations of aggregate indebtedness and net capital (and working papers in connection therewith), financial statements, branch office reconciliations, and internal audit working papers, relating to the business of such member, broker or dealer, as such."

      4 Deficits in customers' unsecured and partly secured accounts of an introducing broker-dealer do not have to be deducted from net capital by the carrying broker-dealer, provided sufficient deposits were received from the introducing broker-dealer that can be legally applied to cover (fully secure) the applicable deficits. The introducing broker-dealer must still take the customers'deficits as a deduction in computing net capital when the clearing agreement states that such deficits are the introducing firm's responsibility. The amount of the introducing broker-dealer's deposits must also be included in the carrying broker-dealer's PAIB computation. SEC Staff of DMR to NYSE, July 2001.

    • 05-37 NASD Restructures Certain TRACE Fees for Market Data and Amends the Definition of "Non-Professional" in Connection with TRACE Market Data

      View PDF File

      GUIDANCE

      Corporate Debt Securities

      Effective Date: June 1, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Legal and Compliance
      Operations
      Senior Management
      Technology
      Trading and Market Making
      Training

      Debt Securities
      Dissemination of Transaction
      Information
      Operations
      Rule 6200 Series
      TRACE Rules
      Transaction Reporting

      Executive Summary

      On April 26, 2005, the SEC approved amendments to Rule 7010(k) relating to Transaction Reporting and Compliance Engine (TRACE) market data to restructure fees for TRACE market data, to amend the definition of "Non-Professional" in connection with TRACE market data, and to make other conforming or minor, technical changes to the rule (the amendments).1 In amended Rule 7010(k)(3)(A)(ii), NASD establishes a new fee, the Vendor Real-Time Data Feed Fee, which allows TRACE data subscribers to receive a real-time feed of TRACE transaction data (Real-Time Feed) that the subscriber may use in multiple applications. The Vendor Real-Time Data Feed Fee is $1,500 per month, except for qualifying Tax-Exempt Organizations. Amended Rule 7010(k)(3)(A)(iii) provides that qualifying Tax-Exempt Organizations will pay $400 per month, but will be subject to significant restrictions on their use of the Real- Time Feed.

      Also, NASD is eliminating two market data fees, the $500 per month Bond Trade Dissemination Service (BTDS) Internal Usage Authorization Fee (per application or use) and the $1,000 per month BTDS External Usage Authorization Fee (per application or use), amending the defined term Non-Professional in Rule 7010(k)(3)(C)(i) in connection with TRACE market data, and making other conforming or minor, technical amendments to Rule 7010(k).

      Rule 7010(k), as amended, is set forth in Attachment A. The effective date of the amendments is June 1, 2005.

      Questions/Further Information

      Questions concerning this Notice should be directed to tracefeedback@nasd.com; Elliot Levine, Associate Vice President, Chief Counsel, Transparency Services, Markets, Services and Information, at 202-728-8405; or Sharon K. Zackula, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at 202-728-8985.

      Discussion

      The amendments restructure and streamline TRACE market data fees and otherwise amend Rule 7010(k) as follows.

      New TRACE Market Data Fee. In amended Rule 7010(k)(3)(A)(ii), NASD establishes a new TRACE market data fee, the Vendor Real-Time Data Feed Fee, which is $1,500 per month. (The fee is reduced to $400 per month for qualifying Tax-Exempt Organizations that use the Real-Time Feed solely to provide Non-Professionals access to the TRACE market data at no charge.) The Vendor Real-Time Data Feed Fee allows TRACE data subscribers to receive a Real-Time Feed that the subscriber may use in an unlimited number of internal and external applications.2

      Two TRACE Market Data Fees Terminated. The amendments terminate the BTDS Internal Usage Authorization Fee and the BTDS External Usage Authorization Fee. Both the fees, in contrast to the new Vendor Real-Time Data Feed Fee, limited a TRACE data subscriber to a single use or application of a TRACE data feed. The Vendor Real-Time Data Feed Fee replaces both fees.

      Tax-Exempt Organization. The term Tax-Exempt Organization is defined in Rule 7010(k)(3)(C)(ii). Qualifying organizations that meet the requirements of the definition and the restrictions on use in Rule 7010(k)(3)(A)(iii) may acquire the Real-Time Feed at the reduced fee of $400 per month.

      Non-Professional. The definition of the term Non-Professional in Rule 7010(k)(3) (C)(i), which is used in connection with TRACE market data, is amended to permit natural persons, such as persons registered with the SEC, to use TRACE market data without charge, when the use is personal and noncommercial.3

      Also, NASD made other minor, technical amendments to Rule 7010(k), which are incorporated in the amended rule text in Attachment A.

      Effective Date

      The effective date of the amendments is June 1, 2005.


      1 See Securities Exchange Act Release No. 51611 (April 26, 2005), 70 Fed. Reg. 22735 (May 2, 2005) (SEC approval order) (File No. SR-NASD-2005-026).

      2 The Vendor Real-Time Data Feed Fee in amended Rule 7010(k)(3)(A)(ii) does not include NASD's monthly charge for each desktop or other interrogation display device receiving the Real-Time Feed. See Rule 7010(k)(3)(A)(i).

      3 Members are advised that NASD intends to file shortly a further technical amendment to the defined term Non-Professional in Rule 7010(k) to heighten uniformity across its rules and facilitate internal data collection practices. This future amendment to the term Non-Professional will not substantively affect Rule 7010(k)'s requirements, as amended.


      ATTACHMENT A

      7010. System Services

      (a) through (j) No change.
      (k) Trade Reporting and Compliance Engine (TRACE)
      The following charges shall be paid by participants for the use of the Trade Reporting and Compliance Engine ("TRACE"):
      System Fees Transaction Reporting Fees Market Data Fees
      Level I Trade Report Only Web Browser Access — $20/month per user ID

      Level II Full Service Web
      Browser Access — $80/month
      per user ID
      Trades up to and including $200,000 par value —
      $0.475/trade;

      Trades between $201,000 and $999,999 par value — $0.002375 times the number of bonds
      traded/trade;

      Trades of $1,000,000 par value or more — $2.375/trade
      BTDS Professional Real-Time Data Display — $60/month per terminal[, except]
      CTCI/Third Party —
      $25/month/per firm
      Cancel/Correct — $1.50/trade Vendor Real-Time Data Feed — $1,500/month
      for Real-Time TRACE transaction data, except
      for qualifying Tax-Exempt Organizations
         "As of" Trade Late — $3/trade Vendor Real-Time Data Feed — $400/month for Real-Time TRACE transaction data for
      qualifying Tax-Exempt Organizations
      [BTDS
      Internal Usage Authorization — $500/month
      per application/service for Real-Time and
      Delayed-Time Data]
            BTDS Non-Professional Real-Time Data Display — No charge

      [BTDS External Usage Authorization — $1,000/month per application/service for Real-Time and Delayed-Time Data][BTDS Non-Professional Real-Time Data Display — No charge]
      (1) through (2) No change.
      (3) Market Data Fees

      Professionals and Non-Professionals[non-professionals] may subscribe to receive Real-Time [and Delayed-Time]TRACE transaction data disseminated by NASD in one or more of the following ways for the charges specified, as applicable. Members, vendors and other redistributors shall be required to execute appropriate agreements with NASD.
      (A) Professional Fees
      Professionals may subscribe for the following:
      (i) No change.
      (ii) [Reserved.]Vendor Real-Time Data Feed Fee of $1,500 per month for Real-Time TRACE transaction data for any person or organization (other than a Tax-Exempt Organization) that receives a Real-Time TRACE transaction data feed. The fee entitles use in one or more of the following ways: internal operational and processing systems, internal monitoring and surveillance systems, internal price validation, internal portfolio valuation services, internal analytical programs leading to purchase/sale or other trading decisions, and other related activities, and the repackaging of market data for delivery and dissemination outside the organization, such as indices or other derivative products. (This fee does not include per terminal charges for each interrogation or display device receiving Real-Time TRACE transaction data.) 2
      (iii) Vendor Real-Time Data Feed Fee of $400 per month for Real-Time TRACE transaction data received by a Tax-Exempt Organization as defined in Rule 7010(k)(3) for the Tax-Exempt Organization to use solely to provide Non-Professionals access to Real-Time TRACE transaction data at no charge. [BTDS Internal Usage Authorization Fee of $500 per month, per application/service for internal dissemination of Real-Time and/or Delayed-Time TRACE transaction data used in one or more of the following ways in a single application/service: internal operational and processing systems, internal monitoring and surveillance systems, internal price validation, internal portfolio valuation services, internal analytical programs leading to purchase/sale or other trading decisions, and other related activities.2]
      [(iv) BTDS External Usage Authorization Fee of $1,000 per month, per application/service for dissemination of Real-Time and/or Delayed-Time TRACE transaction data used in one or more of the following ways in a single application/service: repackaging of market data for delivery and dissemination outside the organization, such as indices or other derivative products.3]
      (B) Non-Professional Fees
      There shall be no charge paid by a Non-Professional[non-professional] for receiving all or any portion of Real-Time TRACE transaction data disseminated through TRACE.
      (C) Definitions
      [(i) "Delayed Time" as used in Rule 7010(k)(3) shall mean that period of time starting four hours after the time of dissemination by NASD of transaction data on a TRACE-eligible security, and ending at 11:59:59 p.m. Eastern Time that calendar day.]
      (i) [(ii)]"Non-Professional" – [A non-professional subscriber must provide certain information to NASD and shall receive TRACE market data primarily for his or her personal, noncommercial use.] As used in Rule 7010(k)(3) a "Non-Professional" ["non-professional"]is a natural person who [is neither:] uses TRACE transaction data solely for his or her personal, non-commercial use. A Non-Professional subscriber must agree to certain terms of use of the TRACE data, including that he or she receive and use the TRACE transaction data solely for his or her personal, noncommercial use. Persons who are excluded from the definition of "Non-Professional" include a person that:
      a. is not a natural person;
      [a.]b. is registered or[nor] qualified in any capacity with the Commission, the Commodity Futures Trading Commission, any state securities agency, any securities exchange or association, or any commodities or futures contract market or association, or an employee of the above and, with respect to any person identified in this subparagraph b., uses TRACE transaction data for other than personal, non-commercial use;[who uses such information primarily for business-related activities;]
      [b.]c. is engaged as an "investment adviser" as that term is defined in Section 202(a)(11) of the Investment Advisers Act of 1940 (whether or not registered or qualified under that Act), or an employee of the above and, with respect to any person identified in this subparagraph c., uses TRACE transaction data for other than personal, non-commercial use;[who uses such information primarily for business-related activities;]
      [c.]d. is employed by a bank, insurance company or other organization exempt from registration under federal or state securities laws to perform functions that would require registration or qualification if such functions were performed for an organization not so exempt[;], or any other employee of a bank, insurance company or such other organization referenced above and, with respect to any person identified in this subparagraph d., uses TRACE transaction data for other than personal, non-commercial use; or
      [d.]e. is engaged in, or has the intention to engage in, any redistribution of all or any portion of the TRACE transaction data.[information disseminated through TRACE.]
      (ii) "Tax-Exempt Organization" as used in Rule 7010(k)(3) means an organization that is described in Section 501(c) of the Internal Revenue Code (26 U.S.C. §501(c)); has received recognition of the exemption from federal income taxes from the Internal Revenue Service; and obtains and uses Real-Time TRACE transaction data solely for redistribution to Non-Professionals, as defined for purposes of Rule 7010(k)(3), at no charge.
      (iii) No change.
      (D) No change.
      (l) through (v) No change.

      2 Under the Vendor Real-Time Data Feed Fee and service, Real-Time TRACE transaction data may not be used in any interrogation display devices or any systems that permit end users to determine individual transaction pricing.

      [2 Under this service, Real-Time and/or Delayed-Time TRACE transaction data may not be used in any interrogation display devices, any systems that permit end users to determine individual transaction pricing, or disseminated to any external source.]

      [3 Under this service, Real-Time and/or Delayed-Time TRACE transaction data may not be used in any interrogation display devices or any systems that permit end users to determine individual transaction pricing.]

    • 05-36 SEC Approves New Interpretive Material to Rule 10308 Regarding Arbitrators Who Also Serve as Mediators

      View PDF File

      GUIDANCE

      Mediators as Arbitrators

      Effective Date: May 6, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance

      Arbitration
      Dispute Resolution
      Mediation

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved a new Interpretive Material (IM) to Rule 10308 of the NASD Code of Arbitration Procedure (Code) relating to mediators who also serve as arbitrators.1 The amendments clarify that (1) fees for service as a mediator are not included in determining whether an attorney, accountant, or other professional derives 10 percent of his or her annual revenue from industry-related parties; and (2) service as a mediator is not included in determining whether an attorney, accountant, or other professional devotes 20 percent or more of his or her professional work to securities industry clients. IM-10308 can be found in this Notice as Attachment A.

      The effective date of this rule change is May 6, 2005, for arbitrator applications received or arbitrator disclosures reviewed on or after that date.

      Questions/Further Information

      Questions regarding this Notice may be directed to Jean I. Feeney, Vice President and Chief Counsel, Dispute Resolution, at (202) 728-6959 or jean.feeney@nasd.com; or Barbara L. Brady, Associate Vice President and Director of Neutral Management, Dispute Resolution, at (212) 858-4352 or barbara.brady@nasd.com.

      Background and Discussion

      Rule 10308 of the Code classifies arbitrators as "public" or "non-public." When investors have a dispute with broker-dealer firms or associated persons in NASD arbitration, they are entitled to have their cases heard by 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 Several rule changes relating to arbitrator classification were approved by the SEC and implemented by NASD on July 19, 2004.3 These changes amended the definitions of public and non-public arbitrators.

      In the course of implementing the 2004 arbitrator classification amendments, NASD surveyed its entire roster of arbitrators, asking questions that tracked the new definitions. In light of information contained in their responses, some arbitrators were reclassified from public to non-public or from non-public to public, and some arbitrators were dropped from the roster for various reasons.

      One new part of the rule provided that arbitrators who were otherwise qualified as public could not continue to serve as public if their firms derived more than 10 percent of their revenue from industry parties. Specifically, Rule 10308(a)(5)(A) was amended to read as follows:

      The term "public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and…(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)….

      Some arbitrators who also serve as mediators raised a concern about the application of the above rule to their practice, because both sides in mediation normally pay a share of the mediator's fees. They noted that the above rule change could be construed broadly enough to encompass income in the form of mediation fees paid by industry parties, meaning that these mediators would no longer qualify as public arbitrators under the new rule. A similar situation could arise with regard to Rule 10308(a)(4)(C) , which classifies an arbitrator as non-public if the person devoted 20 percent or more of his or her professional work in the past two years to securities industry clients. This was not the intent of the recent rule changes. Mediators are expected to be neutral and do not represent either side in a mediation.

      Therefore, NASD is issuing a clarification in IM-10308 to make clear that, so long as the mediator is acting in the capacity of a mediator and is not representing a party in the mediation: (1) fees for service as a mediator are not included in determining whether an attorney, accountant, or other professional derives 10 percent of his or her annual revenue from industry-related parties under Rule 10308(a)(5)(A)(iv); and (2) service as a mediator is not included in determining whether an attorney, accountant, or other professional devotes 20 percent or more of his or her professional work to securities industry clients, for purposes of Rule 10308(a)(4)(C).

      In considering this matter, NASD recognizes that parties may wish to know that an arbitrator on their list also serves as a mediator and may be familiar with the industry parties or their counsel. NASD will prepare materials to inform arbitrators of the need to disclose this fact on their disclosure forms, and will provide this information to parties on whose case the arbitrators may serve.

      Effective Date Provisions

      The new Interpretive Material will become effective on May 6, 2005. The amendments will apply to arbitrator applications received or arbitrator disclosures reviewed on or after that date. Because this Interpretive Material clarifies NASD's original intent in changing arbitrator classifications in July 2004, it will apply to all arbitrators on the NASD roster, as well as to new and pending applications. NASD Dispute Resolution staff will contact those arbitrators who were removed from the roster because of misunderstandings over the effect of mediator fees on Rule 10308(a)(4)(C) and (a)(5)(A)(iv). Other arbitrators who believe they are affected by this change may request reinstatement to the roster.


      1 Exchange Act Rel. No. 51325 (Mar. 7, 2005), 70 Fed. Reg. 12522 (Mar. 14, 2005) (File No. SR-NASD-2005-007).

      2 See Rule 10308(b). Rules governing intraindustry arbitrations use the same definitions of public and non-public, although the panel composition may vary depending on the nature of the dispute, as well as the amount in dispute. See Rule 10202.

      3 See Securities Exchange Act Rel. No. 49573 (Apr. 16, 2004), 69 Fed. Reg. 21871 (Apr. 22, 2004) (File No. SR-NASD-2003-095), and Notice to Members 04-49 (SEC Approves Amendments to Rules 10308 and 10312 Regarding Arbitrator Classification, Disclosures, and Challenges; Effective Date: July 19, 2004) (June 2004).


      ATTACHMENT A

      New text is underlined.

      IM-10308. Arbitrators Who Also Serve as Mediators

      Mediation services performed by mediators who are also arbitrators shall not be included in the definition of "professional work" for purposes of Rule 10308(a)(4)(C), so long as the mediator is acting in the capacity of a mediator and is not representing a party in the mediation.
      Mediation fees received by mediators who are also arbitrators shall not be included in the definition of "revenue" for purposes of Rule 10308(a)(5)(A)(iv), so long as the mediator is acting in the capacity of a mediator and is not representing a party in the mediation.
      Arbitrators who also serve as mediators shall disclose that fact on their arbitrator disclosure forms.

    • 05-35 SEC Approves Amendments to IM-10104 and Rule 10315 to Permit Arbitrations in Foreign Hearing Locations

      View PDF File

      GUIDANCE

      Foreign Hearing Locations

      Effective Date: June 6, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance

      Arbitration
      Dispute Resolution
      Foreign Hearing Locations

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to IM-10104 and Rule 10315 of the NASD Code of Arbitration Procedure (Code) to permit parties to have their hearings in a foreign hearing location, and to allow the director of arbitration to authorize a higher or additional honorarium for the use of a foreign hearing location.1

      The text of the amendments is set forth in Attachment A. The amendments will be effective on June 6, 2005, and will apply to any arbitration claims filed on or after June 6, 2005.

      Questions/Further Information

      Questions regarding this Notice may be directed to Mignon McLemore, Assistant Chief Counsel, NASD Dispute Resolution, at (202) 728-8151 or mignon.mclemore@nasd.com.

      Discussion

      NASD has amended IM-10104 and Rule 10315 of the Code to permit parties to have their hearings in a foreign hearing location, and to allow the director of arbitration to authorize a higher or additional honorarium for the use of a foreign hearing location.

      Background

      In accordance with NASD Rule 10315, the director of arbitration (Director) sets the hearing location for NASD arbitration cases. Currently, for cases involving public customers who reside in the United States (U.S.), the Director generally designates the hearing location that is closest to the public customer's residence at the time of the events in dispute.2 However, for claimants who reside outside of the U.S., the Director sets the hearing in the NASD hearing location that is most logical for the case. Generally, when the claimant resides outside the U.S., the Director will consider a number of factors in determining a hearing location, including the preferences of the parties, the location of counsel or witnesses, and the availability of transportation routes to cities in the U.S.

      In an effort to accommodate parties who reside outside the U.S., NASD has amended the Code to permit parties to have their hearings in a foreign hearing location and to allow the Director to authorize a higher or additional honorarium for the use of a foreign hearing location.

      The first foreign hearing location for NASD arbitrations will be in London. NASD has entered into an agreement with the Chartered Institute of Arbitrators (CIArb) under which CIArb will make its neutrals available for NASD's roster in London. CIArb is based in London and maintains a worldwide roster of neutrals, providing dispute resolution services for banking, finance, business, commercial, and international issues. NASD believes that its agreement with CIArb will provide those international constituents of NASD with access to a local roster of experienced neutrals,3 as well as the convenience and cost efficiency of conducting hearing sessions within a reasonable distance from their place of business or residence.

      Determination of a Foreign Hearing Location

      Rule 10315 permits arbitrations to be held in a foreign hearing location. Under the rule, use of a foreign hearing location will be voluntary. For an arbitration to be held in a foreign hearing location, a claimant residing outside of the U.S. will file with NASD the claim information, submission agreements, payment, and other related documents currently required by NASD rules. At this point, the claimant can request that the arbitration be held in a foreign hearing location, or NASD staff will notify the claimant of the option of using a foreign hearing location, based on a review of the claim filing information. If the claimant wishes to use a foreign hearing location, NASD staff will seek the written agreement of the respondents.

      Foreign Hearing Location Surcharge

      As a condition of using a foreign hearing location, the parties must agree to accept the foreign hearing location surcharge, which the Director may authorize under IM-10104. NASD will assess the daily foreign hearing location surcharge to parties agreeing to use the foreign hearing location to cover the additional daily cost of the foreign neutrals' service, which may be higher than the arbitrator honorarium rates paid by NASD. This surcharge will be used solely to pay additional honorarium to the foreign neutrals, and will not be used to cover any other NASD expenses. The amount of the surcharge will vary depending on factors such as the daily rates for neutrals in a foreign hearing location and the currency exchange rates.

      This surcharge will be apportioned equally among the parties, unless they agree otherwise. However, the foreign arbitrators will have the authority to apportion the surcharge as provided in NASD Rules 10205 and 10332.4

      Effective Date

      The amendments described in this Notice are effective on June 6, 2005, and will apply to any arbitration claims filed on or after June 6, 2005.


      1 Exchange Act Release No. 51324 (March 7, 2005) (File No. SR-NASD-2004-042), 70 Federal Register 12257 (March 11, 2005).

      2 NASD Dispute Resolution maintains a roster of qualified neutrals (i.e., arbitrators and mediators) in 68 cities in the U.S. and Puerto Rico, and has at least one hearing location in every state and the District of Columbia.

      3 CIArb's neutrals are required to complete a rigorous training program and to pass testing and interview requirements before being qualified for appointment to cases. CIArb's neutrals must meet NASD's background qualification requirements. In addition, NASD has conducted training for CIArb neutrals on NASD arbitration rules and procedures.

      4 The Code will govern all case administration in instances where the parties elect to use a foreign hearing location.


      ATTACHMENT A

      New language is underlined; deletions in brackets.

      Code of Arbitration Procedure

      * * *

      IM-10104. Arbitrators' Honorarium

      All persons selected to serve as arbitrators pursuant to the Association's Code of Arbitration Procedure shall be paid an honorarium for each hearing session (including a prehearing conference) in which they participate.
      The honorarium shall be $200 for each hearing session and $75 per day additional honorarium to the chairperson of the panel. The honorarium for a case not requiring a hearing shall be $125.
      The honorarium for travel to a canceled hearing session shall be $50. If a hearing session other than a prehearing conference is adjourned pursuant to Rule 10319(d), each arbitrator shall receive an additional honorarium of $100.
      The Director may authorize a higher or additional honorarium for the use of a foreign hearing location.

      * * *

      10315. [Designation of Time and Place] Determination of Hearing Location

      (a) Designation of Time and Place of Hearing
      The Director shall determine the time and place of the first meeting of the arbitration panel and the parties, whether the first meeting is a pre-hearing conference or a hearing, and shall give notice of the time and place at least 15 business days prior to the date fixed for the first meeting by personal service, registered or certified mail to each of the parties unless the parties shall, by their mutual consent, waive the notice provisions under this Rule. The arbitrators shall determine the time and place for all subsequent meetings, whether the meetings are pre-hearing conferences, hearings, or any other type of meetings, and shall give notice as the arbitrators may determine. Attendance at a meeting waives notice thereof.
      (b) Foreign Hearing Location
      (1) If the Director and all parties agree, parties may have their hearing in a foreign hearing location and conducted by foreign arbitrators, provided that the foreign arbitrators have:
      (A) met NASD background qualifications for arbitrators;
      (B) received training on NASD arbitration rules and procedures; and
      (C) satisfied at least the same training and testing requirements as those arbitrators who serve in U. S. locations of NASD.
      (2) The parties shall pay an additional surcharge for each day of hearings held in a foreign hearing location. The amount of the surcharge will be determined by the Director and must be agreed to by the parties before the foreign hearing location may be used. This surcharge shall be specified in the agreement to use a foreign hearing location and shall be apportioned equally among the parties, unless they agree otherwise. The foreign arbitrators shall have the authority to apportion this surcharge as provided in Rules 10205 and 10332.

      * * * *

    • 05-34 SEC Approves Amendments to Rule 2711 to Prohibit Research Analysts from Participating in a Road Show and from Communicating with Customers in the Presence of Investment Banking Personnel or Company Management about an Investment Banking Services Transaction

      View PDF File

      GUIDANCE

      Research Analysts and Research Reports

      Compliance Date: June 6, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Investment Banking
      Legal & Compliance
      Operations
      Research
      Senior Management

      Communications with the Public
      Investment Banking
      Research Analysts

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to Rule 2711 (Research Analysts and Research Reports) to further insulate research analysts from the potential influences of the investment banking department. The amendments prohibit (1) a research analyst from participating in a road show related to an investment banking services transaction and from engaging in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction and (2) investment banking department personnel from directing a research analyst to engage in sales and marketing efforts and other communications with a customer about an investment banking services transaction. The proposed rule change expressly permits analysts to educate investors and internal personnel about an investment banking services transaction, provided such communications are "fair, balanced and not misleading."

      The new rule can be found in Attachment A of this Notice and becomes effective on June 6, 2005.

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Philip Shaikun, Associate General Counsel, Regulatory Policy and Oversight, at (202)-728-8451.

      Background and Discussion

      During the past few years, NASD has implemented a series of rules to increase the objectivity and reliability of research. While the rules generally foster objectivity through extensive conflict of interest disclosure requirements, they also prohibit certain conduct to minimize the primary source of biased research: the influences of investment banking. To that end, NASD Rule 2711 prohibits compensation paid to analysts based on their contributions to, or the success of, the investment banking department. The rule further prohibits analysts from participating in efforts to solicit investment banking business, including "pitches" to earn an underwriting mandate for a securities offering.

      The new rule fortifies the wall between investment banking and research by prohibiting research analysts from participating in a road show related to an investment banking services transaction and from communicating with current or prospective customers in the presence of investment banking department personnel or company management about such an investment banking services transaction. Additionally, the rule prohibits investment banking personnel from directing a research analyst to engage in sales and marketing efforts and other communications with a current or prospective customer about an investment banking services transaction.

      By prohibiting research analyst participation in road shows and from communicating with customers in the presence of investment bankers or company management, the rule will further reduce pressure on research analysts to give an overly optimistic assessment of a particular transaction. It also will remove any suggestion to investors in attendance at a road show that the analyst will give positive coverage to the issuer or that the analyst endorses all of the views expressed by the company or investment banking department personnel.

      The rule expressly permits research analysts to educate investors and member personnel about a particular offering or other transaction, provided the communication occurs outside the presence of the company or investment banking department personnel. Such permissible communications to investors and internal personnel must be fair, balanced, and not misleading, taking into account the overall context in which such communications are made. Thus, the rule preserves the ability of the research analyst to give a candid assessment of a transaction or sale of securities—including investment risks—in settings where the influences of investment banking and client pressure are minimized.

      Finally, the rule prohibits investment banking department personnel from directing a research analyst to engage in sales or marketing efforts and any other communication with a current or prospective customer about an investment banking services transaction. This provision eliminates any attempt by investment banking personnel to pressure a research analyst to engage in otherwise permissible communications, thereby further insulating research analysts from influences that could affect their objectivity.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      Rule 2711. Research Analysts and Research Report

      (a) through (b) No change.
      (c) Restrictions on Communications with the Subject Company
      (1) through (4) No change.
      (5) A research analyst is prohibited from directly or indirectly:
      (A) participating in a road show related to an investment banking services transaction; and
      (B) engaging in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction.
      (6) Investment banking department personnel are prohibited from directly or indirectly:
      (A) directing a research analyst to engage in sales or marketing efforts related to an investment banking services transaction; and
      (B) directing a research analyst to engage in any communication with a current or prospective customer about an investment banking services transaction.
      (7) Any written or oral communication by a research analyst with a current or prospective customer or internal personnel related to an investment banking services transaction must be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made.
      (d) through (k) No change.

    • 05-33 Short Sales in Pilot Securities and Order-Marking Requirements under SEC Regulation SHO

      View PDF File

      GUIDANCE

      Issues Relating to the SEC's Adoption of Regulation SHO

      SUGGESTED ROUTING

      KEY TOPICS

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

      Order Audit Trail System (OATS)
      Order Marking
      SEC Regulation SHO
      Short Sales

      Executive Summary

      NASD, in conjunction with The Nasdaq Stock Market, Inc. (NASDAQ), is issuing this Notice to Members (NTM) to advise member firms and other interested parties of certain actions and issues surrounding the adoption of Regulation SHO by the Securities and Exchange Commission (SEC). First, on January 3, 2005 and April 15, 2005, the staff of the SEC Division of Market Regulation issued two No-Action Letters granting relief from the order-marking requirements under Regulation SHO in certain circumstances. In this regard, NASDAQ has established a "masking" process, as described in the SEC's April 15, 2005, No-Action Letter. Second, NASD wishes to remind members using their own proprietary or vendor order management systems to accept and execute short sales in Regulation SHO pilot securities that such members are responsible for making appropriate system changes to ensure proper handling of pilot securities. In this regard, NASD is encouraging such members to review and test their systems to ensure readiness for the May 2, 2005, Regulation SHO pilot order effective date. Finally, with respect to Order Audit Trail System (OATS) requirements, members also may mark their OATS report consistent with the SEC's order-marking relief.

      Questions/Further Information

      Questions regarding this Notice may be directed to the Office of General Counsel, Regulatory Policy and Oversight, NASD, at (202) 728-8071; the Legal Section, Market Regulation, NASD, at (240) 386-5126; or the Office of General Counsel, The Nasdaq Stock Market, Inc., at (301) 978-8400.

      Discussion

      As further detailed in NTM 04-93, the SEC recently adopted certain provisions of a new short sale regulation, designated Regulation SHO.1 Regulation SHO consists, among other provisions, of new SEC Rule 200(g) (order-marking requirements) and new SEC Rule 202T (short sale price test pilot). SEC Rule 200(g) of Regulation SHO requires that sell orders in all equity securities be marked "long," "short," or "short exempt."2 SEC Rule 202T established a procedure for the SEC to suspend on a temporary basis the operation of SEC Rule 10a-1(a) and any short sale price test of any exchange or national securities association for those securities designated by SEC order. Together with the Regulation SHO adopting release, the SEC issued an order (Pilot Order) establishing a one-year pilot (Pilot) suspending the provisions of SEC Rule 10a-1(a) and any short sale price test of any exchange or national securities association for short sales of certain securities for certain time periods (Pilot Securities).3 Short sales of Pilot Securities effected during the Pilot should be marked "short exempt."

      The Pilot was originally scheduled to commence on January 3, 2005, and end on December 31, 2005. However, a large number of broker-dealers notified the SEC that it would be inefficient and very costly for them to comply with the order-marking requirements for Pilot Securities because of the significant systems changes necessary to ensure proper marking. Further, broker-dealers raised concerns that these systems changes may be in effect only for the one-year Pilot. To assist firms with these issues and concerns, the market centers agreed to "mask" the short sale character of any short sale orders in Pilot Securities so they are executed as short exempt. To allow adequate time for market centers to make necessary programming changes in this regard, the SEC issued a second pilot order postponing the one-year Pilot to commence on May 2, 2005, and end on April 28, 2006.4

      SEC No-Action Relief

      On January 3, 2005, SEC staff issued a No-Action Letter to grant relief from the ordermarking requirements of SEC Rule 200(g) of Regulation SHO in certain circumstances. The letter provides that SEC staff will not recommend enforcement action under SEC Rule 200(g) of Regulation SHO against a broker-dealer that marks "short," rather than "short exempt," a short sale effected in certain specified classes of securities or during certain specified time periods that are exempt from the provisions of SEC Rule 10a-1(a) or any short sale price test of any exchange or national securities association as set forth in the No-Action Letter. The No-Action relief is subject to certain conditions described in the letter, including without limitation, that in no event will broker-dealers executing exempt short sales be allowed to mark such sales "long." A copy of the letter is available on the SEC's Web site at mr-noaction www.sec.gov/divisions/marketreg/mr-noaction/sia010305.htm.

      In addition, on April 15, 2005, SEC staff issued a No-Action Letter granting further relief from the order-masking requirements. Specifically, this letter provides that SEC staff will not recommend enforcement action against a broker-dealer that marks "short" rather than "short exempt" a short sale effected in any Pilot Security where the broker-dealer, among other things, routes the orders to a market center that has a "masking" process in place. A copy of the letter is available on the SEC's Web site at www.sec.gov/divisions/marketreg/mr-noaction/sia041505.htm.

      NASD encourages members and other interested parties to review both No-Action Letters, including the specific conditions of the relief. Additional guidance and information about the Pilot and order-marking requirements are available on the SEC's Web site at www.sec.gov/spotlight/shopilot.htm.

      Short Sales in Pilot Securities

      Upon commencement of the Pilot on May 2, 2005, orders in NASDAQ-listed and exchange-listed Pilot Securities (including orders entered prior to and remaining open as of May 2, 2005) entered into the NASDAQ Market Center execution system will not be subject to a price test. Broker-dealers that use a proprietary or vendor order management system to execute orders internally must ensure that the appropriate system changes are completed prior to May 2, 2005 such that sell short orders in Pilot Securities are handled and executed in accordance with Regulation SHO. In particular, broker-dealers must ensure that internalized sell short orders in Pilot Securities are executed without the application of a price test. Accordingly, NASD encourages member firms that use such systems to test these systems to ensure proper handling of Pilot Securities.

      Upon commencement of the Pilot on May 2, 2005, and for the duration of the Pilot, broker-dealers may mark sell short orders in Pilot Securities "short" instead of "short exempt" when entering them into the NASDAQ Market Center execution system. The NASDAQ Market Center execution system will not perform a short sale validation of sell short orders in Pilot Securities, regardless of whether such orders entered into the NASDAQ Market Center execution system are marked "short" or "short exempt."

      Similarly, for purposes of OATS reporting, members may mark orders and transactions in Pilot Securities as "sell short," if appropriate, rather than "sell short exempt." Members are reminded, however, that this guidance is limited to orders and transactions covered by the SEC's No-Action relief. For example, short sale transactions that qualify for other exemptions under Rule 3350 or SEC Rule 10a-1, such as the market maker exemption, must continue to be marked as "short sale exempt."


      1 See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004).

      2 The compliance date for SEC Rule 200(g) of Regulation SHO was January 3, 2005.

      3 See Exchange Act Release No. 50104 (July 28, 2004), 69 FR 48032 (August 6, 2004) (Pilot Order). The Pilot Order suspends the price tests for: (1) short sales in the stocks identified in Appendix A of the Pilot Order; (2) short sales in any security included in the Russell 1000 index effected between 4:15 p.m. EST and the open of the consolidated tape on the following day; and (3) short sales in any security not included in paragraphs (1) and (2) above effected in the period between the close of the consolidated tape and the open of the consolidated tape the following day.

      4 See Exchange Act Release No. 50747 (November 29, 2004), 69 FR 70480 (December 6, 2004) (Second Pilot Order).

    • 05-32 SEC Approves Amendments to NASD Rule Governing Predispute Arbitration Agreements with Customers

      View PDF File

      GUIDANCE

      Predispute Arbitration Agreements

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Arbitration
      Books and Records
      Predispute Arbitration Agreements
      Rule 3110

      Executive Summary

      NASD Rule 3110(f) governs a member's use of predispute arbitration agreements with customers. The Securities and Exchange Commission (SEC) has approved changes to NASD Rule 3110(f) to conform the NASD delivery requirement for predispute arbitration agreements with the SEC's recordkeeping rules.1 The rule change also extends the date by which firms must begin using the disclosure required by the recent changes to NASD Rule 3110(f)(1) from May 1, 2005 until June 1, 2005.2 The changes to NASD Rule 3110(f) are attached as Attachment A (new language is underlined; deletions are in brackets).

      Questions/Further Information

      Questions concerning this Notice may be directed to Laura Gansler, Associate General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-8275; or Brant K. Brown, Counsel, OGC, RPO, at (202) 728-6927.

      Discussion

      Delivery Requirement

      On November 22, 2004, the SEC approved changes to NASD Rule 3110(f), which governs the use of predispute arbitration agreements with customers.3 The primary purposes of those changes were to require enhanced disclosure to customers about the arbitration process and to clarify the use of certain clauses in predispute arbitration agreements. Those changes also required that members provide a copy of any customer agreement containing a predispute arbitration clause to the customer, who must acknowledge receipt thereof on the agreement or on a separate document, at the time of signing.4 The rule change announced in this Notice amends the time requirement for delivery of a copy of the customer agreement from the time of signing to within 30 days of signing.5 This change conforms the delivery requirement in NASD Rule 3110(f)(2)(B) to that in the SEC's recordkeeping rules.6

      As amended, NASD Rule 3110(f)(3)(A) requires members to provide customers who request a copy of any predispute arbitration clause or client agreement with a copy within 10 business days of the request. The primary purpose of this provision is to address instances in which members have refused to provide additional copies of agreements to customers who requested them after a dispute arose, making it difficult for customers who had misplaced their original copies to assess their rights and obligations under the agreement. However, it is possible that a customer may make a request pursuant to this provision before the original copy is delivered as required by Rule 3110(f)(2)(B). In such cases, members must provide a copy of the agreement within 10 business days. For example, if a customer requests a copy of the agreement on the date of signing, the member must provide the copy to the customer within 10 business days of receiving that request. However, members may not extend the 30-day time period for compliance with the delivery requirement in NASD Rule 3110(f)(2)(B), even though a member has 10 business days in which to provide a copy of the agreement to a customer upon request. For example, if a customer requests a copy of the customer agreement 25 days after signing, the member still is required to provide the customer with the copy within 30 days of the signing date (rather than within 10 business days of the date the firm received the request). The language added to NASD Rule 3110(f)(3)(A) addresses this situation.

      Extension of Compliance Date

      The changes to NASD Rule 3110(f) approved by the SEC on November 22, 2004, are scheduled to become effective on May 1, 2005. To give members more time to amend their customer agreements to comply with the changes to NASD Rule 3110(f)(1) announced in Notice to Members (NTM) 05-09, the compliance date by which members must begin using the disclosure required by those changes has been extended from May 1, 2005 until June 1, 2005.7

      Effective Date

      By May 1, 2005, members are required to comply with the recent changes to NASD Rule 3110(f) as set forth in NTM 05-09 and this Notice, with the exception of the new disclosure required by NASD Rule 3110(f)(1). Members are not required to use customer agreements with the new disclosure until June 1, 2005; however, members may use the new language earlier if they so choose. Beginning June 1, 2005, all customer agreements containing predispute arbitration clauses must contain the new disclosure required by NASD Rule 3110(f)(1).


      1 SEC Rel. No. 34-51526 (Apr. 12, 2005), 70 Fed. Reg. 20407 (Apr. 19, 2005) (SR-NASD-2005-045).

      2 NASD announced the changes to the predispute arbitration agreement disclosure requirements in Notice to Members 05-09.

      3 SEC Rel. No. 34-50713 (Nov. 22, 2004), 69 Fed. Reg. 70293 (Dec. 3, 2004) (SR-NASD-98-74).

      4 Before the changes, members were required to provide copies of predispute arbitration agreements to customers; however, the rule did not specify when they must do so.

      5 The rule change also makes a technical amendment by renumbering the four subparagraphs in NASD Rule 3110(f)(4) to conform the numbering in those subparagraphs to existing NASD rule format.

      6 See SEC Rule 17a-3(a)(17)(i)(B)(1); SEC Rel. No. 34-44992 (Oct. 26, 2001), 66 Fed. Reg. 55817 (Nov. 2, 2001). The earlier changes to NASD Rule 3110(f) were first filed in 1998, prior to the adoption of the SEC rule. See 69 Fed. Reg. at 70293.

      7 The effective date of the Rule 3110 changes was originally linked to the effective date of amendments to NASD Rule 10304, governing time limits on filing claims in arbitration, which will also take effect on May 1, 2005. See SEC Rel. No. 34-50714 (Nov. 22, 2004), 69 Fed. Reg. 69971 (Dec. 1, 2004) (SR-NASD-2003-101). Extension of the compliance date for NASD Rule 3110(f)(1) does not extend the effective date of the bifurcation provision in NASD Rule 3110(f)(5), which remains the same (May 1, 2005) as the amendments to NASD Rule 10304, or the applicability of any provision in NASD Rule 10304.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      3110. Books and Records

      (a) – (f)(2)(A) No change.
      (f)
      (2)(B) [At the time] Within thirty days of signing, a copy of the agreement containing any such clause shall be given to the customer who shall acknowledge receipt thereof on the agreement or on a separate document.
      (3)(A) A member shall provide a customer with a copy of any predispute arbitration clause or customer agreement executed between the customer and the member, or inform the customer that the member does not have a copy thereof, within ten business days of receipt of the customer's request. If a customer requests such a copy before the member has provided the customer with a copy pursuant to subparagraph (2)(B) of this Rule, the member must provide a copy to the customer by the earlier date required by this subparagraph (3)(A) or by subparagraph (2)(B).
      (f)(3)(B) No change.
      (4) No predispute arbitration agreement shall include any condition that:
      (A) [(i)] limits or contradicts the rules of any self-regulatory organization;
      (B) [(ii)] limits the ability of a party to file any claim in arbitration;
      (C) [(iii)] limits the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement;
      (D) [(iv)] limits the ability of arbitrators to make any award.
      (f)(5) – (h) No change.

    • 05-31 Pilot Program to Increase Position and Exercise Limits for Equity Options and New Reverse Collar Strategy Added to Equity Option Hedge Exemptions

      View PDF File

      GUIDANCE

      Options Position and Exercise Limits

      SUGGESTED ROUTING

      KEY TOPICS

      Institutional
      Legal & Compliance
      Options
      Senior management
      Trading
      Training

      Exercise Limits
      Hedge Exemption
      Options
      Position Limits
      Rule 2860

      Executive Summary

      On March 30, 2005, NASD filed for immediate effectiveness with the Securities and Exchange Commission (SEC) amendments to Rule 2860increasing, for a pilot period, certain stock options position and exercise limits and adding permanently reverse collars to the enumerated strategies set forth in the equity option hedge exemptions.

      The rules, as amended, are set forth in Attachment A. The amendments became effective March 30, 2005.

      Questions/Further Information

      Questions concerning this Notice may be directed to Gary L. Goldsholle, Associate 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

      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.1 The rule provides that the position limits for equity 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.

      NASD recently adopted amendments to its options position limits tiers to match changes approved by the SEC or adopted by other self-regulatory organizations (SROs) with options rules.2 Pursuant to a pilot program that began March 30, 2005, and ends September 2, 2005 (Pilot Period), unless extended, the limits for each of the tiers has increased as follows: 1) 13,500 contracts has been increased to 25,000 contracts; 2) 22,500 contracts has been increased to 50,000 contracts; 3) 31,500 contracts has been increased to 75,000 contracts; 4) 60,000 contracts has been increased to 200,000 contracts; and 5) 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.

      Rule 2860(b)(3)(A)(vii) contains the equity option hedge exemptions and allows certain hedged positions to exceed the base limits set forth in the five tiers. Options positions hedged pursuant to one of the qualified equity option hedge strategies are exempt from position limits for standardized options, and subject to position limits of five times the standardized limits for conventional options. At the time the position limits for each of the five tiers were increased, the SEC also approved (or SROs adopted) amendments expanding the available strategies under the equity option hedge exemptions to include "reverse collars."3 NASD has made a conforming change to its equity option hedge exemptions. The equity option hedge exemption for a reverse collar applies to a long call position accompanied by a short put position where the long call expires with the short put and the strike price of the long call equals or exceeds the short put and where each long call and short put position is hedged with 100 shares of the underlying security (or other adjusted number of shares). Neither side of the long call, short put position can be in-the-money at the time the position is established. The addition of the reverse collar hedging strategy as part of the equity option hedge exemptions is permanent and is not part of the pilot program.


      1 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)(VV)). 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)).

      2 See Securities Exchange Act Release No. 51322 (March 4, 2005), 70 FR 12260 (March 11, 2005) (SR-PHLX-2005-17); Securities Exchange Act Release No. 51317 (March 3, 2005), 70 FR 12254 (March 11, 2005) (SR-BSE-2005-10); Securities Exchange Act Release No. 51316 (March 3, 2005), 70 FR 12251 (March 11, 2005) (SR-AMEX-2005-029); Securities Exchange Act Release No. 51295 (March 2, 2005), 70 FR 11292 (March 8, 2005) (SR-ISE-2005-14); Securities Exchange Act Release No. 51286 (March 1, 2005), 70 FR 11297 (March 8, 2005) (SR-PCX-2003-55); Securities Exchange Act Release No. 51244 (February 23, 2005), 70 FR 10010 (March 1, 2005) (SR-CBOE-2003-30).

      3 Id.


      ATTACHMENT A

      New language 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 2, 2005 ("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) 22,500 (or 50,000 during the Pilot Period) option contracts of the put class and the call class on the same side of the market covering the same underlying security, providing that the 22,500 (or 50,000 during the Pilot Period) contract position limit shall only be available for option contracts on securities that underlie Nasdaq or exchange-traded options qualifying under applicable rules for a position limit of 22,500 (or 50,000 during the Pilot Period) option contracts; or
      (iii) 31,500 (or 75,000 during the Pilot Period) option contracts of the put class and the call class on the same side of the market covering the same underlying security providing that the 31,500 (or 75,000 during the Pilot Period) contract position limit shall only be available for option contracts on securities that underlie Nasdaq or exchange-traded options qualifying under applicable rules for a position limit of 31,500 (or 75,000 during the Pilot Period) option contracts; or
      (iv) 60,000 (or 200,000 during the Pilot Period) option contracts of the put and the call class on the same side of the market covering the same underlying security, providing that the 60,000 (or 200,000 during the Pilot Period) contract position limit shall only be available for option contracts on securities that underlie Nasdaq or exchange-traded options qualifying under applicable rules for a position limit of 60,000 (or 200,000 during the Pilot Period) option contracts; or
      (v) 75,000 (or 250,000 during the Pilot Period) option contracts of the put and the call class on the same side of the market covering the same underlying security, providing that the 75,000 (or 250,000 during the Pilot Period) contract position limit shall only be available for option contracts on securities that underlie Nasdaq or exchange-traded options qualifying under applicable rules for a position limit of 75,000 (or 250,000 during the Pilot Period) option contracts; or
      (vi) No Change.
      (vii) Equity Option Hedge Exemptions
      a. The following qualified hedge strategies and positions described in subparagraphs 1. through [5] 6. below shall be exempt from the established position limits under this rule for standardized options. Hedge strategies and positions described in subparagraphs [6] 7. and [7] 8. below in which one of the option components consists of a conventional option, shall be subject to a position limit of five times the established position limits contained in subparagraphs (i) through (vi) above. Hedge strategies and positions in conventional options as described in subparagraphs 1. through [5] 6. below shall be subject to a position limit of five times the established limits contained in subparagraphs (i) through (vi) above. Options positions limits established under this subparagraph shall be separate from limits established in other provisions of this rule.
      1. through 3. No Change.
      4. Reverse Collars — A long call position accompanied by a short put position where the long call expires with the short put and the strike price of the long call equals or exceeds the short put and where each long call and short put position is hedged with 100 shares of the underlying security (or other adjusted number of shares). Neither side of the long call, short put position can be in-themoney at the time the position is established.
      [4.] 5. Collars — A short call position accompanied by a long put position, where the short call expires with the long put, and the strike price of the short call equals or exceeds the strike price of the long put position and where each short call and long put position is hedged with 100 shares (or other adjusted number of shares) of the underlying security or securities convertible into such underlying security. Neither side of the short call/long put position can be in-the-money at the time the position is established.
      [5] 6. Box Spreads — A long call position accompanied by a short put position with the same strike price and a short call position accompanied by a long put position with a different strike price.
      [6] 7. Back-to-Back Options — A listed option position hedged on a one-for-one basis with an over-the-counter (OTC) option position on the same underlying security. The strike price of the listed option position and corresponding OTC option position must be within one strike price interval of each other and no more than one expiration month apart.
      [7] 8. For reverse conversion, conversion, reverse collar and collar strategies set forth above in subparagraphs 2., 3., 4. and 5. [4.], one of the option components can be an OTC option guaranteed or endorsed by the firm maintaining the proprietary position or carrying the customer account.
      b. No Change.
      (viii) Conventional Equity Options
      a. For purposes of this paragraph (b), standardized equity option contracts of the put class and call class on the same side of the market overlying the same security shall not be aggregated with conventional equity option contracts or FLEX Equity Option contracts overlying the same security on the same side of the market. Conventional equity option contracts of the put class and call class on the same side of the market overlying the same security shall be subject to a position limit equal to the greater of:
      1. the basic limit of 13,500 (or 25,000 during the Pilot Period) contracts, or
      2. any standardized equity options position limit as set forth in paragraphs (b)(3)(A)(ii) through (v) for which the underlying security qualifies or would be able to qualify.
      b. In order for a security not subject to standardized equity options trading to qualify for an options position limit of more than 13,500 (or 25,000 during the Pilot Period) contracts, a member must first demonstrate to NASD's Market Regulation Department that the underlying security meets the standards for such higher options position limit and the initial listing standards for standardized options trading.
      (B) through (D) No Change.
      (4) through (24) No Change.

    • 05-30 SEC Approves New Alternative Display Facility (ADF) Pilot Rule Giving NASD Authority to Receive and Review Complaints Alleging Denial of Access to an ADF Market Participant Quote

      View PDF File

      GUIDANCE

      Denial of Access Complaints

      Compliance Date: May 26, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Market Making
      Operations
      Senior Management
      Trading

      Access to Quotations
      Alternative Display Facility
      Market Regulation

      Executive Summary

      On March 10, 2005, the Securities and Exchange Commission (SEC) approved on a pilot basis new NASD Rule 4400A, which gives NASD the authority to receive and review complaints against NASD Market Participants alleging denial of access to their quotations in the Alternative Display Facility (ADF). In addition, the rule sets forth procedures for reviewing such complaints and delegates authority to NASD's Market Regulation Committee (MRC) to review denial of access determinations rendered in accordance with Rule 4400A. The new rule can be found in Attachment A and becomes effective on May 26, 2005.

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Chris Stone, Associate Chief Counsel, Transparency Services, at (202) 728-8457; or Philip Shaikun, Associate General Counsel, Regulatory Policy and Oversight, at (202) 728-8451.

      Background and Discussion

      On July 24, 2002, the SEC approved SR-NASD-2002-97, which authorized NASD to operate the ADF on a pilot basis for nine months.1 The pilot has since been extended until July 26, 2005.2 The ADF is a quotation collection, trade comparison, and trade reporting facility developed by NASD in accordance with the SEC's SuperMontage Approval Order3 and in conjunction with NASDAQ's proposal to register as a national securities exchange.4

      The ADF does not provide an order routing capability; therefore, NASD Rule 4300A requires an NASD Market Participant to provide direct electronic access to other NASD Market Participants and to provide all other NASD members direct electronic access or allow for indirect electronic access to its quotations in the ADF.

      The rule change gives NASD the authority to receive and review complaints against an NASD Market Participant alleging denial of direct or indirect access required by NASD Rule 4300A. The rule change does not include complaints that allege: (1) a denial of direct or indirect access because of non-payment of fees for access to an NASD Market Participant's quotations that are imposed by the NASD Market Participant in accordance with SEC rules and regulations or otherwise; or (2) a specific instance or group of instances over discrete time periods where an NASD Market Participant is alleged not to have not honored its quotation in accordance with applicable SEC and NASD rules with respect to orders received electronically pursuant to NASD Rule 4300A.

      The process under Rule 4400A for a proper denial of access complaint is as follows: The complainant is required to file a written complaint with ADF Operations via facsimile, personal delivery, courier, or overnight mail that specifically alleges denial of access to an NASD Market Participant's quotation. The complainant is required to serve a copy of the complaint by the same means on the opposite party in accordance with NASD Rule 9134(b).

      An officer designated by a President of NASD or one of its divisions then reviews the denial of access complaint to make a determination on the merits of the complaint. The officer may, at his or her discretion, conduct further investigation before rendering a decision as to whether there has been a denial of access in contravention of Rule 4300A. In the event that the officer determines that there has been such a denial of access, he or she will direct the offending party to provide access to its ADF quotes and may limit participation in the ADF by such party if it does not comply promptly with the directive to provide access. The directive and any action to limit participation in the ADF will become effective and remain in place during the pendency of any further review or appeal.

      The rule change also provides for a review of the initial determination by a three-member subcommittee consisting of current or former MRC members. A party seeking such review is required to submit a written appeal to NASD by the close of business on the next business day after receipt of the initial determination and to simultaneously serve a copy of the written appeal to the opposite party. The party seeking review is accorded twenty-four (24) hours, or a longer period determined by NASD staff, after submission of the appeal to provide to NASD and the opposing party any supporting written information concerning the appeal. The opposing party then has the same amount of time to submit written documentation in support of its position. A threemember subcommittee of current or former MRC members will then render a final determination to affirm or reverse the determination of the NASD officer based on the record and any hearing it determines to hold in its discretion.

      The rule requires the MRC subcommittee to provide written notification of its decision by the close of business the day following its determination. The decision, including affirmation of any directive to provide access or action to limit participation in the ADF rendered by the NASD officer, is effective upon issuance of the written decision and remains in effect during the pendency of further appeals or other legal proceedings. The MRC subcommittee may not impose any additional sanctions, including monetary fines; its authority is limited to affirming or reversing the determination of the NASD officer.

      The MRC decision constitutes final NASD action and can be appealed to the SEC. The decision does not prejudice the rights of the parties to subsequently submit the matter to arbitration or another adjudicatory forum as appropriate. Furthermore, the decision does not operate as an estoppel or otherwise bind NASD in any subsequent disciplinary action or other legal proceeding.

      The pilot rule will remain in effect for the duration of the ADF pilot, absent any additional rulemaking action by NASD.


      1 Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 (July 31, 2002).

      2 Exchange Act Release No. 47633 (April 10, 2003), 68 FR 19043 (April 17, 2003); Exchange Act Release No. 49131 (January 27, 2004), 69 FR 5229 (February 3, 2004); Exchange Act Release No. 50601 (October 28, 2004), 69 FR 64611 (November 5, 2004).

      3 Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53).

      4 Exchange Act Release No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001) (File No. 10-131).


      ATTACHMENT A

      New language is underlined.

      4400A. Review of Direct or Indirect Access Complaints

      (a) Authority to Receive Complaints
      (1) For the purposes of this Rule, a "direct or indirect access complaint" is a complaint against an NASD Market Participant, as defined in Rule 4300A(d)(4), that alleges a denial or limitation of access in contravention of Rule 4300A.
      (2) Any member that wishes to file a direct or indirect access complaint shall submit a written complaint, via facsimile, personal delivery, courier or overnight mail, to ADF Operations and simultaneously serve by the same means the respondent in accordance with Rule 9134(b). Officers of NASD designated by a President of NASD or one of its divisions shall have the authority to review and make a determination regarding direct or indirect access complaints.
      (3) Based upon a review of the complaint and such investigation that the officer, in his or her sole discretion, may decide to conduct, the officer shall promptly determine whether there has been a denial of access by the NASD Market Participant. If the officer determines that there has been a denial of access in contravention of Rule 4300A, the officer shall direct the offending party to provide access to its ADF quotes and may limit participation in the ADF by such party if it does not comply promptly with the directive. NASD shall provide to the parties written notification of the determination by the close of business following the day the determination is rendered. The determination shall be sent to the facsimile number listed in the parties' contact questionnaire submitted to NASD pursuant to Article IV, Section 3 of NASD's By-Laws or another contact specifically designated by a party. The determination, and any directive to provide access or action to limit participation in the ADF, shall be effective when issued or as specified, and shall remain in effect during any review or appeal. The determination shall not constitute an estoppel as to NASD nor bind NASD in any subsequent administrative, civil, or disciplinary proceeding.
      (b) Procedures for Review of Determinations
      (1) Any member that seeks review of a determination issued pursuant to paragraph (a) hereof, shall submit a written appeal setting forth the grounds for such review. The written appeal shall be submitted via facsimile, personal delivery, courier or overnight mail, to NASD and served by the same means on the opposite party, in accordance with Rule 9134(b), by close of the next business day after receipt of the written determination. Written appeals that are not served upon NASD and the opposite party by the close of the next business day after receipt of the written determination will not qualify for further administrative consideration, without prejudice as to the rights of a party to submit the dispute to arbitration or another adjudicatory forum.
      (2) Once a written appeal has been received in accordance with subparagraph (b)(1) above:
      (A) the party seeking review shall have up to twenty-four (24) hours, or such longer period as specified by NASD staff, to submit to NASD and the opposite party via facsimile, personal delivery, courier or overnight mail, any supporting written information concerning the appeal;
      (B) after receipt of the foregoing supporting written information, the party served with the appeal shall have up to twenty-four (24) hours, or such longer period as specified by NASD staff, to submit any relevant written information to NASD and the party seeking review via facsimile, personal delivery, courier or overnight mail;
      (C) if the party seeking review fails to serve the opposite party any written information required pursuant to this subparagraph, that party's written complaint will not qualify for further administrative consideration, without prejudice as to the rights of a party to submit the dispute to arbitration or another adjudicatory forum.
      (3) Each member and/or person associated with a member involved in the review shall provide NASD with any information that it requests to resolve the matter on a timely basis notwithstanding the time parameters set forth in paragraph (b)(2) above.
      (4) All requests for information pursuant to this rule shall be sent by the specified means to a receiving location that, from time to time, may be designated by NASD.
      (c) Review by a Subcommittee of the Market Regulation Committee
      (1) If a party has applied for review of a determination, and the procedural requirements of subparagraph (b) above have been satisfied, the determination shall be reviewed and a decision rendered by a three-member subcommittee comprised of current or former industry members of NASD's Market Regulation Committee. Upon consideration of the record, and after such hearings as it may in its discretion order, the subcommittee, in accordance with the requirements set forth in Rule 4300A, shall affirm or reverse the determination of the NASD officer pursuant to paragraph (a)(3) above.
      (2) The subcommittee shall provide written notification of its determination to the parties by the close of business following the day the determination is rendered. The subcommittee's determination shall not prejudice the rights of a party to submit the dispute to arbitration or another adjudicatory forum. The subcommittee's determination, including affirmation of any directive or action rendered in accordance with paragraph (a)(3), shall be effective when issued or as specified, constitute final NASD action, and remain in effect during any review or appeal. The subcommittee's determination shall not constitute an estoppel as to NASD nor bind NASD in any subsequent administrative, civil, or disciplinary proceeding.

    • 05-29 Guidance Regarding Rule 3012(a)(1) Requirement to Test and Verify a Member's Supervisory Policies and Procedures

      View PDF File

      GUIDANCE

      Supervisory Controls

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading

      Institutional Securities Activities
      Rule 3012
      (Supervisory Control System)
      Rule 3010 (Supervision)
      Supervisory Control Procedures
      Written Supervisory Procedures

      Executive Summary

      On September 30, 2004, the Securities and Exchange Commission (SEC) approved NASD's Supervisory Control Amendments in their final form. These amendments became effective on January 31, 2005. A fundamental element of the Supervisory Control Amendments is new Rule 3012 (Supervisory Control System). Rule 3012(a)(1) requires a member to designate one or more principals who will establish, maintain, and enforce a system of supervisory control policies and procedures that tests and verifies that a member's supervisory procedures are reasonably designed to comply with applicable securities laws and regulations, and with applicable NASD rules, and to amend those supervisory procedures when the testing and verification demonstrate a need to do so. In response to requests for guidance on the subject, NASD is issuing this Notice to provide members with guidelines members may use to comply with Rule 3012(a)(1).

      Questions/Further Information

      Questions or comments concerning this Notice may be directed to Patricia Albrecht, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8026.

      Background

      On September 30, 2004, the SEC approved the Supervisory Control Amendments in their final form.1 The amendments became effective on January 31, 2005.2 Although NASD has previously provided members with detailed guidance regarding the general application of the Supervisory Control Amendments,3 members have continued to request specific guidance regarding compliance with Rule 3012's (Supervisory Control System) requirement that members test and verify the adequacy of their supervisory procedures.4 Accordingly, NASD is issuing this Notice to provide members with guidelines to assist in meeting this requirement.

      Discussion

      Generally, NASD expects members to consider the following guidelines when designing a system of supervisory control policies and procedures that will test and verify that their supervisory procedures are reasonably designed to achieve compliance with the applicable securities laws, regulations, and NASD rules. It is important, however, for members to understand that this guidance is not to be construed as a checklist of steps guaranteed to constitute an adequate supervisory control system or a substitute for the development of a supervisory control system that is tailored to the needs and circumstances of individual member firms. In this regard, this guidance does not constitute a safe harbor and members retain the responsibility to design and implement a supervisory control system that is appropriate for their specific businesses and structures.5

      Guidelines for Rule 3012(a)(1)

      • The first step a member should consider taking when designing its supervisory control system is to conduct an inventory of all of the member's businesses and of the securities laws, regulations, and NASD rules relevant to those businesses.

      • The member should then analyze the requirements of those applicable laws, regulations, and NASD rules by asking, "what questions do the requirements raise that must be answered?" For example, what conduct is prohibited, compelled, limited, or conditioned? How will the member assure compliance w